B-76977, SEPTEMBER 29, 1948, 28 COMP. GEN. 206

B-76977, SEPTEMBER 29, 1948, 28 COMP. GEN. 206

LEASES - TERMINATION - RESTORATION OF PREMISES WHERE THE COST OF PHYSICAL RESTORATION OF LEASED PROPERTY--- OTHER THAN FOR ORDINARY WEAR AND TEAR--- INCIDENT TO THE TERMINATION OF A LEASE CONTAINING THE STANDARD RESTORATION PROVISION EXCEEDS THE AMOUNT OF THE DIFFERENCE BETWEEN THE CURRENT MARKET VALUE OF THE PROPERTY IF RESTORED TO ITS ORIGINAL CONDITION AND THE CURRENT APPRAISED MARKET VALUE OF THE PROPERTY IN ITS EXISTING CONDITION, THE AMOUNT THAT LEGALLY MAY BE EXPENDED FOR RESTORATION OR BE PAID TO THE LESSOR IN LIEU THEREOF IS THE AMOUNT BY WHICH THE MARKET VALUE OF THE PROPERTY HAS BEEN DIMINISHED BY THE GOVERNMENT'S FAILURE TO RESTORE AS PROVIDED IN THE LEASE.

COMPTROLLER GENERAL WARREN TO THE SECRETARY OF THE ARMY, SEPTEMBER 29, 1948:

REFERENCE IS MADE TO LETTER OF JULY 26, 1948, FROM THE ASSISTANT SECRETARY OF THE ARMY REQUESTING A DECISION RELATIVE TO THE PROPER PRINCIPLES TO BE APPLIED IN EFFECTING A RESTORATION SETTLEMENT IN CONNECTION WITH APPROXIMATELY 13,366.7 ACRES OF LAND LOCATED IN COFFEE AND FRANKLIN COUNTIES, TENNESSEE, COMPRISING A PART OF CAMP FORREST, WHICH LAND WAS LEASED TO THE UNITED STATES BY THE STATE OF TENNESSEE FOR " NATIONAL DEFENSE REQUIREMENTS OF THE WAR DEPARTMENT.'

THE FACTS PERTAINING TO THE MATTER ARE STATED IN THE LETTER AS FOLLOWS:

THE GOVERNMENT LEASED FROM THE STATE OF TENNESSEE APPROXIMATELY 13,330 ACRES OF LAND UNDER LEASE NO. W 54-QM-1961 AND APPROXIMATELY 36.7 ACRES WITH AN EASEMENT FOR RIGHT-OF-WAY TO THE SEWAGE DISPOSAL PLANT UNDER LEASE NO. W-09-026-ENG-3007. THE STATE ACQUIRED FEE SIMPLE TITLE TO THESE LANDS FOR THE PURPOSE OF MAKING THEN AVAILABLE TO THE GOVERNMENT FOR NATIONAL DEFENSE PURPOSES, UNDER LEASE, AT AN ANNUAL CONSIDERATION OF $1.00 PER YEAR. BOTH LEASES CONTAIN THE STANDARD PROVISION THAT THE GOVERNMENT, IF REQUIRED BY THE LESSOR, WILL, PRIOR TO TERMINATION OF THE LEASE, RESTORE THE PREMISES TO THE SAME CONDITION AS THAT EXISTING AT THE TIME OF ENTERING, REASONABLE AND ORDINARY WEAR AND TEAR AND DAMAGES BY THE ELEMENTS OR CIRCUMSTANCES OVER WHICH THE GOVERNMENT HAS NO CONTROL, EXCEPTED.

