K'S MERCHANDISE MART v. NORTHGATE LTD.

• Decision Date: 26 September 2005
• Docket Number: No. 4-04-1034.,4-04-1034.
• Citation: 835 N.E.2d 965,359 Ill. App.3d 1137,296 Ill.Dec. 612
• Parties: K'S MERCHANDISE MART, INC., an Illinois Corporation, Plaintiff-Appellee and Cross-Appellant, v. NORTHGATE LIMITED PARTNERSHIP, an Illinois Limited Partnership, Defendant-Appellant and Cross-Appellee.
• Court: United States Appellate Court of Illinois

835 N.E.2d 965

359 Ill. App.3d 1137

296 Ill.Dec. 612

K'S MERCHANDISE MART, INC., an Illinois Corporation, Plaintiff-Appellee and Cross-Appellant, v. NORTHGATE LIMITED PARTNERSHIP, an Illinois Limited Partnership, Defendant-Appellant and Cross-Appellee.

No. 4-04-1034.

Appellate Court of Illinois, Fourth District.

Argued June 21, 2005.

Decided September 26, 2005.

COPYRIGHT MATERIAL OMITTED

Edward F. Flynn (argued), Erick F. Hubbard, Winters Featherstun Gaumer Postlewait Stocks Flynn, Decatur, for Northgate Limited Partnership.

Bridget C. Hogan (argued), John E. Sanner, Samuels, Miller, Schroeder, Jackson & Sly, LLP, Decatur, for K's Merchandise Mart, Inc.

Brian D. Huben, Katten Muchin Zavis Rosenman, Chicago, for Amicus Curiae International Council of Shopping Centers.

Presiding Justice COOK delivered the opinion of the court:

In connection with the sale of a shopping center, the anchor tenant executed an estoppel certificate certifying that the landlord had performed all its obligations and was not in default. A question later arose whether the tenant's obligation to pay maintenance expenses included an obligation to pay a management fee based on a percentage of the shopping center's gross revenue from all tenants. The trial court held that the tenant had no obligation to pay the management fee. We affirm.

I. BACKGROUND

This case involves the lease of department store premises in the Northgate Shopping Center (Center) in Decatur, Illinois. The original lease was executed December 4, 1970, between a trust, as lessor, and Jewel Companies, Inc., as lessee. The parties have changed several times over the years. The trust was succeeded as lessor by Decatur Investors, LLC, which was itself succeeded on January 27, 2000, by Northgate Limited Partnership (Northgate), the current lessor. Jewel Companies, Inc., the lessee, subleased the property to May Department Stores Company, which later assigned the lease to Venture Stores, Inc. (Venture).

Decatur Investors and Venture attempted to negotiate a lease to replace the underlying lease and sublease but were unsuccessful. Instead, the parties entered into an additional agreement on July 7, 1997. The basic thrust of the 1997 agreement was to require the lessor to make certain improvements, following which the lessee would make additional payments. Venture went into bankruptcy, however, and on August 31, 1998, K's Merchandise Mart, Inc. (K's), was the successful bidder at a bankruptcy sale of Venture's interest in the lease. Apparently the lease had some advantages that made it desirable to a new lessee as opposed to executing a new lease with the lessor.

The required improvements were substantially completed by October 27, 1998, after K's had acquired the property. Section 2(b) of the 1997 agreement provided:

"Upon substantial completion of the remodeling and improvements described * * * and notwithstanding anything to the contrary which may be contained in the sublease:

* * *

(B) Venture shall pay to owner (Decatur Investors) its full pro-rata share of:

(i) all expenses for the operation, maintenance, repair, replacement, policing and protecting and lighting of the exterior common areas of the entire shopping center * * *;

(ii) all expenses for painting, cleaning, and routine maintenance * * * of the exterior of the building of the shopping center; and

(iii) all expenses for insuring the entire shopping center * * *."

Under the sublease, common-area-maintenance expenses had been included in the minimum rent.

A. Events Preceding the Estoppel Certificate

After October 27, 1998, Decatur Investors began to bill K's $3,604.22 per month, the estimated amount representing K's share of the common-area-maintenance expenses. The estimated amount included a management fee equal to 5% of the shopping center's gross revenue from all tenants, but no management fee was mentioned in the billing. Nor did Decatur Investors identify how the common-area-maintenance expenses were estimated. The first time that a management fee was mentioned was in October 1999, when Decatur Investors sent K's a reconciliation statement for the year 1998 common-area-maintenance expenses. The statement indicated the total common-area-maintenance expenses for all tenants for 1998 was $91,755.91, including a line item for $22,928.54 in management fees, but did not indicate how those management fees were calculated. K's pro-rata share, for the 66 days it had been the lessee, was calculated at $8,090.01. K's was credited for $7,789.77 in estimated monthly payments, leaving a $300.24 deficit, for which K's sent Decatur Investors a check.

