NCO Financial Systems, Inc. v. Montgomery Park, LLC , 842 F.3d 816 ( 2016 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 15-1988
NCO FINANCIAL SYSTEMS, INC., now known as EGS Financial
Care, Inc.,
Plaintiff - Appellee,
v.
MONTGOMERY PARK, LLC,
Defendant - Appellant.
No. 15-2071
NCO FINANCIAL SYSTEMS, INC., now known as EGS Financial
Care, Inc.,
Plaintiff - Appellant,
v.
MONTGOMERY PARK, LLC,
Defendant - Appellee.
Appeals from the United States District Court for the District
of Maryland, at Baltimore. George L. Russell, III, District
Judge. (1:11-cv-01020-GLR)
Argued: September 21, 2016 Decided: November 29, 2016
Before GREGORY, Chief Judge, and NIEMEYER and HARRIS, Circuit
Judges.
Affirmed in part, reversed in part, and remanded by published
opinion. Judge Niemeyer wrote the opinion, in which Chief Judge
Gregory and Judge Harris joined.
ARGUED: Howard G. Goldberg, GOLDBERG & BANKS, P.C., Baltimore,
Maryland, for Appellant/Cross-Appellee. Andrew David Levy,
BROWN GOLDSTEIN & LEVY, LLP, Baltimore, Maryland, for
Appellee/Cross-Appellant. ON BRIEF: John E. McCann, Jr., Ranak
K. Jasani, MILES & STOCKBRIDGE P.C., Baltimore, Maryland, for
Appellant/Cross-Appellee. Joshua R. Treem, Kevin D. Docherty,
BROWN GOLDSTEIN & LEVY, LLP, Baltimore, Maryland, for
Appellee/Cross-Appellant.
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NIEMEYER, Circuit Judge:
This appeal involves disputes between parties to a 12-year
commercial lease of office space in Baltimore, Maryland. NCO
Financial Systems, Inc., the lessee, contends that it properly
exercised a right of early termination of the lease and that,
during the course of the lease, it was overcharged for rent
based on erroneous calculations of the space’s square footage.
Montgomery Park, LLC, the lessor, contends that NCO failed to
satisfy the lease’s specific conditions for early termination
and that NCO now owes rent for the remainder of the lease term.
The district court concluded that NCO effectively exercised
its right to terminate the lease early. It also concluded that
NCO was not overcharged or, in any event, that its overcharge
claim was barred by Maryland’s three-year statute of
limitations.
On appeal, we reverse the district court’s ruling that NCO
effectively exercised the right of early termination, and we
affirm its ruling rejecting NCO’s overcharge claims.
Accordingly, we remand for further proceedings on Montgomery
Park’s claim that NCO breached the lease agreement in failing to
pay rent.
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I
Beginning on March 15, 2003, Montgomery Park leased
“approximately 106,267” square feet of office space to NCO in a
building located on Washington Park Boulevard in Baltimore,
Maryland. The base rent for the first year was $15 per square
foot, or $1,594,005 per year, which thereafter would increase as
determined by a formula tied to inflation. The rent also
included NCO’s proportionate share of real estate taxes and
operating expenses for the common areas of the building.
The initial term of the lease was 12 years, subject to
renewal for an additional 8 years. The lease, however, gave NCO
a limited right to terminate the lease after 8 years, provided
that NCO gave timely notice and made timely payment of a
termination fee. More specifically, the lease provided:
§ 1.05 Limited Right of Early Termination.
Tenant shall have a one-time, conditional right to
terminate this Lease (the “Termination Right”),
effective on that date which is eight years after the
Commencement Date (the “Termination Effective Date”),
upon Tenant's strict compliance with all of the
following requirements: (a) Tenant shall deliver to
Landlord (not later than ten (10) months prior to the
Termination Effective Date (such notice deadline, the
“Termination Notice Deadline”)) a written notice (the
“Termination Notice”) stating that Tenant elects to
exercise this Termination Right; and (b) Tenant shall
pay to Landlord (50% simultaneously with delivery of
the Termination Notice and the remaining 50% balance
at least three (3) months prior to the Termination
Effective Date), a termination fee (the “Termination
Fee”) equal to ten (10) times the monthly installment
(which will be in effect as of the Termination
Effective Date) of Rent (including, without
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limitation, all Additional Rent on account of Taxes or
Operating Expenses). If (and only if) Tenant both
timely delivers the Termination Notice and timely pays
the Termination Fee as required above, then the Lease
will be terminated effective on the Termination
Effective Date. Tenant shall not have the right to
terminate this Lease if it fails either timely to
deliver the Termination Notice or timely to pay the
Termination Fee.
