Prudential Ins. Co. of America v. U.S.

• Decision Date: 29 August 1986
• Docket Number: No. 86-523,86-523
• Citation: 801 F.2d 1295
• Parties: 33 Cont.Cas.Fed. (CCH) 74,557 The PRUDENTIAL INSURANCE COMPANY OF AMERICA, Appellant, v. The UNITED STATES, Appellee. Appeal
• Court: U.S. Court of Appeals — Federal Circuit

Page 1295

801 F.2d 1295

33 Cont.Cas.Fed. (CCH) 74,557

The PRUDENTIAL INSURANCE COMPANY OF AMERICA, Appellant, v. The UNITED STATES, Appellee.

Appeal No. 86-523.

United States Court of Appeals, Federal Circuit.

Aug. 29, 1986.

Thomas H. Adolph, Baker and Botts, Houston, Tex., argued for appellant. With him on the brief was F. Walter Conrad, Dallas, Tex.

Martin W. Matzen, Dept. of Justice, Washington, D.C., argued for appellee. With him on the brief were F. Henry Habicht, II, Asst. Atty. Gen., Silvia Sepulveda-Hambor and John T. Stahr, Washington, D.C., Howard L. Hardegree, Gen. Services Admin., Fort Worth, Tex., of counsel.

Before RICH, Circuit Judge, NICHOLS, Senior Circuit Judge, and ARCHER, Circuit Judge.

ARCHER, Circuit Judge.

The Prudential Insurance Company of America (Prudential) appeals from the United States Claims Court's partial grant of summary judgment ¹ for the government in The Prudential Insurance Company of America v. United States, 7 Cl.Ct. 710 (1985), holding that, as a matter of law, Prudential was not entitled to special or consequential contract damages incurred

as a result of the government's holdover in its leasehold. We affirm.

Background

A full and complete exposition of the uncontroverted facts may be found in the Claims Court opinion. Summarily, the government had entered into a fixed-term lease for office space in the Pinehollow Building in Houston, Texas. Shortly after the lease commenced, Prudential purchased the Pinehollow Building from the lessor, Diversified Building Equities, Inc. and retained Diversified to manage the building. The lease agreement afforded the government the option to extend the lease for a fixed period, which the government timely exercised. Either party then had the option to terminate the lease at any time during the extension period effective ninety days after giving notice. ² Prudential exercised this option and the lease was terminated effective June 27, 1979. The government did not vacate its Pinehollow space on June 27, but instead held over as a tenant-at-sufferance until April 15, 1980.

Prudential, on several occasions ³ after June 27, 1979, demanded that the government vacate its Pinehollow space. Through these communications the government was placed on notice that: (1) Prudential was negotiating a new lease with one of its tenants; (2) this new lease would include the space occupied by the government; and (3) Prudential could suffer considerable damages if the government did not vacate the space. Prudential executed the new lease with its tenant, Cities Service Company, on November 30, 1979. It covered existing space occupied by Cities Service as well as additional space in the Pinehollow building, including the government-occupied space. The new lease agreement also gave Cities Service the option to cancel its entire lease if it could not occupy the space encumbered by the government by February 1, 1980. Cities Service, on March 2, 1980, terminated its entire lease with Prudential because the government-occupied space was not available to Cities Service by the required date of February 1, 1980.

Prudential brought suit against the government in the United States Claims Court for $814,723 in special or consequential damages. ⁴ This amount included sums for: (i) net loss of rental revenue from the Cities Service space; (ii) real estate commissions incurred in obtaining the new tenants; (iii) refurbishing expenses related to the new tenants; and (iv) increased operating expenses related to the new tenants. Prudential also sought recovery of $35,000 for attorney fees.

Claims Court Opinion

The Claims Court, mindful of its jurisdiction under 28 U.S.C. Sec. 1491(a)(1) (1982), ⁵ determined that there was no express provision in the contract requiring the government to vacate at the end of the lease term and that an implied in fact contract had not been established by Prudential. The court then held as a matter of law that an implied covenant to vacate cannot be read The court further held that even if a covenant to vacate the Pinehollow space could be imputed against the government under the lease agreement, the government would not be liable for the special or consequential damages claimed by Prudential. Id. at 717-18. In reaching this conclusion, it adopted the general rule of contract law that a tenant is only liable for special or consequential damages if they were foreseeable at the time the lease was executed. Id. at 716-18. Under the circumstances presented, the court concluded that it was not foreseeable at the time the government executed its lease that the lessor would be damaged, as a result of the government's holdover, by the loss of another Pinehollow lessee occupying leased space far in excess of that occupied by the government, or that the lessor would be damaged by having to subdivide the other lessee's space to accommodate a plurality of new tenants.