CAMP FORREST IS SURPLUS TO THE REQUIREMENTS OF THE DEPARTMENT OF THE ARMY, AND NEGOTIATIONS FOR TERMINATION SETTLEMENTS ON THE ABOVE MENTIONED LEASES HAVE BEEN IN PROGRESS FOR SOME TIME. AS SHOWN ON THE ATTACHED DISPOSAL PLANNING REPORT, IT HAS BEEN DETERMINED THAT TO PERFORM PHYSICAL RESTORATION IN ACCORDANCE WITH TH PROVISIONS OF THE LEASES WOULD COST THE GOVERNMENT APPROXIMATELY $704,642.00. THIS AMOUNT IS BROKEN DOWN TO (A) THE ESTIMATED COST OF DISMANTLING GOVERNMENT PROPERTY IF REMOVED ($27,812.00), AND (B) COST OF OTHER RESTORATION WHICH INCLUDES REMOVAL OF CONCRETE AND MASONRY, RESTORATION OF WALKS, PARKING AREAS, ETC. ($676,830.00). APPRAISALS BY QUALIFIED APPRAISERS SHOW THAT THE PROPERTY UNDER THE ABOVE-MENTIONED LEASES, IF RESTORED TO THE CONDITION EXISTING AT TIME OF INITIAL OCCUPANCY BY THE GOVERNMENT, HAS THE FOLLOWING FAIR MARKET VALUES: (A) PROPERTY UNDER LEASE W 54-QM-1961 ---------------$225,000.00 (B) PROPERTY UNDER LEASE W-09-026-ENG-3007--------- 1,800.00 AND THAT THE PRESENT MARKET VALUE OF LANDS UNDER THESE LEASES IN THEIR PRESENT STATE IS $143,000.00.

ALL IMPROVEMENTS WHICH HAVE A POSITIVE NET SALVAGE VALUE AND WHICH THE STATE DOES NOT DESIRE TO ACQUIRE HAVE BEEN REMOVED FROM THE PREMISES. THE IMPROVEMENTS WHICH HAVE BEEN LEFT IN PLACE FOR TRANSFER TO THE STATE IN PARTIAL SATISFACTION OF RESTORATION ARE SHOWN ON THE DISPOSAL PLANNING REPORT AND ARE ESTIMATED TO HAVE AN ORIGINAL COST OF $917,007.00 AND AN ESTIMATED MARKET VALUE (IN-PLACE VALUE) OF $47,760.00, WHICH IN THIS CASE ALSO REPRESENTS THE NET SALVAGE VALUE.

UNDER THE EXISTING PROCEDURE OF MAKING CASH SETTLEMENTS WHEN IN THE BEST INTERESTS OF THE GOVERNMENT, IN LIEU OF RESTORATION, THE GOVERNMENT WOULD IN ANY CASE BE LIMITED TO A CASH SETTLEMENT OF $226,800.00, THE FEE VALUE OF THE PROPERTY IF RESTORED TO THE CONDITION EXISTING AT THE TIME OF TAKING, MINUS THE IN-PLACE VALUE OF GOVERNMENT-OWNED BUILDINGS WHICH ARE TO BE TRANSFERRED TO THE LESSOR AT A VALUATION OF $47,760.00.

THIS DEPARTMENT OFFERED THE LESSOR AS FULL SETTLEMENT ON THE ABOVE MENTIONED LEASES A CASH AMOUNT REPRESENTING THE DIFFERENCE IN THE PRESENT FEE VALUE OF THE LAND IN ITS EXISTING CONDITION AND THE VALUE WHICH IT WOULD HAVE IF RETURNED TO THE CONDITION EXISTING AT THE TIME THE GOVERNMENT TOOK POSSESSION OF THE PREMISES. THIS IS THE DIFFERENCE BETWEEN $226,800.00 AND $143,000.00, OR $83,800.00, MINUS THE IN-PLACE VALUE OF $47,760.00 FOR GOVERNMENT-OWNED IMPROVEMENTS WHICH THE STATE DESIRES TO ACQUIRE, LEAVING A TOTAL RESTORATION SETTLEMENT OF $36,040.00.

