GRANTED IN PART: June 30, 1992 GSBCA 10523 BURDETTE A. RUPERT, Appellant, v. GENERAL SERVICES ADMINISTRATION, Respondent. Michael McHale Collins of Collins, Crackel & Mooney, Covington, VA, and William Craig Dubishar of Venable, Baetjer and Howard, McLean, VA, counsel for Appellant. Marie N. Adamson, Real Property Division, Office of the General Counsel, General Services Administration, Washington, DC, counsel for Respondent. Before Board Judges LaBELLA, DANIELS, and HYATT. HYATT, Board Judge. The General Services Administration (GSA) leased space on behalf of the Social Security Administration (SSA) from Burdette A. Rupert, appellant, in a building in Covington, Virginia. When the lease expired, the SSA continued to occupy the space with appellant's permission and pay rent at the rate provided by the expired lease, but without a new lease. Appellant then gave notice that he was increasing the monthly rent, making it payable in advance, and assessing a ten percent penalty if not paid by the tenth of the month. Some nine months later, GSA and appellant negotiated a new lease, and GSA offered to pay appellant for the holdover period the difference between what it had already paid and what it determined to be the fair rental value for the holdover period. Appellant declined and filed this appeal on February 20, 1991. The parties disagree as to what constitutes fair rental value for the holdover period. We conclude that neither appellant's claimed fair rental value nor the amount paid by GSA reflects the fair rental value of the premises for the holdover period. Based on the relevant considerations, we find that a fair and reasonable rental amount is somewhere between the disparate appraisals offered by the respective parties. Consequently, we grant the appeal in part. Findings of Fact 1. On April 29, 1982, GSA awarded R & R Real Estate, Inc. Lease No. GS-03B-20501 (the original lease) for office space on the ground floor at 214 West Main Street, Covington, Virginia. Appeal File, Exhibit 1. The building is a one and one-half story brick building in downtown Covington that has an adjacent parking lot for thirty cars. The SSA occupied the 4,635 square feet[foot #] 1 on the ground floor leased to GSA; 1,100 feet on the second floor was leased to a Virginia Supreme Court judge. Appeal File, Exhibit 3; Transcript at 27-28. The terms of the lease required the lessor to furnish all utilities, maintenance, and janitorial services, as well as eighteen parking spaces in the adjacent parking lot. Appeal File, Exhibit 3. 2. Burdette A. Rupert, appellant, worked with R & R Real Estate, Inc. until it was dissolved, and then operated independently as a real estate agent. Transcript at 23-24. On April 5, 1985, he became the lessor on the original lease. Appeal File, Exhibit 2. 3. The original lease became effective on October 1, 1982, and had a five-year term ending September 30, 1987. Appeal File, Exhibits 1, 2. Paragraph 9 of the rider to the lease provided, however, that if the Government retained possession of the premises after the lease expiration date, the lease continued "in force and effect on a day to day basis not to exceed 90 days and rental shall be paid on a pro-rata basis at the rate provided herein." Id., Exhibit 1. Under the original lease GSA paid appellant annual rent of $42,625 at the rate of $3,552.08 per ----------- FOOTNOTE BEGINS --------- [foot #] 1 GSA leases and solicitations for offers express measurements of rental space in terms of "net usable square feet", which removes from the measurement of rentable building space common areas such as lobbies, corridors, bathrooms, stairwells, and elevator shafts. Appeal File, Exhibit 1, Solicitation for Offer at 11 of 32. This does not mean that GSA does not pay for this type of space; rather, it simply results in a different dollar rate per square foot than if that space is included in the total rental space figure. Transcript at 167-69. ----------- FOOTNOTE ENDS ----------- 3 month. Id., Exhibits 1, 3. According to the parties, GSA was paying $9.34 per square foot in rent.[foot #] 2 4. In June 1987, appellant alerted GSA that the lease was due to expire on September 30, and that, in anticipation of retirement, he wished either to re-lease the property or sell it. Appeal File, Exhibit 4; Transcript at 31-33. On July 14, 1987, a GSA realty specialist did a market survey in Covington preparatory to soliciting offers for a new lease. Transcript at 178. While there, he met with appellant, advised him that offers would be solicited for a follow-on lease, and discussed with him the SSA's changed space requirements. Instead of 4,635 square feet, SSA only wanted 3,315 square feet. Id. at 171-72, 177. Appellant was not sure whether he could reduce the amount of space rented to SSA and be left with a rentable parcel. Appeal File, Exhibit 6 at 1; Transcript at 171. 5. Ultimately, GSA awarded the follow-on lease to appellant at the conclusion of the following chronology of events. On August 6, 1987, GSA mailed a solicitation for offers (SFO) to appellant and two other potential offerors. Subsequently, best and final offers (BAFOS) were requested by January 29, 1988. Appeal File, Exhibit 18 at 1. On October 9, 1987, appellant submitted an offer to rent to the Government 4,635 feet of net usable space at $13.50 per square foot for a term of ten years.