___________________________________ GRANTED IN PART: September 30, 1996 ___________________________________ GSBCA 12920-SEC JUDICIARY PLAZA LIMITED PARTNERSHIP, Appellant, v. SECURITIES AND EXCHANGE COMMISSION, Respondent. Wayne G. Travell and Christine R. Engelmaier of Tucker, Flyer & Lewis, Washington, DC, counsel for Appellant. George Conril Brown, Gary R. Allen, R. William Barton, Arvind K. Lal, and Margaret Moore Caine, Office of General Counsel, Securities and Exchange Commission, Washington, DC, counsel for Respondent. Before Board Judges PARKER, DEVINE, and VERGILIO. VERGILIO, Board Judge. On August 1, 1994, Judiciary Plaza Limited Partnership (JPLP) (the lessor) filed this appeal concerning leases with the respondent, the Securities and Exchange Commission (SEC). Shortly after the parties had entered into a five-year (short- term) lease for given premises, they entered into a fifteen-year (long-term) lease for the same premises. The long-term lease contemplates extensive renovations, with some costs to be directly borne by the SEC and others by JPLP. The long-term lease permits either party to terminate before a given date, even after renovations have begun. Its provisions dictate the obligations of the parties in the event of a termination. JPLP terminated the lease after renovations began--the SEC had vacated one of the leased floors, demolition occurred, and plans were finalized. The SEC withheld various payments for the vacated space and some design and construction management costs which JPLP seeks. JPLP has asserted claims; SEC has raised defenses and counterclaims. Much of the dispute is resolved by interpreting the leases in question. The long-term lease provides JPLP with the right to 2 terminate. JPLP terminated the long-term lease pursuant to the lease provisions; the termination does not constitute a breach, as alleged by the SEC. Provisions of the long-term lease survive the termination and dictate the contested obligations of the parties. JPLP remained obligated to provide improved premises on the eleventh floor; for the eleventh floor, the SEC was obligated to pay full rent through December 31, 1993. While the floor remained vacated and not improved, for the period January 1 through February 3, 1994, the SEC was obligated to pay rent but was entitled to deduct operating expenses derived from predetermined rates. For the period after February 3 until the date of substantial completion, the SEC incurred no rental obligations under the leases. The Board concludes that the defenses raised by the SEC are not supported by the record. The Board grants in part the appeal of JPLP. JPLP is entitled to unpaid rent for the period of November 23 through December 31, 1993. JPLP also is entitled to recover its eleventh-floor base building work and non-eleventh floor costs (with a total not exceeding $1,000,000) amortized over the remainder of the short-term lease (beginning April 16, 1995)--not as a lump sum as requested by JPLP. The Board denies the remainder of the appeal, seeking entitlement to unpaid rent for 1994 and portions of 1995. The Board grants counterclaims of the SEC to the extent that the SEC is entitled to be reimbursed for rent paid to JPLP but for which the SEC was not obligated to pay. Findings of Fact Short-term lease 1. On February 24, 1993, JPLP and the SEC entered into a lease under which JPLP would provide particular premises (already occupied by the SEC) for the term beginning on January 1, 1993, and expiring on December 31, 1997. Exhibit 2, Standard Form 2 at 1 ( 2) (exhibits are from the appeal file). This five-year lease is referred to as the "short-term" and the "existing" lease. In the short-term lease, the SEC agrees to accept, when vacated, additional premises in the building--discrete space, at the time, occupied by others than the SEC. Id., Addendum at 2 ( 1(a)(i)(B)). 2. The short-term lease specifies various components of the rental payment. In particular, there is a basic annual rent of $31.34 per net usable square foot of the premises (exclusive of storage space and the parking area) plus $6.00 per square foot of storage space. Also, there is an "escalating component" at a set dollar figure for initial months and later dependent upon the parking area. Additional components of rent commence January 1, 1994, derived from escalations above the base year in operating 3 costs and real estate taxes. Exhibit 2, Addendum at 7-9 ( 3). As to operating costs, the short-term lease specifies: Beginning January 1, 1994, and each calendar year thereafter, SEC shall pay additional rent for changes in costs listed in Section I of the operating expense form, Form 1217, Lines 5 through 26. The costs currently so listed in the Lessor's Annual Cost Statement attached to the lease have been agreed upon and shall be used to determine the base operating costs for operating costs adjustment. Id., Superseding Agreement of Lease at 12 ( 15). 3. The Changes clause in the short-term lease provides: At any time, the Contracting Officer may make changes within the scope of the lease by a written order. Such changes may include (but are not limited to) changes in specifications, changes in work or services and/or changes in facilities or space lay-out, but shall not include reductions in the amount of space and/or changes which have a material adverse effect upon other tenants in the building or a material adverse effect upon other portions of the building other than the premises. In addition, no change may increase or decrease the area of the premises[.] . . . If a change causes an increase or decrease in the cost of or the time or cost required for work performance, the Contracting Officer shall make an equitable adjustment which, at the Contracting Officer's election, shall, subject to the other terms of this Paragraph 17, take the form of (a) an equitable adjustment in the rental rate, (b) an adjustment in the delivery schedule or (c) a lump sum payment . . . . Any change in the rental rate, or revision of the delivery schedule, shall be made by written modification to the lease by the Contracting Officer. Such modification shall also provide for the payment, in the event of an early termination of the lease by SEC, of any unpaid principal amount of the amount reflected in such adjustment. Failure to agree to any adjustment shall be a dispute over facts under General Clauses Paragraph 23, however, nothing in that Clause shall excuse the lessor from proceeding as directed by the Contracting Officer. Subject to the other terms hereof, SEC may require any improvements or alterations it desires to have made to the Additional Premises to be done by the lessor as a change under this Paragraph 17. This Paragraph 17 supersedes General Clauses Paragraph 17 (a) and (b), but incorporates the terms of General Clauses Paragraphs 17 (c) through (f). 4 Exhibit 2, Superseding Agreement of Lease at 15-16 ( 17, Changes). 4. The incorporated paragraph (d) of the Changes clause states: "Adjustments for operating expenses in vacant leased premises will be in accordance with the clause at 552.270-25, Adjustment for Vacant Premises." Exhibit 2, General Clauses at 3 ( 17(d)). The referenced regulatory clause dictates: (a) If the Government fails to occupy any portion of the leased premises or vacates the premises in whole or in part prior to expiration of the firm term of the lease, the rental rate will be reduced. (b) The rate will be reduced by that portion of the costs per square foot of operating expenses not required to maintain the space. Said reduction must occur after the Government gives 30 calendar days prior notice to the Lessor, and must continue in effect until the Government occupies the premises or the lease expires or is terminated. 48 CFR 552.270-25 (Adjustment for Vacant Premises (JUNE 1985)) (1993). Long-term lease 5. After the short-term lease was signed, the SEC and JPLP continued to pursue entering into a fifteen-year lease. In a letter dated May 6, 1993, to the Georgetown University (the groundlessor to JPLP), JPLP states its position, as well as its understanding of the SEC position, concerning the potential fifteen-year lease: The SEC does not want to create a situation in which a long-term lease is approved, but thereafter substantial changes to the terms thereof are proposed by either Judiciary Plaza Limited Partnership ("JPLP") or Georgetown. Similarly, JPLP does not want to approve a lease only to learn that (1) it cannot obtain adequate financing on a non-recourse basis and/or (2) the new 15-year lease provides less economic benefits than the existing 5-year lease. Exhibit 252 at A512. 