LaSalle Nat. Bank v. Service Merchandise Co., 86-1454

Citation827 F.2d 74
Decision Date30 September 1987
Docket NumberNo. 86-1454,86-1454
PartiesLaSALLE NATIONAL BANK, et al., Plaintiff-Appellant, v. SERVICE MERCHANDISE CO., Defendant-Appellee.
CourtUnited States Courts of Appeals. United States Court of Appeals (7th Circuit)

Robert Marks, Marks, Marks & Kaplan, Ltd., Chicago, Ill., for plaintiff-appellant.

Stephen H. Pugh, Jr., Chapman & Cutler, Chicago, Ill., for defendant-appellee.

Before BAUER, Chief Judge, CUDAHY and RIPPLE, Circuit Judges.

RIPPLE, Circuit Judge.

Appellant, LaSalle National Bank (LaSalle), brought this declaratory judgment action to construe the provisions of leases that govern the rights of tenants in a shopping center owned by LaSalle. Appellee, Service Merchandise Company, Inc., (Service Merchandise), the defendant in the original action, is a tenant in the shopping center. It also brought a counterclaim against LaSalle for the return of alleged rent overpayments. The district court entered judgment for Service Merchandise on the claim and on the counterclaim. For the reasons set forth in the following opinion, we reverse.

FACTS

LaSalle owns a shopping center in Oak Lawn, Illinois (Shopping Center). It leases space to various commercial enterprises. The tenants share in the real estate taxes and common area maintenance (CAM) expenses. Each tenant's share is determined by multiplying the total expense for the shopping center by a fraction, the numerator of which is the total number of square feet in the tenant's leased premises, and the denominator of which is the total number of square feet of leasable space in the shopping center.

Two sections of the lease govern the application of this formula. Section 2.3 1 sets up the basic allocation formula described in the foregoing paragraph. Section 2.4 2 reserves, inter alia, the right of Section 7.1 states that LaSalle cannot build in the area "outlined in red on Exhibit A." In 1978, the Bank desired to build in the "red outlined area." It sought and obtained the consent of Service Merchandise to do so. However, the contemplated construction also required a zoning variance from the village. To obtain the variance, LaSalle proposed to close off the second floor of a then-vacant building to all uses except for access for the maintenance of mechanical equipment. The village approved the variance by adopting an ordinance that required that this second floor of the building (70,000 square feet) be closed off in accordance with the proposal. To comply with the ordinance, the Bank also had to make many changes that rendered the space structurally nonleasable as well as legally nonleasable.

LaSalle to alter the common areas; this alteration may clearly involve an enlargement or a reduction in the size of the common area. Section 2.4 is expressly subject to the provisions of section 7.1 3 which authorizes LaSalle to make major alterations to the Shopping Center, including the addition of new structures or the addition of new floors to existing structures.

The Bank notified Service Merchandise that it intended to subtract the 70,000 square feet from the denominator of the tax/CAM payment fraction. Service Merchandise disagreed. This litigation followed.

The Decision of the District Court

The district court determined that the contract was ambiguous. The court found the language vague with respect to the nature and extent of the landlord's right to reduce leasable space. Indeed, the district judge believed the question of whether the agreement allowed the landlord to reduce the leasable space at all was a matter in dispute. Furthermore, the court found that the lease was ambiguous with respect to the tenant's right not to have its business materially affected by any diminution of leasable space by the landlord.

After a bench trial, in which a good deal of parol evidence was admitted, the district court concluded that section 7.1 of the contract does not permit the landlord to change existing physical space to non-leasable space. Indeed, the court held that the section simply did not deal with that question and noted that none of the witnesses had testified that there was any discussion about this subject with respect to section 7.1. The court noted that all of the witnesses had agreed that the parties' discussion regarding section 7.1 concerned physical alterations. Consequently, the district court concluded that section 7.1 did not create the right of the landlord to change existing leasable space to non-leasable space.

The district court acknowledged that, as a general rule, a landlord has the right to manage his property, except as limited by lease. However, relying on Metropolitan Airport Auth. v. Farliza Corp., 50 Ill.App.3d 994, 8 Ill.Dec. 950, 366 N.E.2d 112 (1977), the court held that, before a landlord may alter the property in a way that would increase the tenant's taxes, there must be a "clear and concise," LaSalle Nat'l Bank v. Service Merchandise Co., No. 80 C 6185, mem. op. at 3 (N.D.Ill. Jan. 31, 1986); R. 133 at 3-4 [hereinafter cited as Mem. op.], provision permitting such an increase:

[I]n the absence of a clear affirmative right on the part of the landlord to increase the tenant's share of the taxes by eliminating leasable space in a non-physical way, I take it that the landlord does not have that right.