[foot #] 3 Id., Exhibit 7. In addition to appellant's offer, GSA received three other offers to lease 3,315 square feet. The first offer was to construct new space at $13.00 per square foot, the second was for new construction at $16.90 per square foot, and the third was for an existing building at $24.00 per square foot. Id., Exhibit 18. The first offer was determined to be noncompliant with the terms of the SFO prior to the BAFO closing date. Another offeror was deemed noncompliant after BAFOs were received. Of the two remaining offerors, appellant offered to lease 4,635 square feet at $13.50 per square foot; the other offered 3,315 square feet at $24.00 per square foot. Although deemed "technically unresponsive" for offering more space than the solicitation requested, appellant was awarded the lease because his offer was substantially lower than the other offeror's, no moving costs would be incurred, and the SSA indicated that the larger square footage would meet its ----------- FOOTNOTE BEGINS --------- [foot #] 2 The Board's calculations yield $9.20 per square foot (annual rental of $42,625 divided by 4,635 square feet). [foot #] 3 Appellant testified that he thought he was offering a ten-year lease with a five-year renewal option. GSA maintains that he offered a ten-year lease cancelable after five years, which is the term requested by GSA in the solicitation. Appellant later agreed to the latter term. Compare Appeal File, _______ Exhibit 7 at 1 with Transcript at 45, 61-64, 189-190. ____ ----------- FOOTNOTE ENDS ----------- 4 long-term needs. Id. Appellant was awarded the lease on May 19, 1988, but the lease was not executed until October 12, 1988, as a result of misunderstandings over several of its terms. Id., Exhibits 24, 28, 32, 33. By supplemental agreement, the lease became effective on October 20, 1988. Id., Exhibits 37, 38. 6. While the parties were pursuing a follow-on lease, the original lease expired on September 30, 1987, although by its terms it continued in effect for ninety days, until December 29. Finding 3. During the holdover period, which began on December 30, SSA continued to occupy the premises with appellant's permission and to pay rent at the same rate as under the original lease. Appeal File, Exhibit 11. 7. In a telephone conversation held on December 30 with the GSA realty specialist, appellant stated he would not agree to an extension of the original lease. Id., Exhibit 6, Notes of conversation with B.A. Rupert. On January 11, when appellant again declined to agree to a lease extension, the contracting officer asked, hypothetically, what he would do if, on March 1, 1988, he received notice that the Government was awarding the new lease to someone else. He replied that he would give us 30 days notice to vacate. I informed him that the Govt. has the right to condemn the leasehold and remain. However, we were obligated to pay him the fair annual rental. I told him that I did not want to resort to this but that I had to protect the Govt's. occupancy. . . . I told him that . . . we would not be able to decide on [a] long-term lease until March 1. I asked him what his possibilities were of selling the building if he granted us a one year or a month extension & he replied "slim" (apparently potential buyer wants bldg. for their offices). Id., Exhibit 9. The next day, appellant informed the contracting officer that he was writing to his Congressman about the Government's right of condemnation under the principle of eminent domain, and to confirm what the contracting officer had said. Id. At hearing, appellant testified that these discussions of the Government's power of eminent domain led him to believe that he could not sell the building or refuse to allow GSA to hold over, but also that he gave the Government permission to stay because he had enjoyed an "excellent rental relationship" with it for ten years. Transcript at 107-08. 9. On January 20, 1988, appellant informed GSA that, effective February 1, 1988, he was increasing the rent to $10,600 per month, or $25.50 per square foot, payable on the first of 5 each month. Appeal File, Exhibit 11. Appellant was willing to continue to rent to GSA on a month-to-month basis, but "because of the economic insecurity of having no long term rent guarantee, because of the financing on this property, and because [he was], in deference to the [SSA], not actively soliciting a new tenant," he was increasing the rent. Id.; Transcript at 99-100. On February 29, 1988, appellant also informed GSA that he would charge a ten percent penalty per month for any payment which was not received by the tenth of the month. Appeal File, Exhibit 13. 10. On March 14, 1988, the contracting officer informed appellant's attorney that GSA was willing to enter into a nine- month lease extension at a rate somewhere between the $9.34 per square foot that it was currently paying and the $25.50 that appellant wanted, cancellable in six months if appellant was awarded the follow-on lease. Appeal File, Exhibit 14. On May 18, 1988, the contracting officer offered appellant what it deemed to be a fair annual rental of $11.40 per square foot for the holdover period. Id., Exhibit 22. Appellant, through his attorney, declined this offer on July 21. Id., Exhibits 27, 28. 