6. On July 9, 1993, JPLP and the SEC executed a "long- term" lease, with an effective date of July 1, 1993. The lease has an occupancy date to commence January 1, 1994; it is for a term of fifteen years through December 31, 2008. Exhibit 1, Standard Form 2 at 1 ( 3), Agreement at 1 ( 4, 6). The premises consist of the space then-occupied by the SEC pursuant to the short-term lease. Id., Addendum at 1 ( 1.(a)(i)). The 5 SEC agrees to accept "additional premises" in the building; although other tenants occupied portions of some floors, JPLP was to have the occupants vacate the specified, discrete spaces no later than stated dates. Id. at 1-3 ( 1.(a)(ii)).[foot #] 1 7. Similar to the short-term lease, the long-term lease contains a Changes clause: A. At any time, the Contracting Officer may make changes within the scope of the lease by a written order. Such changes may include (but are not limited to) changes in specifications, changes in work or services and/or changes in facilities or space lay-out, but shall not include reductions in the amount of space and/or changes which have a material adverse effect upon other tenants in the building or a material adverse effect upon other portions of the building other than the premises. In addition, no change may increase or decrease the area of the premises[.] . . . B. If a change causes an increase or decrease in the cost of or the time or cost required for work performance, the Contracting Officer shall make an equitable adjustment which, at the Contracting Officer's election, shall, subject to the other terms of this Paragraph 17, take the form of (1) an equitable adjustment in the rental rate . . ., (2) an adjustment in the delivery schedule or (3) a lump sum payment . . . . Any change in the rental rate, or revision of the delivery schedule, shall be made by written modification to the lease by the Contracting Officer. . . . Failure to agree to any adjustment shall be a dispute over facts under General Clauses Paragraph 23, however, nothing in that Clause shall excuse the lessor from proceeding as directed by the Contracting Officer. Subject to the other terms hereof, SEC may require any improvements or alterations it desires to have made to ----------- FOOTNOTE BEGINS --------- [foot #] 1 Entered into on October 27, 1993, the second amendment to the long-term lease implements the agreement of the parties concerning additional premises, specifically two of the discrete premises the SEC occupied beginning in September and October, Exhibits 50, 51. The amendment specifies dates in each month from which rent begins to accumulate under the long-term lease. It also makes an aggregate adjustment to the total net usable square footage of the expanded premises, as well as the percentage of SEC occupancy for purposes of increases in operating expenses and real estate taxes. Exhibit 89 at 1-2 ( 1-3). ----------- FOOTNOTE ENDS ----------- 6 the Additional Premises to be done by the lessor as a change under this Paragraph 17. C. This Paragraph 17 supersedes General Clauses Paragraph 17 (a) and (b), but incorporates the terms of General Clauses Paragraphs 17 (c) and (d) . . . . Exhibit 1, Superseding Agreement of Lease at 20-21 ( 17). The referenced paragraph (d) of the general clauses is the same as that set out above, Finding 4. The long-term lease also provides for the payment of operating expenses, and the agreed-upon rates reflecting JPLP's annual costs contained in a standard form 1217. Exhibit 1, Superseding Agreement of Lease at 16-19 ( 15). 8. The long-term lease requires renovations and upgrades throughout the building. Rent is greater for improved space than for existing space ($31.34 per net usable square foot). Exhibit 1, Addendum at 6 ( 3(a)). Particular modifications, designated as "base building shell work," are to be accomplished at JPLP's expense. Id., Tenant Work Agreement at 3-5 ( 2). "Tenant work" refers to improvements which are both in excess of the base building shell work and shown on tenant plans. Tenant work is to be performed at the SEC's sole expense; JPLP shall provide any tenant work (including all work or materials) requested by the SEC. Id. at 5-20 ( 3). 9. The lease, in its Tenant Work Agreement, expressly recognizes that work on the eleventh floor may be expedited: Lessor acknowledges that SEC may "fast-track" the preparation of the Tenant Plans, and the bidding and performance of the Tenant Work (and related Block Work), for the 11th Floor. Lessor and SEC shall cooperate with each other in connection with any such "fast-track", provided, however, that in no event shall the Substantial Completion Target for the 11th Floor Block Work be earlier than December 31, 1993. Any such "fast-track", together with all Tenant Work and Block Work related thereto and all other work or activities in connection therewith, shall be in accordance with the lease (including, but not limited to, the Tenant Work Agreement), except that . . . (e) the maximum amount of any Tenant Allowance which may be expended under any such fast-track on Tenant Work Costs, Tenant Plans Costs and Construction Manager Costs attributable solely to the 11th Floor shall not exceed One Million Dollars ($1,000,000.00). Exhibit 1, Tenant Work Agreement at 34-35 ( 6(a)(ii)(C)(II)). Termination provisions 7 10. The lease specifies the rights of each party to terminate the lease. Paragraph 18.D requires JPLP to submit particular evidence by December 31, 1993, satisfactory to the SEC; if JPLP fails to timely satisfy the obligations, either party may terminate the lease by written notice. Exhibit 1, Superseding Agreement of Lease (SAL) at 23-24 ( 18.D). Paragraph 18.E addresses a right particular to JPLP: Anything contained in the lease or any other document executed in connection therewith to the contrary notwithstanding, the lessor shall have the right to terminate the lease by written notice received by SEC at any time prior to 5:00 p.m., Eastern Standard Time, on Friday, December 31, 1993, in the event that the lessor has been unable, for any reason whatsoever, to procure funds necessary and sufficient to refinance the Existing Mortgage and perform all of the Base Building Shell Work and Tenant Work provided herein upon terms acceptable to it, in its sole discretion. SEC acknowledges that, (i) in order for the lessor to obtain such financing, or prior to procuring such financing, it will be necessary for the lessor to enter into an agreement modifying the Existing Groundlease (as defined in Paragraph 55.B.(1) below) upon terms acceptable to it, in its sole discretion (except that such groundlease, as so modified, shall not directly or indirectly inhibit and/or restrict SEC and/or the lessor from enjoying their respective rights and/or performing their respective obligations as provided herein), and (ii) the rental rate and other economic terms set forth herein are predicated upon the lessor's ability to obtain a non-recourse loan at a particular fixed rate of interest. Accordingly, SEC acknowledges that the lessor may terminate the lease in the event that, inter alia, (a) the lessor and the existing groundlessor under the Existing Groundlease are unable to agree upon acceptable modifications to the Existing Groundlease, (b) the lessor is unable to procure non- recourse financing at an acceptable fixed interest rate upon such terms as are acceptable to it, in its sole discretion, or (c) the lessor otherwise determines that it is not economically feasible to proceed with any proposed financing or with the terms hereof with the effect as provided in Addendum Paragraph 6. Such termination shall not be deemed to be a termination for breach or other wrongful cause. Id. at 25 ( 18.E). 