THE STATE OF TENNESSEE, A LESSOR, HAS REFUSED TO ACCEPT THIS AMOUNT AND HAS REQUESTED PHYSICAL RESTORATION.

THE VIEWS OF THE DEPARTMENT OF THE ARMY AS TO THE LEGALITY OF THE CLAIMS ARE STATED IN THE LETTER AS FOLLOWS:

THE AMOUNT IN SETTLEMENT WHICH THIS DEPARTMENT OFFERED THE LESSOR IS BASED UPON OUR UNDERSTANDING THAT THE MEASURE OF DAMAGES IN SUCH CASES SHOULD REPRESENT THE LOSS SUSTAINED BY THE OWNER IN THE DIMINUTION OF THE FEE VALUE OF THE LAND. THIS IS BELIEVE TO BE IN CONSONANCE WITH THE DECISION OF THE COMPTROLLER GENERAL (XXVII COMP. DEC. 538). THIS DECISION INVOLVES A PROBLEM DISTINGUISHED FROM THE PRESENT PROBLEM OF THIS DEPARTMENT INVOLVING LEASES WITH EXPRESSED STIPULATIONS FOR RESTORATION, SINCE THE LEASE REFERRED TO IN YOUR DECISION CONTAINED NO RESTORATION CLAUSE, AND, AS THE CLAIMS FOR DAMAGES WERE FOR WASTE, BASED ON AN IMPLIED COVENANT TO RESTORE. SINCE THERE IS NO DIFFERENCE IN THE LEGAL EFFECT OF IMPLIED OR EXPRESSED COVENANTS, HOWEVER, IT IS PRESUMED THAT THE SAME MEASURE OF DAMAGES WOULD BE APPLICABLE WHERE A LEASE CONTAINS AN EXPRESS COVENANT FOR RESTORATION. IT WOULD ALSO APPEAR THAT THE MEASURE OF DAMAGES WOULD APPLY BOTH TO SITUATIONS WHERE THE GOVERNMENT HAS INCREASED OR DIMINISHED THE FEE VALUE OF THE LESSOR'S PROPERTY.

THIS VIEW IS SUPPORTED BY NUMEROUS DECISIONS IN MODERN CASES WHICH HAVE CONSISTENTLY HELD THAT THE INJURY TO THE MARKET VALUE OF THE REVERSION IS THE TRUE MEASURE OF DAMAGES FOR FAILURE OF THE TENANT TO REPAIR IN ACCORDANCE WITH THE COVENANTS OF THE LEASE. ( TAYLOR'S LANDLORD AND TENANT, EIGHTH EDITION, SECTION 368; CRYSTAL CONCRETE CORP. V. TOWN OF BRAINTREE, MASS. (1941) 309 MASS. 463, 35 N.E.2D 672; HOPKINS VS. AMERICAN PNEUMATIC SERVICE COMPANY (1907) 194 MASS. 582, 80 N.E. 624; WEBB VS. DAGGETT (1905) 39 TEX. CIV. 390 87 S.W. 743, AND MANY OTHERS)

THE GENERAL RULE OF OLDER CASES, NAMELY, THAT THE MEASURE OF DAMAGES FOR BREACH OF A COVENANT TO RESTORE LEASED PREMISES TO THEIR ORIGINAL CONDITION IS THE REASONABLE COST OF RESTORING THE PREMISES TO THE REQUIRED CONDITION, HAS BEEN SUBJECT IN ITS APPLICATION TO THE LIMITATION THAT, SINCE THE OBJECT OF AWARDING COMPENSATORY DAMAGES IS TO GIVE JUST COMPENSATION FOR PECUNIARY LOSS, THE LESSOR IS ENTITLED ONLY TO SUCH AN AMOUNT AS WILL PUT HIM IN THE SAME POSITION, SO FAR AS MONEY CAN DO IT, AS HE WOULD HAVE BEEN IF THE CONTRACT HAD BEEN PERFORMED ( WILLISTON ON CONTRACTS, REV. USED. 1937, SECTION 1338).