By letter dated May 12, 2010, NCO gave Montgomery Park
notice that it was exercising its right of early termination,
effective March 15, 2011. At the same time, it remitted
$779,964.15, representing 50% of the termination fee, which
§ 1.05 of the lease specified was equal to 10 months’ rent.
On December 15, 2010, NCO remitted the second payment of
the termination fee, but the amount it remitted was only
$697,100.55, which was $79,067.70 less than the first payment
that it had made the previous May. NCO explained the
discrepancy, stating that it had reduced the termination fee by
the amount of a janitorial services credit described elsewhere
in the lease. Under that provision, if NCO elected to hire its
own janitorial service in lieu of using Montgomery Park’s
service for NCO’s own leased premises -- as distinct from such
services that Montgomery Park provided for the common areas --
Montgomery Park would provide NCO with an annual allowance of up
to $1.00 per square foot per year.
Montgomery Park responded to the discrepancy, stating that
because NCO had failed to remit the second half of the
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termination fee on December 15, 2010, it had not satisfied the
specified condition for early termination and therefore had not
terminated the lease. Montgomery Park stated that it would,
upon NCO’s acknowledgment of this fact, return to NCO the
payments that NCO had made in May and December.
NCO disagreed with Montgomery Park’s position, asserting
that it had “timely and completely fulfilled all of the
requirements set forth in Section 1.05 of the Lease,” and it
considered the lease properly terminated. Accordingly, it
vacated the premises on May 31, 2011, and did not pay rent
thereafter. Montgomery Park advised NCO that it considered NCO
to be in default of the lease for the failure to pay rent.
In 2010, after NCO had first provided notice of early
termination, the parties discussed the alternative possibility
of reducing the size of rented space, and, in furtherance of
those discussions, Montgomery Park provided NCO with computer-
generated drawings of the building containing the leased space.
Receipt of those drawings prompted NCO to question the amount of
rent that it had been paying under the lease. It disputed the
calculation of “usable square feet,” which, when multiplied by a
factor of 1.12, determined “rentable square feet,” the basis for
computing the rent. NCO contended that it should have paid rent
for only 100,800 rentable square feet instead of “approximately
106,267” rentable square feet, a difference of 5,467 square
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feet. To make its claim, NCO relied on standards published by
the Building Owners and Managers Association (“BOMA”), which
would exclude from “usable square feet” restrooms within NCO’s
leased space, areas holding mechanical equipment serving NCO’s
space, a 13-square-foot room holding fire protection equipment,
and an elevator lobby used by NCO within its leased space. NCO
also disputed the inclusion in its leased space of a 562-square-
foot area called the “Bridge.”
NCO commenced this diversity action against Montgomery Park
in February 2011, alleging breach of contract, unjust
enrichment, and fraud based on the allegation that NCO had been
overcharged for rent. NCO also sought a judgment declaring that
the lease had been effectively terminated under the early
termination right contained in § 1.05. Montgomery Park filed a
counterclaim, seeking a judgment declaring that the lease was
still in effect and demanding contract damages for NCO’s failure
to pay rent after May 31, 2011.
After the completion of discovery, NCO and Montgomery Park
filed cross-motions for partial summary judgment. NCO sought a
partial summary judgment on its claims that the premises did not
include the Bridge; that NCO had properly terminated the lease;
and that “usable square footage” should be determined according
to the standards published by BOMA. Montgomery Park sought a
partial summary judgment dismissing NCO’s overcharge claims on
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the ground that they were barred under Maryland’s three-year
statute of limitations.
The district court granted NCO’s motion in part, agreeing
that the leased premises did not include the Bridge and that NCO
had effectively exercised the early termination right. It
denied NCO’s motion on its overcharge claim, deferring that
issue to trial of disputed facts. It also deferred to trial
Montgomery Park’s motion claiming that NCO’s overcharge claim
was barred by the applicable statute of limitations.