11. The referenced addendum paragraph 6 specifies the lease provisions which become effective at the time of signing and those which govern in the event of a termination: 8 Termination of Lease Pursuant to SAL Paragraphs 18.D and/or 18.E.; Survival of Certain Terms (a) Anything to the contrary contained in the Lease notwithstanding, SEC and the Lessor agree that until the satisfaction of all conditions set forth in SAL Paragraph 18.D. or 18.E., the only portions of the lease in force shall be this Addendum (other than Paragraphs 3(a), (b) and (d) hereof), SAL Paragraphs 7, 8, 18, 20, 21, 66.H., and 66.I., the Tenant Work Agreement (including Schedules I, II, III, IV and V thereto), and the other terms and conditions applicable or which become applicable (including, but not limited to, by reference) to the performance of any Tenant Work and/or any Base Building Shell Work and/or to the satisfaction of any Minimum Base Building Shell Requirements. In the event that all such conditions are not timely so satisfied, and further in the event of a termination of the Lease pursuant to such SAL Paragraphs 18.D. or 18.E.[], then, except as otherwise provided below in this Paragraph 6, the Lease shall be terminated with like force and effect as if the Lease had never been entered into; provided, however, that notwithstanding any such termination, (i) any Additional Premises added to the Lease and the Premises pursuant to Paragraph 1(a)(ii) above shall be deemed to have been added to and to be a part of the Premises under the Existing Lease (and SEC and the Lessor shall enter into an appropriate amendment to the Existing Lease reflecting same); (ii) SEC shall be released from any liability in connection with (and the Lessor shall be responsible for) any and all Tenant Plans Costs (including any and all Architect's Expenses pursuant to Paragraph 1(a)(iii)(B) above) and Construction Manager Costs pursuant to the TWA (other than as provided in Paragraph 6(b) below); (iii) except as otherwise provided in Paragraph 6(a)(v) below, SEC's obligations with respect to any Swap Expenses shall be as provided in the Existing Lease (as though the Lease had never been executed); (iv) SEC's obligations with respect to Tenant Sprinkler Work pursuant to the Existing Lease shall be as provided in the Existing Lease 9 (as though the Lease had never been executed); and (v) in the event that SEC shall terminate the Lease pursuant to SAL Paragraph 18.D. as a result of the failure or inability of Lessor (by December 31, 1993) to satisfy the conditions and obligations with respect to the Corp Counsel Space and the PSC Space set forth in SAL Paragraph 18.D.(3), then Addendum Paragraph 1(a)(i)(C)(II) of the Existing lease shall be deleted. (b) Paragraph 6(a)(ii) above notwithstanding, in the event that the Lease is terminated pursuant to SAL Paragraphs 18.D. or E., and further in the event that SEC shall have "fast-tracked" the construction of the 11th Floor, and the performance of the Tenant Work with respect thereto, pursuant to Tenant Work Agreement Paragraph 6(a)(ii)(C)(II), then (i) Lessor shall nevertheless complete all of its obligations with respect thereto and/or as otherwise provided in such Paragraph 6(a)(ii)(C)(II) and/or in the Tenant Work Agreement (with like effect as though no Lease termination had occurred), and (ii) upon substantial completion thereof (as defined in Tenant Work Agreement Paragraph 9(a)(iii)), and the satisfaction of all conditions for the "lease commencement date" and the "rent commencement date" therefor pursuant to Tenant Work Agreement Paragraph 9(b)(iii)(A)(I), such Tenant Work shall be deemed a "change" under Paragraph 17 of the Existing Lease and (i) the Basic Annual Rent under the Existing Lease shall be adjusted so as to amortize the first One Million Dollars ($1,000,000.00) of all Tenant Work Costs, Tenant Plans Costs and Construction Manager Costs actually attributable solely to the 11th Floor Tenant Work (as reasonably determined by the Contracting Officer) (the "11th Floor Construction Costs"), together with the Lessor's imputed borrowing cost of eight percent (8%), over the remaining term of the Existing Lease (with any unpaid principal amount, together with any accrued but unpaid interest, due and payable upon the effective termination date of the Lease) and (ii) any such 11th Floor Construction Costs in excess of One Million Dollars ($1,000,000.00) shall be paid by SEC in accordance with the Tenant Work Agreement. At the time of the rental adjustment described in this Paragraph 6(b), SEC and the Lessor shall enter into an appropriate amendment to the Existing Lease establishing the amount thereof and attaching an amortization schedule. 10 (c) Anything to the contrary contained in the Lease notwithstanding, the technical specifications of the Lease constituting Minimum Base Building Shell Requirements and which shall not be complete until the Block Work related thereto has been completed in accordance with the Tenant Work Agreement shall be deemed applicable only to Improved Premises, and all other Currently Occupied Premises (including any Additional Premises added thereto and not yet constituting Improved Premises) shall continue to be governed by the technical specifications of the Existing Lease. Exhibit 1, Addendum at 10-11 ( 6). Among the provisions effective upon signing are those relating to temporarily vacated space and improved premises, and to rent for temporarily vacated space. Id. at 4-5 ( 2(b), (c)), 8 ( 3(c)); Findings 14, 15, 16. The three specified subparagraphs of the addendum which do not become enforceable on the effective date deal with the basic annual rent, additional rent in respect of operating costs and real estate taxes, and the payment of rent in arrears in equal monthly installments. Exhibit 1, Addendum at 6-8 ( 3(a), (b), (d)). 12. On October 27, 1993, JPLP and the SEC entered into amendment two to the long-term lease. The "background" portion of the amendment contains four paragraphs. The first recognizes that the parties have entered into the long-term lease. The next three specify: B. The Lease contemplates that certain Additional Premises will be delivered to SEC, and accepted by SEC, as part of the Premises under the Lease. C. The Lease also contemplates that certain improvements to the Premises and the Building could be commenced prior to the commencement date, in which event the parties have agreed to certain adjustments in the Rent and certain limitations on Lessor's financial contributions. D. The parties desire to confirm their understandings with respect to the foregoing and with respect to certain other matters which have arisen since execution of the Lease. Exhibit 89 at 1 (Background). 13. One aspect of amendment two addresses the eleventh floor, which, by the time of the signing of the amendment, had 11 already been vacated and demolished, as the SEC had elected to fast-track the construction: It is understood and agreed that for purposes of the One Million Dollar ($1,000,000) cap on Lessor's expenditures referred to in paragraph 6(b) of the Addendum and TWA paragraph 6(a)(ii)(C)(II)(e), the term "11th Floor Construction Costs" in paragraph 6(b) of the Addendum shall be amended to mean the sum of (i) all Tenant Work Costs and Base Building Costs for all "fast-tracked" 11th Floor Block Work, plus (ii) all Tenant Plans Costs, fees to the Designer for the Base Building Drawings, and fees to the Construction Manager incurred prior to December 31, 1993; and TWA paragraph 6(a)(ii)(C)(II)(e) shall be amended to read "the maximum amount of 11th Floor Construction Costs which Lessor shall be required to expend shall not exceed One Million Dollars ($1,000,000), unless SEC agrees to reimburse Lessor for such excess pursuant to paragraph 6(b) of the Addendum." Such limitations shall be waived if Lessor obtains permanent financing which covers such costs as contemplated in SAL paragraph 18E. Exhibit 89 at 3 ( 5). Thus, by altering paragraph 6(b) of the addendum, the parties amended a lease provision which would become effective only upon the termination of the lease. As to the "effect of lease and amendment": "The Lease, as modified by this Amendment, is ratified and affirmed in all respects. In the event of any conflict between this Amendment and the rest of this Lease, this Amendment shall govern." Id. ( 6). Rent for temporarily vacated space 14. The long-term lease expressly provides for the renovation of space, with the SEC temporarily vacating space while renovations occur. The long-term lease obligates the SEC to pay full rent on temporarily vacated space on the eleventh floor for at least 120 days from the date of vacation, Finding 9; the SEC is to pay no rent from the date established for substantial completion until the improved premises are substantially complete: (b) Temporarily Vacated Space (i) It is the intent of