NO CASE HAS BEEN FOUND AWARDING DAMAGES IN AN AMOUNT WHICH WOULD DEFRAY THE COST OF RESTORATION WHERE THE COST OF RESTORATION WOULD EXCEED THE MARKET VALUE OF THE PROPERTY AS RESTORED. IN THOSE CASES WHERE THE POINT HAS BEEN RAISED SPECIFICALLY, THE RULE APPEARS TO BE GENERALLY THAT WHERE THE COST OF RESTORATION WOULD BE EXCESSIVE OR MORE THAN THE DIMINUTION OF THE MARKET VALUE, THE PLAINTIFF MAY RECOVER ONLY THE AMOUNT OF DIMINUTION OF MARKET VALUE ( HARTSHORN V. CHADDOCK (1892) 135 N.Y. 116, 31 N.E. 997).

ON SUCH PRESENTATION A DECISION IS REQUESTED ON THE FOLLOWING QUESTIONS:

WHERE IT IS FOUND THAT THE COST OF PERFORMING PHYSICAL RESTORATION OF PROPERTY FOR DAMAGES BEYOND ORDINARY WEAR AND TEAR FOR THE PURPOSE FOR WHICH THE PROPERTY WAS LEASED TO THE UNITED STATES EXCEEDS THE AMOUNT OF THE DIFFERENCE BETWEEN THE CURRENT APPRAISED MARKET VALUE OF THE PROPERTY IF RESTORED TO ITS ORIGINAL CONDITION AND THE CURRENT APPRAISED MARKET VALUE OF THE PROPERTY IN ITS EXISTING CONDITION, IS THIS DEPARTMENT REQUIRED TO LIMIT THE EXPENDITURE OF FUNDS FOR RESTORATION TO THE AMOUNT OF THIS DIFFERENCE, NOTWITHSTANDING THE FACT THAT THE LEASE CONTAINS AN EXPRESS PROVISION FOR RESTORATION?

(2) IF THE ANSWER TO THE FIRST QUESTION IS IN THE NEGATIVE, IS THIS DEPARTMENT LIMITED IN THE EXPENDITURE OF FUNDS FOR RESTORATION OF THE PROPERTY LEASED TO THE UNITED STATES TO (A) THE AMOUNT REQUIRED TO PERFORM COMPLETE PHYSICAL RESTORATION, OR (B) AN AMOUNT NOT EXCEEDING THE APPRAISED FEE SIMPLE VALUE OF THE PROPERTY, ASSUMING COMPLETE RESTORATION AS OF THE DATE OF TERMINATION OF THE LEASE, WHICHEVER IS LESS?

(3) IN SOME CASES INVOLVING LEASES ENTERED INTO BY THIS DEPARTMENT THE FEE VALUE OF THE LEASED PROPERTY IS ENHANCED CONSIDERABLY BY REASON OF GOVERNMENT IMPROVEMENTS MADE DURING THE PERIOD OF THE GOVERNMENT'S OCCUPANCY SO THAT THE VALUE OF THE PROPERTY AT THE TIME OF SURRENDER THEREOF IS CONSIDERED TO BE GREATER THAN IT WOULD BE IF RESTORED TO ITS CONDITION AS OF THE TIME THE GOVERNMENT TOOK POSSESSION. IN SUCH CASES, IS THIS DEPARTMENT REQUIRED TO REFUSE TO RESTORE THE PROPERTY TO THE CONDITION EXISTING AT THE TIME OF TAKING OR TO MAKE A CASH SETTLEMENT IN LIEU THEREOF, IN VIEW OF THE FACT THAT THERE HAS BEEN NO DIMINUTION OF THE FEE VALUE OF THE PROPERTY, NOTWITHSTANDING THAT THE LEASE CONTAINS AN EXPRESS PROVISION FOR RESTORATION?