In granting a partial summary judgment to NCO on the early
termination issue, the court concluded, as a matter of law, that
the janitorial allowance claimed by NCO was not a credit
properly applied against the early termination fee because it
was not a component of rent that defined the fee. Therefore,
NCO’s deduction of the allowance from the termination fee was
improper. Nonetheless, the court found that NCO had properly
exercised its early termination option. Even though the court
recognized that the words of the early termination provision
“clearly and unambiguously provide[d]” that exercising the
option required “strict compliance with specified conditions
precedent,” it determined that the payment amount required was
not a condition but instead a “non-material covenant” that did
not need to be strictly satisfied. The court reasoned that,
while parts of the lease made full payment of the termination
8
fee a condition, other phrases were less clear. At bottom it
held that it would be unreasonable to require NCO to correctly
calculate the termination fee in order to exercise its early
termination right.
Following a bench trial on the overcharge claim, the court
held that “usable square feet” included the square footage of
internal restrooms, the area holding mechanical equipment, the
room holding fire protection, and the elevator lobby. The court
reasoned that the word “usable” was not ambiguous in the context
of the lease, and it accordingly applied the normal meaning of
that term, finding that NCO had exclusively possessed and used
the areas that BOMA would, if applied, have deemed unusable.
Additionally, the court found that NCO had had inquiry notice of
its overcharge claim for more than three years before it
commenced this action, such that its claim was barred by
Maryland’s three-year statute of limitations. The court thus
dismissed NCO’s overcharge claim by judgment dated August 19,
2015.
Montgomery Park filed this appeal, contending that the
district court erred in concluding that NCO had effectively
terminated the lease under the early termination provision, and
NCO filed a cross-appeal, challenging the district court’s
denial of its overcharge claim.
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II
With respect to Montgomery Park’s appeal, both parties
accept the district court’s conclusion that the lease’s early
termination provision required NCO to provide timely notice and
to pay in two equal payments a termination fee equal to 10
months’ rent. Both parties also accept the district court’s
conclusion that, although NCO gave timely notice and made its
first payment in the correct amount, NCO failed to make the
second of these equal payments in the correct amount because it
improperly deducted $79,067.70 for a janitorial services credit.
Montgomery Park, however, challenges the court’s conclusion that
NCO had nonetheless exercised its right of early termination on
the reasoning that, under the lease, payment in the correct
amount was a covenant with which strict compliance was not
required. Montgomery Park contends that payment in full was an
express condition of the option’s exercise and NCO’s attempt to
terminate early was therefore ineffective. It argues that the
district court’s contrary interpretation, based on its
conclusion that the correct amount of the termination fee was
not part of the condition for early termination but merely a
non-material covenant, ignored the plain language of the early
termination provision and violated key principles of contract
construction under Maryland law.
10
NCO contends that the district court “correctly analyzed
the language of the lease to conclude that matching precisely
Montgomery Park’s calculation of the termination fee was not a
condition precedent to NCO’s exercise of its option.” Relying
on Beckenheimer’s Inc. v. Alameda Associates Limited
Partnership, 611 A.2d 105 (Md. 1992), it asserts that the
inadequate payment of the termination fee was a breach of a
covenant, not the failure to satisfy a condition, and that the
district court therefore properly applied principles of equity
to conclude that NCO effectively terminated the lease early
under § 1.05, even though it did not pay the full early
termination fee.
Under Maryland law, which applies in this diversity case,
when the terms of an option impose conditions on its exercise,
those conditions must be exactly matched for exercise to be
effective. See Elderkin v. Carroll, 941 A.2d 1127, 1133 (Md.
2008). In determining whether an option has been exercised, the
Elderkin court articulated a three-part test to be applied. Id.
at 1135. First, a court must evaluate whether the exercise
exactly matched the terms specified by the offer. Second, if
the match is not exact, the court must consider whether any
variance is covered by a number of highly specific exceptions,
none of which applies to the present case. Finally, the court
must determine whether any breach was of a covenant or of a
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condition. Id. The determination of whether requirements for
exercising an option are conditions or covenants is a question
“of construction dependent on the intent of the parties to be
gathered from the words they have employed.” Chesapeake Bank of
Md. v. Monro Muffler/Brake, Inc., 891 A.2d 384, 391 (Md. Ct.
