Gebhardt & Smith Llp v. Mpa

982 A.2d 876

188 Md. App. 532

GEBHARDT & SMITH LLP v. MARYLAND PORT ADMINISTRATION.

No. 1326, September Term, 2008.

Court of Special Appeals of Maryland.

October 29, 2009.

Lawrence J. Gebhardt, Patrick J. Madigan (Gebhardt & Smith, LLP on the brief), Baltimore, for appellant.

Philip P. Whaling (Douglas F. Gansler, Atty. Gen., on the brief), Baltimore, for appellee.

Panel: SALMON, ZARNOCH and GRAEFF, JJ.

GRAEFF, J.

This appeal arises from a dispute between Gebhardt & Smith LLP ("Gebhardt & Smith"), appellant, and the Maryland Port Administration ("MPA"), appellee, over a lease ("Lease") for office space in the Baltimore World Trade Center ("WTC"). The Lease required that the tenant, Gebhardt & Smith, pay to the landlord, the MPA, base rent plus a proportional share of the building's operating expenses. In 2003, a dispute arose regarding the charges for operating expenses. Gebhardt & Smith continued to pay its base rent, but it did not pay the invoices for operating expenses.

Suit was instituted in the Circuit Court for Baltimore City. Following a bench trial, the circuit court found that Gebhardt & Smith breached the Lease, and it entered a judgment in favor of the MPA for $328,186.88, plus interest.

Gebhardt & Smith appealed, and it presents two questions for our review, which we have rephrased:

1. Did the Lease contain a condition precedent to Gebhardt & Smith's obligation to pay its share of operating expenses, and if so, was this condition satisfied?

2. Where the Lease provided that the determination of operating expenses by "Lessor's certified public accountant" "shall constitute a final determination," was Gebhardt & Smith precluded from challenging the operating expenses in court?

For the reasons set forth below, we shall affirm the judgment of the circuit court.

FACTUAL AND PROCEDURAL BACKGROUND

Gebhardt & Smith, a law firm, leased office space from 1977 until 2006 in the WTC, an office building operated by the MPA and located in Baltimore, Maryland. In 1992, the parties executed the Lease at issue, with Gebhardt & Smith renting 30,161 square feet of office space on three floors of the WTC. Gebhardt & Smith agreed to pay $49,011.63 per month in base rent, plus its proportional share of "additional rent," which was comprised of "real estate taxes" and "operating expenses."¹

Article 4 of the Lease defined "operating expenses" as follows:

The term "operating expenses shall mean any and all costs and expenses (except real estate taxes) paid, incurred, or charged by Lessor in connection with the operation, servicing and maintenance of the building, including, but not limited to, the following:

1) Wages and salaries and costs of employee benefits of employees or independent contractors engaged in the operation and maintenance of the building, including Lessor's Social Security Taxes and any other governmental taxes which may be levied on such wages and salaries;

2) All charges and rates connected with water supplied to the building and related sewer use charges;

3) All charges connected with heat and air conditioning supplied to the building;

4) The cost of labor and material for cleaning the building, surrounding areaways and windows in the building;

5) The cost of all electric current supplied to the building;

6) The cost of fire; casualty, liability and such other insurance customarily provided in connection with an office building.

The term "operating expenses" shall include only reasonable and bonafide expenses actually incurred by Lessor and shall not include any of the following: depreciation, administrative overhead expenses, leasing commissions, management or rental agents fees, capital expenditures (which shall include, without limitation, the cost of renovating, decorating or otherwise preparing space in the building for tenants), or any other expenses relating to the ownership and management, as distinguished from the operation, of the building.

Article 4(c) of the Lease, which was included in an addendum, identified how operating expenses would be billed to Gebhardt & Smith:

In the event that the operating expenses incurred by Lessor during any fiscal year following the base year shall exceed the operating expenses incurred by Lessor during the base year Lessee shall pay to Lessor as additional rent for such fiscal year an amount equal to The Percentage[²] of the excess. In the month of June in the base year and each fiscal year thereafter, Lessor shall furnish to Lessee a statement of the estimated operating expenses for the forthcoming fiscal year compared with the base year and shall compute Lessee's estimated additional rent for such fiscal year as provided herein. If the estimated operating expenses for said fiscal year exceed the operating expenses during the base year Lessee shall pay each month in addition to the base year specified in Article 2 hereof an amount equal to one-twelfth (1/12) of the Percentage of the excess. When the statements of the actual operating expenses for such fiscal year are issued by the State Legislative Auditor's Office or Lessor's certified public accountants, if the estimated additional rent paid by Lessee exceeds Lessee's Percentage of the excess operating expenses, Lessor shall promptly either refund the overpayment to Lessee or credit the amount thereof against subsequent payments of additional rent under this paragraph c. If the estimated additional rent paid by Lessee is less than Lessee's Percentage of the excess operating expenses[,] Lessee shall pay the additional rent due within ten (10) days after receipt of a statement therefor from Lessor.