the Lessor and SEC that SEC from time to time vacate certain portions of the Currently Occupied Premises to permit the Lessor to perform the Base Building Shell Work (as defined in Tenant Work Agreement Paragraph 2(a)(i)) and the Tenant Work (as defined in Tenant Work Agreement Paragraph 3(a)(i)(A)) related thereto, all according to the schedule further set forth in Paragraph 1(b)(ii) below 12 and in Tenant Work Agreement Paragraph 1(a)(iii). Portions of the Currently Occupied Premises thus vacated are, until the lease commencement date and the rent commencement date for Improved Premises shall have occurred with respect thereto pursuant to the terms of Tenant Work Agreement Paragraph 9(b)(iii)(A)(I), referred to as the "Temporarily Vacated Space". As used in this Lease, the term "Temporarily Vacated Space" shall mean the portion of the Currently Occupied Premises vacated as such and SEC shall not (except in its sole and absolute discretion) be required to accept less than the entire such Space vacated. For example, if SEC vacates the 10th and 11th floors, the term "Temporarily Vacated Space" shall mean the entire space so vacated and SEC shall not be required to accept either floor, and the lease commencement date and the rent commencement date for Improved Premises shall not occur with respect to either floor, until the Lessor has satisfied all conditions precedent to the lease commencement date and the rent commencement date for both floors. (ii) SEC shall vacate the 10th and 11th floors of the Building on or before the First Vacation Date (as defined in Tenant Work Agreement Paragraph 1(a)(iii)). Subsequent vacations (and the "Vacation Dates" with respect thereto) shall occur as provided in Tenant Work Agreement Paragraph 1(a)(iii). In the event that SEC does not elect to have Tenant Work (and if the Lessor is not required to perform any Base Building Shell Work) performed with respect to a floor, then the lease commencement date and the rent commencement date for Improved Premises with respect thereto shall be the lease commencement date and the rent commencement date applicable to the last accepted Improved Premises. Exhibit 1, Addendum at 4 ( 1(b)). 15. The long-term lease also provides: (c) Rent for Temporarily Vacated Space Anything to the contrary contained herein notwithstanding, except as otherwise provided for Tenant Delay pursuant to Tenant Work Agreement Paragraph 9(b)(iii)(B), SEC's obligation to pay any rent, additional rent or other consideration and/or compensation with respect to any Temporarily Vacated Space shall cease upon and effective as of the ninety- first (91st) day following the Vacation Date therefor. The ninety-one (91) day period described in the preceding sentence shall be one hundred twenty-one 13 (121) days in the case of any Vacated Block containing the 11th floor. Addendum at 8 ( 3(c)). Both this provision and that in the preceding finding became enforceable at the time the lease was signed. Finding 11; Exhibit 1, Addendum at 10 ( 6(a)). 16. Also specifically applicable upon the signing of the long-term lease is paragraph 66.I of the superseding agreement of lease, which provides in part: 14 (1) Introduction Under the terms of Addendum Paragraph 1(b), SEC is to make available and the lessor is to accept predetermined portions of the premises (including Additional Premises) as Temporarily Vacated Premises and to perform the Tenant Work (and any related or otherwise scheduled Minimum Base Building Shell Work) with respect thereto. . . . (2) Rent Suspension Anything to the contrary contained in the lease notwithstanding, (a) SEC's obligation to pay rent or other consideration with respect to Vacated Premises comprising a Vacated Block shall cease and be suspended upon and effective as of the first calendar day following the Substantial Completion Target therefor until the time when such Block is entitled to become (and in fact becomes) Improved Premises (and the Improved Premises rent commencement date and the Improved Premises lease commencement date shall have occurred with respect thereto)[.] Exhibit 1, Superseding Agreement of Lease at 89-90 ( 66.I). The Tenant Work Agreement obligates the parties to accomplish eleventh floor fast-track work in accordance with all lease provisions. Finding 9. Also, similar to the paragraphs above and in the two findings above, the Tenant Work Agreement obligates the parties to act pursuant to paragraph 1(b) of the Addendum, Finding 14, and, while recognizing the 120-day substantial completion period for the eleventh floor, it specifies that no rent obligation shall commence for a vacated block until the block is substantially complete. Exhibit 1, Tenant Work Agreement at 1-2 ( 1(a)), 45-47 ( 9(b)). Designer and Engineering Services 17. The Tenant Work Agreement, applicable upon the signing of the long-term lease, Finding 11, specifies that JPLP "shall cause to be prepared all plans, working drawings and specifications for the Tenant Work and necessary for the construction and completion thereof" and "shall retain the Designer for the purpose of preparing such Tenant Plans and performing the functions and exercising the rights of the Designer." Exhibit 1, Tenant Work Agreement at 20-21 ( 5(a)(i)(A)); Exhibit 89 at 2 ( 4.A). The long-term lease also directs that JPLP "shall retain a firm to act as construction manager," to be approved by the SEC. Exhibit 1, Tenant Work Agreement at 21-22 ( 5(a)(i)(B)). 15 18. The long-term lease provides JPLP and the SEC each with the right to elect to have the SEC undertake directly to supervise and direct the day-to-day activities of the designer, the Construction Manager and/or any other consultants responsible for preparing the tenant plans. Exhibit 1, Tenant Work Agreement at 24-25 ( 5(a)(iv)(A)). In a jointly executed letter dated July 9, 1993, the SEC elects to supervise and direct the day-to- day activities of all three entities. Further, SEC hereby acknowledges that all work heretofore performed by the [Designer], the Construction Manager and/or Other Consultants, as the case may be, solely as between JPLP and SEC, has been approved and accepted by SEC, and except for Lessor Responsible Occurrence (as defined in the Tenant Work Agreement), shall have no responsibility or liability for the further or subsequent performance of such [Designer], Construction Manager and/or such Other Consultants, as the case may be, or for any cost or delay resulting from such performance. Exhibit 1, Cover & Transmittal Letters (July 9, 1993); Exhibit 89 at 2-3 ( 4). The record suggests that contracts between JPLP and the given entities were not assigned from JPLP to SEC. For example, JPLP remained obligated to invoke, at the SEC's written request and at the Government's sole cost, the remedies available to JPLP under its agreement with the designer in the event of a failure of performance by the designer. Exhibit 89 at 2-3 ( 4.B). Eleventh floor 19. From the time of signing the long-term lease, the SEC communicated to JPLP its intent to fast-track the eleventh floor work. Exhibit 16 at 2; Exhibit 252 at 259. By letter dated August 13, 1993, the SEC informed JPLP that, in an effort to facilitate the fast-tracking of the eleventh floor work, it would vacate the eleventh floor by August 16. Moreover, Although the Commission is vacating the 11th floor more than 120 days before December 31, 1993, the Commission agrees that the Substantial Completion Target Date will continue to be December 31, 1993, except for previously identified "long lead" items for which the Substantial Completion Target Date will be January 31, 1993. Exhibit 24. 20. On August 14, 1993, the SEC vacated the eleventh floor. Exhibits 69, 98, 177. 16 21. By letter dated August 31, 1993, the SEC provided notice to proceed with demolition of the eleventh floor. Exhibit 38. Demolition of the eleventh floor commenced no later than September 15, 1993, and was completed as of October 1, 1993. Exhibits 46, 52 at 1 ( B.2), 63 at 1 ( B.2). 22. On October 6, 1993, the SEC and JPLP approved plans and specifications for the eleventh floor. Exhibit 66. 