WITH RESPECT TO THE MEASURE OF DAMAGES FOR BREACH OF THE LESSEE'S COVENANT TO LEASE OR SURRENDER LEASED PREMISES IN A PARTICULAR CONDITION UPON TERMINATION OF A LEASE, IT WAS STATED BY THE SUPREME COURT OF MASSACHUSETTS IN THE CASE OF CRYSTAL CONCRETE CORP. V. TOWN OF BRAINTREE, MASS., CITED IN THE ABOVE LETTER, AS FOLLOWS:

A LESSEE WHO BREACHES A PROVISION OF THE LEASE REQUIRING HIM TO MAKE CERTAIN REPAIRS OR TO DELIVER UP THE PREMISES AT THE TERMINATION OF THE LEASE IN A CERTAIN CONDITION IS LIABLE IN DAMAGES FOR THE REASONABLE COST OF MAKING SUCH REPAIRS OR OF PUTTING THE PREMISES IN THE CONDITION PRESCRIBED BY THE LEASE. * * *. BUT THE PLAINTIFF IS NOT TO BE PUT IN A BETTER POSITION THAN IT WOULD HAVE BEEN IF THE DEFENDANT HAD PERFORMED THE TERMS OF THE LEASE. THE LOCATION AND CHARACTER OF THE DEMISED PREMISES MUST BE CONSIDERED; AND THE REASONABLE COST OF REPAIRS, IN SOME INSTANCES, WOULD FURNISH THE PROPER MEASURE OF DAMAGES WHILE, IN OTHER INSTANCES, THE VALUE OF THE PREMISES MAY BE SUCH THAT THE INCURRENCE OF EXPENSE FOR REPAIRS WOULD NOT BE A REASONABLE, PRACTICAL OR ECONOMICAL METHOD OF DEALING WITH THE PROPERTY. SUCH EXPENSE MIGHT GREATLY EXCEED ANY DIMINUTION OF THE FAIR MARKET VALUE OF THE LAND THAT WAS CAUSED BY THE DEFENDANT'S NONPERFORMANCE OF THE PROVISIONS OF THE LEASE. * * *. THE DIMINUTION IN THE FAIR MARKET VALUE OF THE PREMISES THAT RESULTED FROM THE DEFENDANT'S CONDUCT WAS THE PROPER MEASURE OF DAMAGES. SEE ALSO IN THIS CONNECTION VICTOR A. HARDER REALTY AND C. CO. V. CITY OF NEW YORK, 64 N.Y.S. 2D 310; 51 C.J.S. LANDLORD AND TENANT, SEC. 416, 17 C.J. 882, 883.

IN VIEW OF SUCH AUTHORITIES AND THEIR APPARENT APPLICABILITY TO SITUATIONS SUCH AS DISCLOSED BY THE FACTS IN THE PRESENT CASE, THIS OFFICE WOULD NOT BE WARRANTED IN CONCLUDING THAT ANY GREATER AMOUNT COULD LEGALLY BE EXPENDED FOR RESTORATION OR PAID TO THE LESSOR IN LIEU THEREOF THAN THE AMOUNT BY WHICH THE MARKET VALUE OF THE PREMISES HAS BEEN DIMINISHED BY THE GOVERNMENT'S FAILURE TO RESTORE AS PROVIDED IN THE LEASE.

ACCORDINGLY, YOUR FIRST QUESTION IS ANSWERED IN THE AFFIRMATIVE. THE FIRST QUESTION HAVING BEEN ANSWERED IN THE AFFIRMATIVE, THE SECOND QUESTION REQUIRES NO ANSWER. SINCE YOUR THIRD QUESTION APPEARS HYPOTHETICAL, IT IS BELIEVED THAT A CONSIDERATION THEREOF SHOULD BE RESERVED PENDING THE SUBMISSION OF AN ACTUAL CASE.