11. The matter continued unresolved; by letter dated November 29, 1989, appellant presented a certified claim for $78,833.28, the total of unpaid rent, late charges, and interest for the period February 1 through August 1, 1988. Appeal File, Exhibit 40. Although the follow-on lease did not go into effect until October 20, 1988, appellant calculated rent and late charges only through August 30, the date it agreed to enter into the new lease. Id., Exhibit 38. The contracting officer denied this claim, offering instead to pay appellant the difference between $9.50 per square foot, the rate paid, and $11.40 per square foot, which GSA determined to be the fair rental value during the holdover period, for a total of $7,069.66, plus applicable Contract Disputes Act interest. Id., Exhibit 45; Transcript at 198-99. This appeal ensued. 12. At hearing, appellant testified that the rent increase of $25.50 per square foot, demanded for the duration of the holdover period, was based on 150 percent of his offer of $13.50 per square foot for the follow-on lease. Transcript at 50. This increase was to compensate for the lack of security in a short- term rental, the inability to sell the building quickly and easily, increased damage and remodeling costs, and an expected twenty-five percent vacancy rate. Id. at 51-53. In addition to increasing the rent, appellant also included charges of $10.00 per square foot for the 353 feet of "unusable space", such as corridors, lobbies, and bathrooms, on the theory that any other renter but the Government would use it and pay for it, and $3.75 per day per car, based on twenty-two days per month for thirty parking spaces. Id. at 53-54. 6 13. At the hearing, appellant was qualified as a general expert in appraisals in the Covington area; he testified that he had some familiarity with commercial real estate there. Transcript at 67-68. An appraisal by another Covington real estate appraiser of the fair rental value of the space occupied by the SSA incorporated data compiled by appellant on four properties in the Covington area which he believed were comparable to the space leased to GSA. Appellant's Exhibits B, E. This appraisal, which was dated February 20, 1991, set the fair rental value at $19.51 per square foot. Appellant's Exhibit B. Appellant valued Comparable "A", a 6,000 square foot building leased for five years (for the period from 1990-1995) at an actual rental of $6.00 per square foot, at $16.84 per square foot. Id.; Transcript at 90. Comparable "B", a 4,800 square foot building leased for ten years (1987-1997) at $8.13 per square foot, was valued by appellant at $17.27 per square foot. Appellant's Exhibit B; Transcript at 92-93. Comparable "C", a much smaller building of 1,120 square feet with an unknown lease term, and leased for $7.07 per square foot, was valued by appellant at $18.21 per square foot. Appellant testified that he really did not consider the "C" property to be comparable to the space rented to the SSA. Transcript at 93. Comparable "D", a 4,300 square foot building leased for five years (1988-1993) at $7.81 per square foot, was valued at $16.70. Appellant's Exhibit B. 14. Appellant also submitted three appraisals by other Covington real estate agents of the fair rental value for the space occupied by the SSA for the holdover period. Respondent's Exhibits A, B, C. These appraisals, which were developed in the spring of 1990, found the fair rental value to be, respectively: $19.00 per square foot, an increase of approximately forty percent to reflect month-to-month rental status; $14.25 per square foot, 150 percent of the original lease rent of $9.50 per square foot; and $19.51 per square foot, reflecting an upward adjustment from $13.50 per square foot for a month-to-month rental and inclusion of the services provided under the lease. Id. The last appraisal was made by the same person whose earlier appraisal was based on comparables compiled by appellant. See Finding 13. 15. On April 8, 1988, GSA appraised the fair rental value of the space occupied by the SSA at $10.29 per square foot. Appeal File, Exhibit 16. The chief of the appraisal section of GSA's Region 3, which encompasses Virginia, performed the appraisal at the request of the Region 3 Leasing Branch. Transcript at 118. He has extensive training and experience in appraising commercial and industrial real estate, and testified as an expert in the field. Transcript at 112-17. The appraiser evaluated the fair annual rental of the space assuming that it was under a five-year lease, and not rented on a month-to-month basis. Appeal File, Exhibit 16; Transcript at 158. He 7 considered the holdover period an extension of the original lease and not a true month-to-month rental; therefore, he did not evaluate the property on a month-to-month basis. Id. at 160. This appraiser did, however, agree that as a general proposition, the uncertainty inherent in a month-to-month lease created a risk of increased costs, such as potential period of vacancy, might justify a higher rental rate. Id. at 162-64. 