23. By letter dated October 14, 1993, the SEC responded to an inquiry by JPLP regarding the 120-day construction period for the eleventh floor under the long-term lease: In light of the fact that the construction plans for the 11th floor were completed October 6, 1993, the Commission is of the position that October 6 as the start date results in the Substantial Completion Target Date (as defined in the Lease) of February 3, 1994. This date is more than two months after the date set forth in the Lease, and more than 160 days after vacation of the floor by the Commission. I believe that this accommodation to JPLP is more than reasonable, given the fact that all of the first phase of construction, demolition, was begun shortly after the Commission vacated the 11th floor, and was completed on October 1, 1993, thus allowing JPLP a head start on the work prior to the start date. Exhibit 69. Despite language in the long-term lease, Finding 15, by a letter to the SEC dated October 27, 1993, JPLP indicated that it continued to construe the 120-day construction period as commencing with the start of construction, not the date of vacation. Exhibit 88. On-going dialogue 24. By August 13, 1993, JPLP had already engaged the SEC in discussions, as JPLP sought to relax and alter requirements set forth in the long-term lease. Exhibit 23. Such discussions continued until the termination. E.g., Exhibits 64, 65, 68, 79, 81, 83. JPLP informed the SEC that JPLP would be unable to obtain necessary financing without the lease being altered with the SEC waiving various of its rights. Exhibits 79 (Oct. 21, 1993), 90 (Oct. 29, 1993), 93 (Nov. 2, 1993), 97 (Nov. 4, 1993). 25. By letter dated October 14, 1993, JPLP notified the SEC regarding the long-term lease: After extensive negotiations and discussions with Georgetown University, a new lender and existing retail tenants, JPLP can state that it is prepared to fulfill 17 all requirements of Par. 18(D) of the above-referenced Lease Agreement. The one exception: the termination of the DC Government lease and the vacating of approximately 20,000 [net usable square feet] on the 8th Floor, by [a named entity] before December 31, 1993. Exhibit 68. The letter is silent on the views of JPLP regarding its right to terminate pursuant to paragraph 18.E. Id. Termination of long-term lease 26. By letter dated November 22, 1993, with references to the language in the termination paragraph 18.E, JPLP informed the SEC: As a result of the unavailability of non-recourse financing and various other reasons which have caused Lessor to conclude that it is no longer economically feasible to proceed, Lessor hereby notifies the SEC of its election to terminate the Lease in accordance with its rights under Paragraph 18 of the SAL, effective as of 5:00 pm on Tuesday, November 23, 1993. Exhibit 111. By letter dated November 24, after it terminated the lease, JPLP notified the SEC that it had received the building permit to proceed with the eleventh floor work. Exhibit 114. 27. A two-paragraph letter dated November 24, 1993, from the SEC to JPLP states: Due to lessor's termination of the lease effective Tuesday, November 23, 1993, the SEC has notified the [Designer] and [Construction Manager] to cease all tenant work on the 11th floor. This action is taken to curtail additional expenses with respect to the 11th floor pending SEC's evaluation of the effects of your termination action. Our current buildout plans for the 11th floor are premised on a complete renovation of the building, and the lease termination has caused us to consider other utilization possibilities. You should make whatever notifications you deem appropriate with respect to the 11th floor. Exhibit 115. 28. By letter dated December 30, 1993, the SEC informed JPLP that it was forwarding payment of rent on occupied space. 18 However, the SEC specifies that the amount paid does not include any sum for the unoccupiable eleventh floor. Exhibit 129. Redesigning the eleventh floor 29. In a letter to the designer, dated December 14, 1993, the SEC states that, because the long-term lease has been cancelled, it is required to build out the eleventh floor at the most cost-effective, short-term design. Through the letter, the SEC solicits a cost proposal to develop the revised design and construction documents for the eleventh floor, differentiating between base building and tenant work. Exhibit 124. 30. By letter dated December 17, 1993, the designer responded to the SEC request--it provided a cost proposal for the design and documentation of the new build-out of the eleventh floor. Exhibit 127. By letter dated December 22, 1993, the SEC informed JPLP that the SEC is accepting the proposal of the designer and that the SEC requests that JPLP authorize the designer to proceed with the effort. Exhibit 128. Under cover letter dated February 7, 1994, the designer provided JPLP with a copy of a ready-to-execute proposal, already found acceptable by the SEC. The designer specifies its understanding that it is to proceed with the work in the absence of an executed, formal agreement. Exhibit 143. 31. With discussions on-going as to the responsibilities under the short-term and long-term leases regarding the eleventh floor, on May 19, 1994, the SEC and JPLP approved a design for the eleventh floor. Exhibit 204. In a letter dated June 9, 1994, the SEC directed JPLP: JPLP has an obligation to complete the buildout of the 11th floor and has approved plans in its possession. The Commission directs JPLP to proceed with buildout of the 11th floor. At this stage, the next step in buildout is for the approved design to be submitted to a designer for the preparation of construction drawings. . . . . Any Commission changes to the approved design will be submitted directly to JPLP. The Commission consents to whatever subcontract JPLP may enter into [] with a designer, without prejudice to the fundamental rights and obligations of the Commission and JPLP existing under the surviving provisions of the Long term Lease relating to the completion of the 11th floor. Exhibit 204. 32. JPLP did not immediately proceed with directions to the designer. During June, July, and August, JPLP both attempted to 19 obtain the SEC's acceptance and approval of various terms and conditions for JPLP proceeding, and suggested alternatives for the SEC to pursue. Exhibits 223, 237, 238, 244. By letter dated August 15, 1994, the SEC responds to continuing JPLP concerns: None of the objections that JPLP has raised since May 19, 1994, when 11th floor schematic drawings were approved, provides grounds for its continuing refusal to proceed with my direction as Contracting Officer to obtain construction drawings. Whichever lease is applicable, be it the Long-term Lease or the 5-year Lease, there is a Changes clause that applies to the Commission's tenancy with JPLP. . . . . The drawings and construction I have directed JPLP to prepare and effect are within the scope of whichever contract applies to the Commission's tenancy, and my order to JPLP to proceed is well within my authority. JPLP cannot use the Commission's refusal to execute JPLP's "agreement" to justify JPLP's nonperformance of the ordered work. I have clearly stated to JPLP that the Commission will pay for the tenant work portion of the design and construction, and that if JPLP claims additional compensation because of its performance of the work it should present those claims for consideration and resolution. That the Commission and JPLP disagree does not excuse JPLP from its duty to proceed. The Changes clauses of the two leases state that disagreements over changes are disputes over facts under the Disputes clause . . . . Exhibit 222. 33. By letter dated August 17, 1994, JPLP responded to the SEC directive of August 15, Finding 31. JPLP informed the SEC that the designer and JPLP have amended their agreement, and a notice to proceed has been issued with respect to the 11th floor design work. Exhibit 223. 34. Substantial completion and reoccupancy occurred on April 16, 1995. Transcript at 153, 535. Claims and contracting officer decisions 35. In claims certified on February 3, March 2, and April 19, 1994, JPLP demands payment (with interest) of $75,806.24, $75,806.24, and $75,806.46, respectively, pursuant to the short- term lease, for the unpaid balance of the basic annual rent for the premises for January, February, and March 1994. Exhibits 141, 148, 155. The figures represent the rental amount for the eleventh floor; the SEC had withheld the amount. 