On January 27, 2000, Northgate purchased the shopping center from Decatur Investors. As a part of that purchase, on January 21, 2000, in compliance with the lease documents, Richard Powers, K's vice-president and chief financial officer, executed an estoppel certificate prepared by Northgate and/or the lender. The estoppel certificate read in part as follows:

"This Certificate is given to First Union National Bank, * * * (`Lender'), and Northgate (`Purchaser') by K's (`Tenant'), with the understanding that Lender and Purchaser and their counsel will rely on this certificate in connection with a proposed mortgage loan (the `Loan') and purchase on the * * * Northgate Shopping Center * * * (the `Property').

Tenant hereby certifies as follows:

1. * * * A true, correct, and complete copy of the lease, together with any amendments, modifications, and supplements thereto, is attached hereto. The lease is the entire agreement between the undersigned, said sublessor, and the owner of the Shopping Center, pertaining to the leased premises. * * *

2. Tenant's Lease terms: * * * Tenant's percentage share of operating expenses/common area charges and insurance is 48.89% * * *, which is currently being paid on an estimated basis in advance at the rate of $3,604.22 per month for common-area charges * * *.

* * *

6. All obligations of Landlord under the lease have been performed, and Landlord is not in default under the lease. There are no offsets or defenses that Tenant has against the full enforcement of the lease by landlord. No free periods of rent, tenant improvements, contributions or other concessions have been granted to Tenant; Landlord is not reimbursing Tenant or paying Tenant's rent obligations under any other lease; and Tenant has not advanced any funds for or on behalf of Landlord for which Tenant has a right of deduction from, or setoff against, future rent payments.

* * *

9. * * * The person executing this estoppel certificate is authorized by Tenant to do so and execution hereof is the binding act of Tenant enforceable against Tenant."

B. Events After the Estoppel Certificate

In March 2000, shortly after executing the estoppel certificate, K's received the reconciliation for the year 1999, a time prior to the sale of the center to Northgate. The total common-area-maintenance expenses for all tenants was listed at $141,600.45, including $45,734.29 in management fees. K's pro-rata share was calculated to be $69,044.38, and K's was given a credit for $45,793.74 in estimated monthly payments, leaving a deficit of $25,793.74. Although K's noted an increase in the monthly common-area-maintenance expenses from $3,604.22 to $5,985.71, no extensive review of the lease was performed by K's and K's sent a check for the reconciled figure to Northgate.

In March 2001, Northgate sent K's the reconciliation for the year 2000. The total common-area-maintenance expenses for all tenants was listed at $146,942.51, including $63,675.71 in management fees. K's pro-rata share was calculated to be $71,828.49 and K's was given a credit for $43,250.64 in estimated monthly payments, leaving a deficit of $28,577.85. The statement required K's to begin to pay $5,985.71 per month in estimated monthly payments beginning April 1, 2001, in place of the previous $3,604.22. After resolving some discrepancies, K's sent a check to Northgate for the reconciled figure of $27,671.95. In July 2001, K's sent a letter to Northgate objecting to the inclusion of the management fee as a part of the common-area-maintenance expenses. In October 2001, K's filed this declaratory judgment action.

Fine Associates was the agent of Decatur Investors. Fine Associates sent K's the estimated monthly billings, which did not mention a management fee. Fine Associates sent K's the reconciliation statement in October 1999, which mentioned that management fees were being charged as a part of common-area-maintenance expenses, but did not explain how the fees were calculated. At approximately that same time, Fine Associates began negotiating a sale of the Center to Northgate. During its investigation of the purchase, Northgate was assured by Fine Associates that K's was paying, as a part of its common-area-maintenance expenses, 5% of gross rents as a management fee. Moreover, Northgate received a prospectus from a New York broker containing the representation that K's, as well as the other tenants in the Center, were paying all management fees and common-area-maintenance operating expenses. The leases of all the other tenants contained an express provision for the payment of management fees. Fine Associates also sent K's the year 1999 reconciliation statement in March 2000, after the estoppel certificate had been signed. Northgate agreed in the purchase of the Center to assume the risk for any misrepresentation and that its purchase of the premises was based on its own investigation and inquiry.

C. The Trial Court's Order

On December 7, 2004, the trial court entered a seven-page written order, carefully setting out its findings of fact and conclusions of law. The court found there was no obligation under the terms of the lease documents for K's to pay Northgate a management fee. Although K's was required to pay its pro-rata share of operating expenses, the court concluded "that a management fee is not an expense involved...