16. The GSA appraisal was also based on an analysis of three comparable properties. The appraiser explained that in performing the comparison, an appraiser selects properties that are most like the subject and on which information can be obtained. Transcript at 123. In this case, he chose three buildings at a shopping mall in Covington because, although appellant's property is an office building, it is essentially a storefront that has been turned into an office. Id. at 125. The appraiser's comparables were: "A", a 1,080 square foot branch bank building leased for twenty years at $8.88 per square foot; "B", a 2,000 square foot beauty salon leased for five years at $4.50 per square foot; and "C", a 3,456 square foot store leased for five years at $3.22 per square foot. Appeal File, Exhibit 16.[foot #] 4 Appellant testified that he did not consider the properties that the appraiser used as comparables because they were outside the downtown area that GSA had designated as the location for the property it wished to rent for the SSA. Transcript at 72-73, 76, 176. 17. The GSA appraiser questioned appellant's appraisal of a fair annual rental rate of $19.51 per square foot because it was higher than all of the comparables. See Finding 13. In his opinion, good appraisal practice requires that the fair annual rental fall within the range of the comparable properties. Transcript at 130-31. He also deemed the appraisals done by other Covington agents not to be true appraisals but rather only "opinions of value" since they were not supported by any data or comparables. See Finding 14. Decision The issue presented in this appeal is the determination of the fair market rental value of the subject office space for the holdover period. When a tenant holds over at the end of a lease term and fails to surrender possession of the premises, the ----------- FOOTNOTE BEGINS --------- [foot #] 4 These comparables are different from the properties he used in appraising appellant's building at the beginning of the original lease term. The latter were state properties, and the appraiser explained that government leases were not always the best comparables to use to arrive at a fair annual rental that reflects the marketplace. Respondent's Exhibit D; Transcript at 124, 147. ----------- FOOTNOTE ENDS ----------- 8 landlord may treat him as a holdover tenant or as a trespasser, at the landlord's option. Isadore & Miriam Klein, GSBCA 6614, et al., 84-2 BCA 17,273, at 86,004 (citing 49 Am. Jur. 2d, Landlord and Tenant, 1115, 1116 (1970)). If the landlord treats the holdover as a tenant, then the new rental terms are the same as the original rent; if the landlord elects to treat the former tenant as a trespasser, then the landlord is entitled to the damages he suffers by reason of the holdover's failure to surrender the premises. 49 Am. Jur. 1125. The amount of damages is usually the value of the use of the premises, i.e., their fair rental value plus such other damages as the tenant could reasonably foresee would result from the tenant's failure to leave the premises. Id., 1126. The rent in the lease is evidence of rental value, but a landlord may establish a rental value greater than rent. Id., 1125; see also 2 M. Friedman, Friedman on Leases 18.2 (2d ed. 1983). The landlord's entitlement to rental amounts for a holdover tenancy has been described as follows: Except to the extent the parties to a lease validly agree . . . the landlord . . . is entitled to recover from a tenant improperly holding over after the termination of his lease for the use and occupation of the leased property during the holdover period at a rate based on the previous rental rate, or on the proven reasonable value independently established if that differs from the previous rental rate. Restatement (Second) of Property 14.5 (1977), cited in Jonnet Development Corp., GSBCA 6943, 86-3 BCA 19,311, at 97,656-57. Finally, where the holdover tenant and the landlord are negotiating a new lease during the holdover period, the status of the tenant has been variously described as that of a holdover tenant with the rental amount unresolved, a tenant from month to month, a tenant at will, or a tenant at sufferance. 49 Am. Jur. 2d, Landlord and Tenant, 1120. In the case before us, the parties were negotiating a new lease, although GSA was not negotiating solely with appellant. Findings 4, 5. When the holdover period began, the SSA remained in possession of the building and paid rent at the same rate as under the original lease. Finding 6. Appellant never notified respondent to quit the premises, although he explicitly did not agree to an extension of the original lease, and less than one month into the holdover period, gave notice of a rent increase for GSA to pay as a month-to-month tenant. Findings 7, 8. One could argue that appellant gave permission for the SSA to stay and the amount of rent is therefore governed by the original lease. At the same time, however, appellant made it clear he did not consider the lease to be extended and gave early 9 notice of a rent increase. However one characterizes the relationship between appellant and GSA, the parties agree that appellant is entitled to the fair rental value of the SSA space during the holdover period, but disagree as to amount. Their dispute focuses on what that amount should be. Appellant contends that the fair market value must be evaluated in light of the economic uncertainty of having a month- to-month, rather than a long-term tenant, his inability to sell the building, potential increased damage and remodeling