20 36. In a decision dated May 2, 1994, as modified on May 3, the contracting officer addresses JPLP's entitlement to rental payment for the eleventh floor under the long-term and the short- term leases. Exhibit 3 at 1. The contracting officer specifies that "one important term that was to survive [the termination] was JPLP's obligation to complete construction of the 11th Floor in accordance with the terms of the Tenant Work Agreement appended to the Long-term Lease." The decision adds: JPLP's abrupt termination, without warning, after Long-term Lease Tenant Plans had been completed, forced the Commission to seek revision of the completed Tenant Plans, which had contemplated a much more extensive build-out than a 5-year Lease warranted. The Commission ceased paying rent for the 11th floor because the long-term lease's provision for 120 days of continued rent did not survive termination, the 5-year Lease excused rent on space that was unoccupiable, and the 11th Floor was unoccupiable. Id. at 3. Noting that the eleventh floor remained demolished and unoccupiable, the contracting officer concludes that the SEC will pay rent for the eleventh floor for the period from November 23, 1993, through the date of the SEC's submission of revised Tenant Plans to JPLP. From this total the contracting officer subtracts operating expenses not incurred by JPLP while the eleventh floor remained demolished and vacant--an annual amount of $2.75 per net usable square foot of eleventh floor space derived from the agreed upon operating expenses, Finding 2. Exhibit 3, Decision of May 2 at 3-5; Correction of May 3. For the period after JPLP's receipt of revised Tenant Plans, the contracting officer considered the 120-day period provided for in the long-term lease, the demolition work already accomplished during the period the agency paid full rent, and the yet to be done work, which would be less extensive than the anticipated build-out. The contracting officer concluded that the SEC will pay full rent for the eleventh floor (without subtracting allegedly unincurred operating expenses) for 115 days after receipt, after which no rent will be paid for the eleventh floor until substantial completion and delivery: This 115-day period assumes that JPLP will immediately resume efforts to construct the 11th Floor as called for in the termination provisions of the Long-term Lease in accordance with the Redesigned Tenant Plans. After the Redesigned 11th Floor Completion Period the Commission shall have no further rental obligations with respect to the 11th Floor until the 11th Floor is Substantially Complete and delivered to the Commission (as defined in the Long-Term Lease). 21 Id. at 7. The decision states that the conclusions are reached as a compromise and do not serve as a waiver by the SEC to seek recovery of full rental payments should JPLP contest the decision. Id. 37. Based upon the decision, the SEC forwarded payment (plus interest) to JPLP for the period from November 23, 1993, through April 30, 1994. For the eleventh floor, the SEC paid the square footage rental amount less $34,811.04, the SEC-calculated operating costs saved by JPLP. Exhibit 3, Decision of May 2 at 5; Correction of May 3. 38. By letter dated February 2, 1994, JPLP invoiced the SEC for partial reimbursement for eleventh floor construction costs. JPLP sought $592,840.39, for amounts invoiced by the designer, the construction manager, and the general contractor. Exhibit 140. The SEC obtained documentation and conclusions from the designer, dated February 7, 1994, relating to amounts billed, not limited to those in the JPLP invoice. Regarding its costs billed, the designer represents that $468,781.69 are attributable to eleventh floor fast-track efforts and $122,075.01 are associated with other areas of the project. Exhibit 142. In the decision of May 2, 1994, the contracting officer concludes that $127,075.01 of JPLP's requested amount are attributable to non- eleventh floor work ($122,075.01 by the designer and $5,000 by the construction manager)--a conclusion not disputed by JPLP, JPLP Post-hearing Brief at 17--and hence, not reimbursable. Exhibit 3 at 8. 39. In three claims, each with a certification date of July 12, 1994, JPLP demands payment of $6,651.77, $6,651.77, and $41,228.87 (each with interest), pursuant to the short-term lease, for the unpaid balance of the basic annual rent for the premises for April, May, and June 1994. Exhibit 213. The amounts for April and May reflect withheld operating expenses, the amount for June reflects withheld rent for the eleventh floor. 40. On August 1, 1994, JPLP filed with the Board a notice of appeal, seeking payment for rent for the eleventh floor and a Board determination as to the interpretation and application of various aspects of the long-term and short-term leases, which the contracting officer had propounded in his decision, Findings 36- 37. Exhibit 217. 41. In a claim with a certification date of August 10, 1994, JPLP demands payment of $75,806.24 (with interest), pursuant to the short-term lease, for the unpaid balance of the basic annual rent for the premises for July. Exhibit 219. 42. In a claim with a certification date of August 10, 1994, JPLP demands payment of $127,075.01 (with interest), 22 pursuant to the short-term and long-term leases, for what it characterizes as "the balance of the amount due to JPLP to reimburse JPLP for '11th Floor Construction Costs' pursuant to an invoice submitted to the SEC on February 2, 1994," Finding 38. Exhibit 220. 43. In a claim with a certification date of September 14, 1994, JPLP demands payment of $90,502.11 (with interest), pursuant to the short-term and long-term leases, for what it characterizes as "the balance of the amount due to JPLP to reimburse JPLP for '11th Floor Construction Costs' pursuant to an invoice submitted to the SEC on August 10, 1994." Exhibit 250. The referenced invoice specifies that, excluded from this figure are amounts invoiced on February 2, 1994, Finding 38. Exhibit 218. Attached to the invoice are invoices to JPLP from the designer and others. In these attachments JPLP, as well as the designer for its work, categorize the amounts as relating to base building work, as distinct from work done on behalf of the SEC. Id. 44. In a claim with a certification date of September 14, 1994, JPLP demands payment of $75,806.24 (with interest), pursuant to the short-term lease, for the unpaid balance of the basic annual rent for the premises for August. Exhibit 225. 45. In a decision dated October 11, 1994, the contracting officer resolves various claims by JPLP. Specifically, he denies claims for unpaid rent (SEC-deemed operating expenses previously withheld for April and May 1994 and more inclusive amounts for June, July, and August 1994) totalling $206,144.89, and for eleventh floor construction costs totalling $217,577.12 ($127,075.01 + $90,502.11). The contracting officer concludes that this latter sum is attributable to non-eleventh floor and base building costs for which the SEC bears no liability. Exhibit 228. 46. On December 22, 1994, JPLP filed an amended complaint, seeking additional relief, while taking issue with the decision of the contracting officer dated October 11. 47. In his decision dated May 2, 1994, as modified May 3, 1994, the contracting officer details the calculation of the $2.75 figure for operating expenses saved by JPLP with the vacation and demolition of the eleventh floor. The calculations are derived from the agreed-to operating expenses. Exhibit 3; Finding 36. Testimony during the hearing on the merits focused on various actual or imputed operating costs with respect to the eleventh floor which may or may not have been saved in actuality. While JPLP takes issue with assumptions of the contracting officer, the testimony did not focus on the agreed-to operating expenses and, hence, did not undermine the reasonableness of the contracting officer's calculations. 23 Discussion In this appeal, JPLP states that it is entitled to full rent for the eleventh floor for the period from the SEC's vacation through substantial completion. JPLP has put these matters at issue in its individual claims (relying on the short-term lease) and in its appeal of the SEC claims (found in the contracting officer decisions) which, under both leases, withhold allegedly saved operating expenses or full rent. JPLP seeks payment of all portions of the full rent not paid as well as payment of $217,577.12. The SEC claims entitlement to reimbursement of all rental amounts paid for the eleventh floor for the period in question. 