Article 4(d) of the Lease is the provision central to this appeal. It provided that the statements of operating expenses to be furnished by Lessor "shall be as determined by Lessor's certified public accountant" and that the statements furnished "shall constitute a final determination" of the amount of operating expenses owed by Gebhardt & Smith to the MPA. This provision provided as follows:

The Statements of the real estate taxes and operating expenses to be furnished by Lessor as provided in subdivisions (b) [referring to Real Estate Taxes] and (c) [referring to operating expenses] above shall be as determined by Lessor's certified public accountant xxxxxxxxxxxx xxxxxxxxxxxx xxxxxxxxxxxx xxxxxxx. The statements thus furnished to Lessee shall constitute a final determination as between Lessor and Lessee of the real estate taxes and operating expenses for the periods represented thereby.[³]

(Emphasis added).

In a letter dated November 8, 2002, the WTC Building Manager advised Gebhardt & Smith that, for the fiscal years ending in 2000 or 2001, there was no increase in the operating expenses:

We have received the final Auditor's report for the actual operating expenses for the World Trade Center for Fiscal Years ending June 30, 2000 and June 30, 2001. These expenses for Fiscal Years 2000 and 2001 were audited and certified by an independent public accountant.

By this letter, we will adjust the estimated operating expenses per Article 4c of your Lease for the Fiscal Year ending June 30, 2003. ...

The letter advised, however, that the estimated operating expenses for fiscal year 2003 increased, and Gebhardt & Smith was obligated to pay its proportional share of that increase, $17,871.12.⁴ Mark Gaspar, Administrative Partner with Gebhardt & Smith, testified that the firm paid this bill without protest or request for additional information because "it was a small amount" and "the letter represented ... that the expenses had been audited and certified by an independent public accountant."

In September 2003, Hurricane Isabel flooded the WTC and the building was closed from September 19, 2003, until November 10, 2003. During this time, Gebhardt & Smith vacated its offices, moved its files and computers out of the building, and occupied temporary office space to continue operating its law practice.

While Gebhardt & Smith was displaced from the WTC, it received a letter and an invoice for actual operating expenses for fiscal year 2002 and estimated operating expenses for 2004. The letter again indicated that the MPA had received "the Auditor's report for the actual operating expenses" and, similar to the previous year, stated that the expenses "for fiscal year 2002 have been audited and certified by an independent public accountant."⁵ The letter informed Gebhardt & Smith that, for fiscal year 2002, it owed an additional $22,854.38 for actual operating expenses over what Gebhardt & Smith had paid for estimated operating expenses. In addition, Gebhardt & Smith owed $33,512.28 for estimated operating expenses for fiscal year 2004. An invoice indicated that Gebhardt & Smith owed MPA a total of $56,366.66.

Upon receipt of the invoice, Mr. Gaspar testified that he was "shocked" because "rent was supposedly being abated at that point," as a result of the firm's displacement from the WTC due to Hurricane Isabel, and "the invoice was requesting payment of $56,000 right away." Mr. Gaspar took the bill to Jim Smith and Larry Gebhardt, two of the firm's partners.⁶

In a letter dated December 29, 2003, Gebhardt & Smith responded to the WTC's building manager regarding the bill it received for actual and estimated operating expenses:

We have received your letter of December 22, 2003 relating to the World Trade Center's operating expenses for fiscal 2002 and its estimated operating expenses for fiscal 2003. Your letter, together with its attachment, expresses the Maryland Port Administration's contention as to Gebhardt & Smith['s] responsibility for a percentage of these actual and estimated operating expenses under the terms of the Lease. Gebhardt & Smith, however, has significant concerns-and potentially substantial disagreements-with the Maryland Port Administration's computation of the amounts claimed due as actual operating expenses for fiscal 2002 and the estimated operating expenses for fiscal 2003.

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