Spec. App. 2006) (quoting Chirichella v. Erwin, 310 A.2d 555(Md. 1973)). The Chesapeake Bank court noted that conditions
are indicated by words and phrases such as “if,” “provided
that,” and “when.” Id.Applying these principles to the lease before us, the
language could hardly be more clear that § 1.05 reveals an
intent to impose two conditions on the exercise of the right of
early termination: (1) that the lessee give 10 months’ notice
prior to the specified early termination date; and (2) that the
lessee make payment -- in two equal installments -- of a
“termination fee” defined to equal 10 months’ rent. As § 1.05
states, the right to early termination can be exercised only
“upon strict compliance” with the two requirements. And the
lease then uses language indicative of a condition when
describing how early termination can be effected. The lease
states that termination will be effective “[i]f (and only if)
Tenant both timely delivers the Termination Notice and timely
pays the Termination Fee as required above.” (Emphasis added).
And thereafter, it makes unmistakably clear that the lease is
12
imposing conditions by stating the obverse -- that early
termination is not exercised “if [Tenant] fails either timely to
deliver the Termination Notice or timely to pay the Termination
Fee.” (Emphasis added). Applying Maryland law, which provides
that the use of the word “if” is indicative of a condition, we
therefore conclude that § 1.05 of the lease imposes conditions,
as it uses “if” three different times when referring to the two
requirements and, on one of those occasions, uses “if” with
“only if” to emphasize the conditional nature of the
requirements.
In short, we conclude that the lease unambiguously imposes
two conditions on NCO’s exercise of its right of early
termination -- timely notice and timely payment of the
termination fee. Because NCO undisputedly failed to make full
payment of the termination fee, it did not satisfy those
conditions and therefore did not successfully exercise the right
of early termination.
The district court expressed a concern that reading the
requirement of full payment as a condition to early termination
would be potentially unreasonable as it would require NCO to
properly calculate the termination fee. Following this vein,
NCO argues that it satisfied the requirement of payment even
though it did so in the wrong amount, because paying the proper
amount was not part of the condition. It asserts that because
13
the calculation of the termination fee could be difficult, any
inadequate payment, regardless of its cause, must therefore be
excused as the failure to satisfy a covenant, not treated as the
failure to satisfy the condition. The flaw in this argument is
its underlying assumption that the calculation of the amount of
the termination fee was somehow at issue. But it never was.
When NCO paid the first 50% installment, it remitted
$779,964.15, and Montgomery Park never expressed any reservation
or disagreement with the accuracy of that amount. Similarly,
the second installment differed only because NCO made the
decision, as it explained, to set off against that amount the
janitorial services credit, as if it were rendering an account,
not paying a specifically defined fee. It thus reduced the
second installment to $697,100.55, contrary to the condition
that required payment of the defined fee in equal parts.
Because NCO’s underpayment derived not from any miscalculation
but from NCO’s deliberate decision to offset an unrelated
payment, any concerns about the posited difficulty of
calculation are irrelevant.
In sum, the clear and unambiguous language of the lease
agreement made payment in full of the termination fee a
condition, and NCO failed to satisfy it.
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III
Because NCO failed effectively to exercise its right of
early termination, the lease continued in force after March 15,
2011, and Montgomery Park is thus entitled to pursue its
counterclaim against NCO for breach of the lease agreement for
failing to pay rent. In response to this conclusion, NCO argues
that Montgomery Park’s claim for rent should be barred by the
equitable doctrine of election of remedies because, after the
district court found that NCO had properly exercised its early
termination option, Montgomery Park pursued the unpaid balance
of the termination fee, rather than refusing that remedy in the
hope that a favorable holding on appeal would enable it to
pursue the unpaid rent.
The doctrine of election of remedies, however, has no
application here because Montgomery Park did not have multiple
remedies available from which to choose when it pursued the
balance of the termination fee. To interpret the doctrine as
NCO urges would force claimants to forego the only remedy made
available to them by the court in hopes of obtaining a favorable
result on appeal. This harsh interpretation is inconsistent
with Maryland law.
Maryland law recognizes that “[t]he doctrine of election of
remedies is quite technical and should not be lightly employed
by a court.” Surratts Assocs. v. Prince George’s Cnty, 408 A.2d
151323, 1330 (Md. 1979). Moreover, the doctrine is available only
“where there are two or more coexistent remedies available to
the litigant at the time of election which are repugnant and
inconsistent.” Shoreham Developers, Inc. v. Randolph Hills,
Inc., 305 A.2d 465, 472 (Md. 1973) (emphasis added) (quoting 25
Am. Jur. 2d, Election of Remedies §§ 10-12 (1966)).