24 Defenses The SEC raises a number of defenses to the claims of JPLP. It asserts that the claims are barred by accord and satisfaction, the doctrine of avoidable consequences, misrepresentation, the doctrine of frustration of the purpose of the contract, unclean hands, and/or the statute of limitations. Further, it maintains that JPLP may not pursue the claims because of waiver, estoppel, or failure of consideration. The SEC has failed to demonstrate the existence of the necessary facts to support the applicability of any of the defenses it raises generally. The language of the long-term lease provides JPLP the opportunity to terminate by written notice received by the SEC no later than a specified time and date. The SEC approved various actions, including the vacation and demolition of the eleventh floor, although JPLP (and the SEC) possessed the right to terminate the long-term lease. Moreover, the parties entered into the second amendment to the long-term lease after the SEC had vacated the eleventh floor and after demolition had occurred. The amendment modified a provision of the long-term lease which became applicable only if the lease were to be terminated. Hence, at the time the parties signed amendment two, they recognized the potential for a lease termination. The SEC has pointed to no action or inaction by JPLP or the SEC which should in any way limit the ability of JPLP to invoke the termination provision of the long-term lease. As explained more fully below, the Board gives effect to the agreement mutually reached by the parties. Such a lease, which grants the lessor broad rights to terminate, does not fail for want of consideration. Portions of the lease became effective upon signing, thereby creating obligations of the parties. Finding 11. Under the long-term lease, the SEC occupied "additional space" and incurred an obligation to pay rent prior to the termination. Footnote 1. The lease expressly describes the obligations of the parties in the event of a termination. The lease provides for the situation that occurred. Validity of termination Paragraph 18.E of the superseding agreement of the long-term lease expressly provides JPLP the right to terminate the lease. Finding 10. Contrary to the assertions by the SEC, the lease grants to JPLP broad discretion to terminate. The first sentence of paragraph 18.E specifies that JPLP may exercise, "in its sole discretion," the right to terminate if it "has been, for any reason whatsoever," unable to procure necessary funds "upon terms acceptable to it." In the third sentence of the paragraph, the SEC expressly acknowledges that JPLP may terminate the lease if, among other reasons (introduced by "inter alia", such that JPLP 25 may assert a reason in addition to those enumerated), JPLP "otherwise determines that it is not economically feasible to proceed with any proposed financing or with the terms hereof." JPLP determined that it was not economically feasible for it to proceed with the terms of the long-term lease. Finding 26. JPLP terminated the lease pursuant to the provisions of paragraph 18.E. The lease places beyond review the motivations of JPLP, or the soundness of its reasoning. Effect of termination The termination occurred after the SEC fast-tracked the construction of the eleventh floor. The addendum, paragraph 6(b), dictates the provisions of the long-term lease which survive the termination: (i) Lessor shall nevertheless complete all of its obligations with respect thereto [i.e., the fast- tracked construction of the eleventh floor and the performance of the eleventh floor tenant work] and/or as otherwise provided in . . . the Tenant Work Agreement (with like effect as though no Lease termination had occurred), and (ii) upon substantial completion thereof . . . and the satisfaction of all conditions for the "lease commencement date" and the "rent commencement date" therefor pursuant to Tenant Work Agreement Paragraph 9(b)(iii)(A)(I), such Tenant Work shall be deemed a "change" under paragraph 17 of the Existing Lease[.] Finding 11. The Tenant Work Agreement obligates JPLP to perform the fast-tracked eleventh floor work in accordance with the long- term lease provisions. Findings 9, 16. The long-term lease obligates JPLP to complete the eleventh floor work as if no termination occurred. No change under the short-term lease for the eleventh floor is to become effective until substantial completion--that is, the satisfaction of the conditions for the rent commencement date and the lease commencement date under the long-term lease. Prior to the termination, under the long-term lease, the SEC could utilize the Changes clause to direct or alter work on the eleventh floor and to reduce the rental rate for operating expenses not required to maintain unoccupied space; JPLP was obligated to proceed in light of any such changes. Finding 11. Subsequent to the termination, the SEC retained the right to invoke the Changes clause; JPLP remained obligated to proceed with any changes. Nothing in the long-term lease divests the SEC of these rights or eliminates any of JPLP's obligations. 26 Given the termination by JPLP, it was foreseeable and not unreasonable for the SEC to redesign the tenant work on the eleventh floor. The record does not demonstrate that tenant delay was a cause for the eleventh floor remaining unfinished; that is, the facts do not reveal that the SEC unreasonably delayed in the revision of tenant plans or that the SEC failed to cooperate in the effort. Actions and inactions of JPLP during this period, in not proceeding promptly with the designer under the long-term lease, Findings 30-33, extended the period of time the eleventh floor remained vacant or less than substantially complete. With the vacation date of August 14, 1993, under the long- term lease, the SEC was obligated to pay full rent for the eleventh floor space for the period through December 31, 1993. Absent a tenant (SEC) delay, JPLP is to receive no rent for the eleventh floor beyond that date until the improved premises become substantially complete. Findings 14, 15, 16. However, prior to the termination, despite the August date of vacation, the SEC concluded that the substantial completion date should be February 3, 1994. Findings 20, 23. The extension is not contrary to the terms for rent suspension, Findings 14, 15, 16, particularly when the extension is not caused by an SEC delay; the situation falls within the terms of the Changes clause in the long-term lease. Finding 7. The Changes clause enables the SEC to reduce its rental payments for the eleventh floor space by that portion of the operating expenses not required to maintain the space. The contracting officer acted pursuant to the Changes clause in making his calculations; the SEC withheld an appropriate amount of operating expenses for the period in question. Finding 47. The long-term lease prescribes the obligations of the SEC to pay rent in the event of a termination. Absent tenant delay, not here present, no provision of the long-term lease obligates the SEC to pay rent for the period after the date established for substantial completion until substantial completion occurs. This loss of rental payments for the eleventh floor space is part of the bargained-for lease agreement which permits JPLP to exercise its right to terminate the lease after the SEC vacates the eleventh floor. Effect of amendment two on other costs Prior to amendment two, in the event of a termination after the eleventh floor has been fast-tracked, the long-term lease established the methodology for compensation for the work involved in improving the eleventh floor premises. Specifically, with the substantial completion of the eleventh floor (the conditions of the long-term lease and rent commencement dates having been satisfied): (i) the basic annual rent under the short-term lease shall be adjusted to amortize the first 27 $1,000,000 of eleventh floor construction costs over the remaining term of the short-term lease and (ii) the SEC shall pay any such eleventh floor construction cost in excess of $1,000,000, in accordance with provisions of the Tenant Work Agreement. The phrase "eleventh floor construction costs" meant all tenant work costs, tenant plans costs and construction manager costs actually attributable solely to the eleventh floor tenant work. Finding 11 (Addendum ( 6(b)). Moreover, prior to the