R. 144 at 4.

The district court then opined that, had the Shopping Center been reduced in size by "involuntary reductions, such as by condemnation or destruction by fire," 4 id. at 6, it would have been a permissible reduction of leasable space for purposes of tax allocation:

[D]iminution and destruction of buildings I think was a risk that the defendants took. Physial [sic] diminution was a risk that they took, and had we had a Id. at 8.

physical destruction of a building, we would analyze it under 7.1.

Here, however, there was no diminution or destruction of a building but simply withdrawal from leasable space. Therefore, the court held, the denominator in the tax equation could not reflect such a withdrawal.

In short, in the district court's view, the lease does not permit the landlord voluntarily to change existing physical space to non-leasable space except as specifically provided in the lease. According to this view, if the landlord voluntarily chooses to alter the use of physical space so that it cannot be leased, the space must still be considered "leasable" within the meaning of the contract so long as the space is physically available. Moreover, in computing the tenant's percentage liability of the space and CAM assessments, space that physically exists would be considered leasable and be considered within the denominator. 5

Governing Principles

Where our jurisdiction is based on diversity of citizenship, see 28 U.S.C. Sec. 1332, the resolution of substantive issues is determined by the applicable state law. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). See generally Erie R.R. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). The parties are in agreement that the applicable state law is the law of Illinois. Therefore, in interpreting this contract, we must follow the applicable Illinois principles of contract construction. See Marmon Group, Inc. v. Rexnord, Inc., 822 F.2d 31, 34 n. 2 (7th Cir.1987). Recently, in Airline Stewards & Stewardesses Ass'n, Local 550 v. American Airlines, Inc., 763 F.2d 875 (7th Cir.1985), cert. denied, 474 U.S. 1059, 106 S.Ct. 802, 88 L.Ed.2d 778 (1986), this court had occasion to set forth the basic principles of Illinois law regarding the construction of contracts. There, the court noted that "[t]he primary object in construing a contract is to give effect to the intention of the parties." Id. at 877 (citing Schek v. Chicago Transit Auth., 42 Ill.2d 362, 247 N.E.2d 886, 888 (Ill.1969)). The starting point must be the contract itself. If the language of the contract unambiguously provides an answer to the question at hand, the inquiry is over. Id. at 878. The question of whether a contract is ambiguous is a conclusion of law and may be reviewed de novo by the court on appeal. Id. (citing National Tea Co. v. American Nat'l Bank & Trust Co., 100 Ill.App.3d 1046, 50 Ill.Dec. 474, 427 N.E.2d 806, 808 (Ill.App.Ct.1981)). If the trial court determines that the contract is unambiguous, it must then go on to declare its meaning. Such a declaration is also a conclusion of law and may be reviewed de novo. Id. On the other hand, if the court holds that the contract is ambiguous, its meaning becomes a question of fact and must be submitted to the trier of fact. Id. (citing Hagerty, Lockenvitz, Ginzkey & Assocs. v. Ginzkey, 85 Ill.App.3d 640, 40 Ill.Dec. 778, 406 N.E.2d 1145, 1146 (1980)). Under these circumstances, the trier of fact considers not only the language of the contract but also any extrinsic or parol evidence presented by the parties. Its determination is a finding of fact and this court must review that finding of fact under the clearly erroneous standard. See Anderson v. City of Bessemer City, 470 U.S. 564, 573-74, 105 S.Ct. 1504, 1511-12, 84 L.Ed.2d 518 (1985).

DISCUSSION

We believe that the district court correctly understood the basic analytical framework for the interpretation of contracts under Illinois law. However, we also believe that its painstaking analysis of the evidentiary submissions of the parties was unnecessary because, in our view, the text of the lease agreement is not ambiguous 6 In determining whether the language of a lease is unambiguous, we must remember that, while modern real estate practice has shed a good many of the cumbersome conventions of yesteryear, commercial leases rarely contain the sort of clear, concise prose which wins legal writing awards. Nor are they usually organized in a manner that makes their interpretation expeditious and convenient. This lease is no exception. However, an examination of the entire text of...

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