costs, and a twenty-five percent vacancy rate, and asks us to accept that these costs are fairly reflected in a rent increase of more than 150 percent. Finding 12. We conclude that the record before us contains no convincing evidence whatever that the amount of $25.50 per square foot constituted a fair or reasonable rental rate on a month-to-month basis. In addition, that proposed increase encompassed charges for corridor, lobby, and bathroom space that GSA explicitly excluded from its measurement of net usable space, asking the lessor to figure it into the rental rate, Finding 1 n.1. It also included charges for all of the parking spaces when only eighteen were required to be provided under the lease and there is no evidence that the Government used more. Finding 1. None of the other evaluations that appellant submitted in support of its increase arrive at a fair rental value as high as appellant's. The highest appraisal, $19.51, was based on comparables compiled by appellant, and was higher than any of the fair rental values given for the comparable properties. Finding 13. The three other appraisals, which were not based on examinations of comparable properties, were also not as high as appellant's increase. They did, however consider the impact of a month-to-month rental and the fact that utilities and maintenance services were provided during the holdover period. Finding 14. During the holdover period, GSA appraised the fair rental value of the SSA space at $10.29 per square foot, and this figure formed the basis of its offer to appellant to pay rent at the rate of $11.40 per square foot for the holdover period. Findings 11, 15. We do not deem this appraisal to be fully representative of a fair rental value for the holdover period for two reasons. First, the appraiser considered the holdover period an extension of the original lease and not a true month-to-month rental; thus, although he agreed that there were greater costs and risks associated with the latter type of rental, he did not factor them into his estimate. Finding 15. Second, the appraiser's comparable properties were in a shopping mall outside the downtown area which GSA had designated as the location for the SSA rental space. Finding 16. Central, downtown location was important to the SSA; thus, the appraiser's comparables were not like appellant's building in all key respects. 10 Since we reject both appellant's and respondent's calculations of fair rental value of the space occupied by SSA during the holdover period, we must make our own determination. We begin by noting that GSA was willing to pay $13.50 per square foot for the space under a five year lease. Finding 5. We also acknowledge that, despite being in a holdover status from an expired lease and negotiating a new lease, appellant and GSA were on a month-to-month footing. Until May 1988, appellant had no assurance that it would be awarded the lease, and after the award, there were some difficulties to be resolved before the lease could be executed. Id. On the one hand, appellant's proposed rent increase appears to give no recognition to the factors that lent stability to its situation -- that it had a holdover tenant with whom it was negotiating for a follow-on lease -- but on the other, GSA's appraisal and offer to appellant for the holdover period ignore the factors lending instability -- an expired lease, a month-to-month tenant and no assurance of resolving the matter with a long-term lease. See Finding 7.[foot #] 5 We must determine from the record before us a fair rental for the holdover period. See Isadore & Miriam Klein, 84-2 BCA at 86,005-06. We reject the appraisal of $19.51 per square foot that is based on comparables prepared by appellant and which is higher than any of those comparables. Finding 13. Of the appraisals made by three Covington real estate agents, the highest appraisal, $19.51, is made by the same person who appraised the space at $19.51 per square foot based on comparables compiled by appellant, and we again reject this amount. Findings 13, 14. The second appraisal is for $19.00 per square foot; the third, for $14.25 per square foot. Finding 14. We conclude, based on the record, that a reasonable estimate of the fair rental value of the space occupied by the SSA during the holdover period would be the average of the second and third appraisals, or $16.62. Thus, we conclude that GSA must pay appellant for the holdover period of February 1 through August 30, 1988, the difference between $9.34 per square foot, the rent already paid, and $16.62 per square foot, or $7.28 per square foot. Decision The appeal is GRANTED IN PART. Respondent shall pay appellant any back rent that is due in accordance with this ----------- FOOTNOTE BEGINS --------- [foot #] 5 Unlike respondent, we are unwilling to discount these risks entirely. Notably, in both of the appeal decisions cited by the parties as involving holdover tenancies, the Government in fact vacated at the conclusion of the holdover period. Jonnet Development Corp.; Isadore & Miriam Klein. ________________________ ______________________ ----------- FOOTNOTE ENDS ----------- 11 opinion, with interest as provided by statute. 41 U.S.C. 611 (1988). CATHERINE B. HYATT Board Judge 12 We concur: VINCENT A. LaBELLA STEPHEN M. DANIELS Board Judge Board Judge