amendment, the Tenant Work Agreement specified that, should the SEC fast-track the construction of the eleventh floor, "the maximum amount of any Tenant Allowance which may be expended under any such fast-track on Tenant Work Costs, Tenant Plans Costs and Construction Manager Costs attributable solely to the 11th Floor shall not exceed One Million Dollars." Finding 9 (Tenant Work Agreement ( 6(a)(ii)(C)(II)(e))). Amendment two to the long-term lease, in part, reflects adjustments in rent and certain limitations on JPLP's financial contributions relating to improvements to the premises. Finding 12. With respect to the $1,000,000 cap on potential JPLP expenditures referenced in the above paragraph, amendment two expands the phrase "eleventh floor construction costs" in paragraph 6(b) to mean the sum of (i) all tenant work costs and base building costs for all fast-tracked eleventh floor block work and (ii) all tenant plans costs, fees to the designer for the base building drawings, and fees to the construction manager incurred prior to December 31, 1993. Amendment two alters the Tenant Work Agreement, paragraph 6(a)(ii)(C)(II)(e), to read "the maximum amount of 11th Floor Construction Costs which Lessor shall be required to expend shall not exceed One Million Dollars ($1,000,000), unless SEC agrees to reimburse Lessor for such excess pursuant to paragraph 6(b) of the Addendum." Finding 13. In light of the language of the amendment, unpersuasive are the interpretations of the amendment proffered by the parties during the hearing on the merits and in the briefs. JPLP views the amendment as entitling it to lump sum reimbursements for its costs totalling less than $1,000,000. The SEC views the amendment simply as a limitation on the amount of money JPLP could be required to expend but not affecting the obligations and liabilities of the SEC. The amendment establishes a means for adjusting the rental rate in the short-term lease, should a party terminate the long- term lease. The adjusted rental rate is to reflect costs not contemplated under the short-term lease--base building costs and tenant work costs as specified relating to the eleventh floor ( 6(b)(i), as amended) and to the entire building ( 6(b)(ii), as amended), incurred before December 31, 1993 (a date which could, and did, post-date the actual termination). 28 Paragraph 6(b), as amended, requires an amortization of the specified costs. The SEC does not contest the invoices or the reasonableness of the amounts at issue, incurred by JPLP prior to the termination--$90,502.11 in base building design and construction management costs and $127,075.01 in non-eleventh floor tenant plan costs and construction management costs. Findings 38, 42, 43, 45. These costs are of the types specified in amendment two for use in the SEC calculations. The long-term lease, as amended, directs the action the SEC must take. As of April 16, 1995 (the date of substantial completion), the SEC must amortize, over the then-remaining term of the short-term lease, the amount at issue ($217,577.12), including an imputed borrowing cost of eight percent, interest, and other amounts. This resulting amortized amount is to be used to adjust the rental amount in the short-term lease, utilizing the Changes clause in the short-term lease. Findings 11, 13. Counterclaims The SEC raises counterclaims in its filing of October 7, 1994. It pursues four. 1. JPLP's termination is a breach of contract and appears to have been made in bad faith because it violated paragraph 18.E of the long-term lease. SEC Submission at 32-33. As determined above, JPLP obtained and properly exercised its termination rights pursuant to paragraph 18.E. The termination does not reflect bad faith and does not constitute a breach of the long-term lease. Accordingly, the Board denies this counterclaim of the SEC. 2. SEC is entitled to a credit for 11th floor rental payments made subsequent to August 31, 1993. SEC Submission at 34. SEC contends that under long-term lease addendum paragraph 6(a), the provisions of the short-term lease dictate rental payment obligations. The SEC contends that, under the short-term lease, it has no obligation to pay rent on unoccupiable space. Because the eleventh floor became unoccupiable in August 1993, when demolition began, there is no obligation to pay rent on the space until it is occupiable. Thus, the SEC claims a credit for all rent paid for the eleventh floor since August 1993. As concluded above, the SEC incorrectly relies upon the short-term lease; the long-term lease establishes the parameters of the obligations of the parties through the period the eleventh floor is substantially complete. However, in interpreting the leases, the Board has resolved the merits of the SEC claim for reimbursement for the various periods from the date of vacation through substantial completion. 29 3. JPLP is responsible for costs of demolition work to 11th floor. SEC Submission at 35. Relying on provisions of the Tenant Work Agreement pre- dating amendment two, which purport to limit the liability of the SEC to tenant work shown in the tenant plans, the SEC maintains that demolition is not part of tenant work because it is not on the tenant plans. The SEC concludes that JPLP is responsible for the payment of demolition costs, such that JPLP must reimburse the SEC $79,346 (the amount the SEC paid JPLP for eleventh floor demolition). This SEC claim fails to consider the effects of amendment two. As concluded above, amendment two alters the liability of the SEC with respect to the first $1,000,000 of all fast-tracked eleventh floor work. This cost, with others, should be included in the calculation of the amount to amortize over the then- remaining term of the short-term lease beginning April 16, 1995. 4. JPLP misrepresented to the SEC the reasons why it would terminate and the SEC relied to its detriment on the misrepresentations. SEC Submission at 35-37. The SEC maintains that it granted every waiver on the terms asked for by JPLP. The SEC concludes that, even if JPLP had a reason for terminating other than these waivers, it misrepresented itself to the SEC by concealing its reasons, is estopped from relying on 18.E to terminate, and is liable to the SEC for all expenses incurred by the Commission since August 14, 1993. The SEC determines that its expenses, through October 7, 1994, total $2,312,563.87--$1,061,287.30 in rental payments on the 11th Floor through the date of this Counterclaim of October 7, 1994; $651,276.57 of Tenant Improvements expenses made useless by Appellant's termination; and $600,000 required to rebuild the 11th Floor with the new design. After the eleventh floor became improved premises, the SEC updated this counterclaim to seek $3,727,536. Exhibit 254. The facts fail to reveal a misrepresentation. In mid- October 1993, JPLP stated that it was prepared to fulfill all requirements of paragraph 18.D. JPLP gave no indication with respect to its termination rights under paragraph 18.E. Finding 25. By late October, with amendment two, the parties had not precluded a termination. JPLP was not obligated to reveal a reason for its decision to terminate. The SEC may well have relied to its detriment on representations made by JPLP. However, the language of the long- term lease both permits JPLP to terminate the lease through December 31, 1993, and details the consequences. Whether reasonable or not, the SEC reliance does not create cause to depart from the provisions of the long-term lease with the 30 identified liabilities and obligations. The Board denies this counterclaim. 31 Decision The Board GRANTS IN PART this appeal. JPLP is entitled to withheld operating expenses for the period of November 23 through December 31, 1993. The SEC is entitled to recover all rent paid for the eleventh floor for the period of February 4, 1994, through April 15, 1995. As prescribed in the long-term lease, the SEC must amortize $217,577.12 in JPLP costs (as well as the demolition costs at issue in counterclaim four, if not already part of the calculation) and adjust rental payments under the short-term lease for the period beginning April 16, 1995, through the end of the five-year term of the short-term lease. ___________________________ JOSEPH A. VERGILIO Board Judge We concur: ____________________________ ___________________________ ROBERT W. PARKER DONALD W. DEVINE Board Judge Board Judge