                into a fixed-term lease agreement where the government is the lessee.   Prudential Insurance, 7 Cl.Ct. 714-15
                

ISSUES

Prudential has appealed both rulings of the Claims Court and we are called upon to decide:

a. whether the Claims Court erred in holding that the government is not obligated under a fixed term lease to vacate the premises at the end of the term in the absence of an express or implied in fact covenant requiring it to do so; and

b. whether, assuming the government breached an obligation to vacate, the Claims Court erred in concluding that the government would not be liable for special or consequential damage sought by Prudential.

OPINION

A. Prudential contends in this appeal, as it did before the Claims Court, that a lease for a fixed term obligates the lessee to vacate at the end of that term. It says the obligation is implicit or inherent in the landlord-tenant relationship under such a lease. Thus, at the beginning the landlord is obligated to deliver possession of the premises to the lessee and, by the same token, at the end of the term the lessee is obligated to deliver up possession. This argument is based on construction of the express terms of the lease agreement, and not on additional or implied in fact agreements established through parol or other evidence.

The Claims Court, however, focused its opinion in large measure on the necessity of Prudential showing the existence of an implied in fact agreement separate and distinct from the lease agreement, in order to recover. It first noted that the Pinehollow lease contained no express covenant requiring the government to vacate at the end of the lease term; that the common law remedies for monetary compensation--trespass, assumpsit or unlawful detainer--available to a landlord against a holdover tenant were actions sounding in tort and did not fall within the court's jurisdictional umbrella provided by the Tucker Act; ⁶ and that state law damage provisions for holdover were not applicable to the federal government. To establish an implied in fact covenant requiring the government to vacate at the end of the term, the Claims Court, relying on Goodyear Co. v. U.S., 276 U.S. 287, 48 S.Ct. 306, 72 L.Ed. 575 (1928) and H.F. Allen Orchards v. U.S., 749 F.2d 1571 (Fed.Cir.1984), ruled that there must be the same mutuality of intent as in the case of an express covenant.

A contract implied in fact is not created or evidenced by explicit agreement of the parties, but is inferred as a matter of reason or justice from the acts or conduct of the parties. However, all of the elements of an express contract must be shown by the facts or circumstances surrounding the transaction--mutuality of intent, offer and acceptance, authority to contract--so that it is reasonable, or even necessary, for the court to assume that the parties intended to be bound.

The Claims Court found Prudential set forth "no facts either in the lease itself or in the circumstances surrounding its execution which would indicate such mutual intent here." Since an implied in fact covenant is not the theory of the case put forth by Prudential, it is not surprising that such facts are missing.

We are required to deal here only with the express terms of the Pinehollow lease and determine, as a matter of law, whether they may properly be construed to impose on the lessee an implicit obligation or covenant to return possession of the premises to the lessor at the end of the lease period, and whether a failure to do so constitutes a breach of the lease agreement. Cf. United States v. Bostwick, 4 Otto 53, 94 U.S. 53, 66, 24 L.Ed. 65 (1876).

B. It is well settled that contracts to which the government is a party--and though a lease may concern and convey a property interest it is also very much a contract--are normally governed by federal law, not by the law of the state where they are made or performed. United States v. County of Allegheny, 322 U.S. 174, 183, 64 S.Ct. 908, 913-14, 88 L.Ed. 1209 (1944); Forman v. United States, 767 F.2d 875, 879 (Fed.Cir.1985); Keydata Corp. v. United States, 205 Ct.Cl. 467, 482, 504 F.2d 1115 (1974); cf. George S. Groves v. United States, 202 Ct.Cl. 660, 674 (1973). Leases are not sufficiently different from other federal contracts to call for an independent set of analytical principles and rules, cf. Perry v. United States, 294 U.S. 330, 55 S.Ct. 432, 79 L.Ed. 912 (1935); Forman, 767 F.2d at 879; Torncello v. United States, 231 Ct.Cl. 20, 681 F.2d 756 (1982), particularly when there is no question about the nature of the property interest transferred, but merely a question of the lessee's obligations under the lease agreement. Keydata Corp., 205 Ct.Cl. at 482. To the extent existing federal law is not determinative of the issue and permits an area of choice between the merits of competing principles, the best in modern decision and discussion, including the general principles of contract and landlord-tenant law, should be taken into account. Priebe & Sons, Inc. v. United States, 332 U.S. 407, 411, 68 S.Ct. 123,...