In this case, when Montgomery Park pursued the balance of
the termination fee, the district court had already found that
NCO had validly exercised its right to terminate the lease
early. At that point, Montgomery Park had no remedy other than
claiming the balance of the termination fee that NCO had failed
to remit. Because Montgomery Park did not have two or more
coexistent remedies from which to make an election, the doctrine
has no applicability.
IV
In its counterclaim, NCO contends that Montgomery Park
misrepresented or misstated in the lease the usable-square-
footage portion of the total space for which NCO paid rent. The
lease used 94,881 as the number of “usable square feet” and then
applied to that number a factor of 1.12 to calculate the
“rentable square feet” of 106,267 square feet. The rentable
square footage was then used to determine the rent. NCO argues
that 94,881 overstated the usable square footage of the premises
16
because it included internal restrooms, areas holding mechanical
equipment serving NCO space, a room holding fire protection
equipment, and the elevator lobby used by NCO within its
offices. NCO argues that those areas should not have been
included in the total number of usable square feet, as they were
not “usable” under standards published by the Building Owners
and Managers Association or BOMA. When those areas are excluded
from “usable square feet,” NCO contends, the “rentable square
footage” becomes 100,800, instead of the leases’ provision of
“approximately 106,267,” a difference of 5,467 square feet. In
furtherance of this argument, NCO introduced at trial parol
evidence from several witnesses who testified that they
understood the lease to be measuring “usable square feet” under
the standards published by BOMA.
Even though the district court heard the parol evidence at
trial, it did not apply the BOMA standards to define “usable”
because it found that the term “usable,” “in the context of the
agreement, [was] unambiguous,” and therefore it could not use
parol evidence to overcome the unambiguous contract terms. See
Sy-Lene of Wash., Inc. v. Starwood Urban Retail II, LLC, 829
A.2d 540, 544 (Md. 2003). In addition, the court noted that the
lease’s integration clause suggested that the parties were not
relying on a technical meaning not defined in the lease. The
court concluded, “using its own common sense and everyday
17
experience as a finder of fact[,] . . . that the term ‘usable’
means to use, occupy, or possess.” And when it applied that
meaning to the facts, it found that NCO “certainly possessed and
occupied and used exclusively the bathroom areas, the mezzanine
area, and as well the valve room.” In addition, it noted that
NCO’s use and possession of the bathrooms was further evidenced
by NCO’s taking over the janitorial services for the bathroom
areas of which it had exclusive use.
We conclude that the district court did not err in its
construction of the lease and that its finding that the disputed
areas were used and possessed exclusively by NCO was not clearly
erroneous. When these disputed areas are included in the usable
square feet, as the court concluded, the lease did not
misrepresent or misstate that the premises constituted
“approximately 106,267” rentable square feet. *
NCO argues that this conclusion is erroneous because it
ignores the parol evidence NCO offered to show that BOMA should
be consulted to supply the meaning of “usable” in the lease.
* NCO also argues that the inclusion of some 562 square feet
for the area called the Bridge was improper. The district court
agreed, ruling that the Bridge’s square footage should not have
been included in the definition of the leased premises. But the
court also ruled that in the context of a 106,000-square-foot
premises, the Bridge area was not material, especially in light
of the lease’s use of “approximately 106,267” square feet, as
well as the testimony of NCO’s witnesses that 562 square feet
was not material. We agree with the district court’s ruling.
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This argument, however, misunderstands the court’s position on
that evidence. The district court, in fact, received the parol
evidence as to the BOMA standards during trial but concluded not
to use it in light of the court’s conclusion that the term
“usable” was unambiguous. This was not error. See Sy-Lene, 829
A.2d at 544.
At bottom, we conclude that the district court did not err
in concluding that NCO was properly charged for “approximately
106,267” square feet. In reaching this conclusion, we do not
address NCO’s claim that the district court erred in applying
Maryland’s three-year statute of limitations as an alternative
basis for denying NCO’s overcharge claim.
* * *
For the reasons given, we reverse the district court’s
ruling that NCO satisfied the lease’s conditions for early
termination; we affirm its ruling rejecting NCO’s overcharge
claims; and we remand for further proceedings on Montgomery
Park’s claim that NCO breached the lease agreement by failing to
pay rent after May 31, 2011.
AFFIRMED IN PART,
REVERSED IN PART,
AND REMANDED
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