E-Alert Case Updates

Building Management Company Can Only Enforce Terms From Implied-In-Fact Contract Coinciding with Conduct

Spectra-4, LLP v. Uniwest Commercial Realty, Inc.
(August 21, 2015)
by Colleen K. O’Brien, Associate
Semmes, Bowen & Semmes (www.semmes.com)

Available at: http://www.courts.state.va.us/opinions/opnscvwp/1140892.pdf

Spectra-4, LLP v. Uniwest Commercial Realty, Inc., Supreme Court of Virginia, Record No. 140892 (June 4, 2015), involved the extent to which an implied-in-fact contract encompasses the terms of a previously expired express contract that was not executed by the same parties to the implied-in-fact contracts. The parties, Spectra-4 LLP and Spectet Limited Partnership, LLP, individually owned and leased neighboring commercial buildings. This appeal arose out of a dispute over the management services provided for the commercial buildings.

Relevant to the appeal, three (3) separate entities had provided the management services for the commercial buildings. First, Jefferson/LBG, L.L.C. managed the commercial buildings from 1995 to 1997. Jefferson/LBG was organized in August 1995 and was owned in part by Suzanne O. Farr. Jefferson/LBG's management services were governed by two (2) separate, but materially identical, Management Agreements, one for each commercial building. Spectra-4 and Jefferson/LBG executed the Management Agreement pertaining to the commercial building owned by Spectra-4, and Spectet and Jefferson/LBG executed the Management Agreement pertaining to the commercial building owned by Spectet. The corporate existence of Jefferson/LBG was automatically cancelled by the Virginia State Corporation Commission in December 1997 when it failed to pay its annual registration fee.

Next, Jefferson Commercial Real Estate Services, Inc. managed the commercial buildings from 1998 to 1999. Farr was also an owner of Jefferson Commercial, but despite their similar titles, Jefferson Commercial was a separate entity legally distinct from Jefferson/LBG. No new Management Agreements were executed to govern Jefferson Commercial's management services for the commercial buildings. Jefferson Commercial did not transact any business with Jefferson/LBG.

Then, Uniwest Commercial Realty, Inc. managed the commercial buildings from 2000 until 2012. No new Management Agreements were executed to govern Uniwest's management services for the commercial buildings. Uniwest did not transact any business with Jefferson/LBG. Uniwest did transact business with Jefferson Commercial, however. Uniwest and Jefferson Commercial executed an Asset Purchase Agreement in November 1999 in which Jefferson Commercial sold all of its assets, but no stock, to Uniwest.

Jefferson Commercial notified Spectra-4 and Spectet that it added Uniwest "as partners" to its management services effective January 2000. At that time, Farr became Uniwest's president. Later, in 2002, Uniwest fired Farr from this position. Despite this change, Uniwest continued to provide management services for the commercial buildings until 2012. In September 2012, Spectra-4 and Spectet notified Uniwest that they sought to "terminate[] the [M]anagement [A]greement[s] between Uniwest and [Spectra-4 and Spectet]." Uniwest responded that the termination was "invalid per the terms of the [Management] Agreement[s]," and stated that it would continue its management services until certain specified dates. Legal counsel sent a series of letters back and forth, Uniwest's management services for both commercial buildings were terminated in October 2012. Following the termination of its management services, Uniwest withdrew $13,847.61 in premature termination fees from Spectra-4's operating accounts, and $22,605.72 in premature termination fees and $1,751.30 in copying costs from Spectet's operating accounts.

Uniwest withdrew these funds because it believed that it was entitled to such fees and costs based on Uniwest’s perception that Spectra-4's and Spectet's prematurely terminated Uniwest's management services. Uniwest's position was predicated upon its belief that the Management Agreements themselves dictated the contractual relationships between Spectra-4 and Uniwest, and between Spectet and Uniwest; or, alternatively, that the contractual relationships between the parties had incorporated the full terms of the Management Agreements. In contrast, Spectra-4 and Spectet believed that Uniwest's withdrawal of such fees and costs was impermissible. Spectra-4's and Spectet's position was predicated upon the belief that the Management Agreements did not govern Uniwest's management services; and that even if the Management Agreements did govern, Spectra-4 and Spectet had complied with the "just cause" termination clause of those agreements in terminating Uniwest's management services.

Upon learning that Uniwest had withdrawn additional fees and costs, Spectra-4 and Spectet filed separate Warrants in Debt against Uniwest in the General District Court of Fairfax County, alleging conversion. The cases were not consolidated, but a single trial was held and the district court awarded judgment in favor of Spectra-4 and Spectet.

Uniwest timely appealed to the Circuit Court of Fairfax County, and Spectra-4 and Spectet amended the complaints to include breach of contract claims. Once again, the cases were not consolidated but a single trial was held. After a bench trial the circuit court requested additional briefing on Uniwest's renewed motion to strike. Upon considering the parties' arguments and briefs, the circuit court entered judgment in favor of Uniwest and dismissed Spectra-4's and Spectet's claims with prejudice. Spectra-4 and Spectet timely appealed to this Court.

The issue on appeal was whether the trial court erred in holding that the implied-in-fact contracts between [Spectet and Spectra-4] and [Uniwest] "effectively incorporated the terms of the [Management Agreements]" and, thus, that [Uniwest] did not breach the implied-in-fact contracts by taking liquidated damages from [Spectet and Spectra-4] equal to six months' management fees and charging [Spectet] for copy costs.

The circuit court concluded that the Management Agreements – the express contracts executed by Spectra-4 and Jefferson/LBG, and by Spectet and Jefferson/LBG – did not govern the relationship between Spectra-4 and Uniwest, and between Spectet and Uniwest. The circuit court concluded that the Management Agreements were cancelled when the State Corporation Commission automatically cancelled the corporate existence of Jefferson/LBG. Regardless of whether that holding was correct, and regardless of the status of the rights and obligations under the Management Agreements as entered into by Spectra-4, Spectet, and Jefferson/LBG, those rights and obligations were never extended to either Jefferson Commercial or Uniwest.

Neither Jefferson Commercial nor Uniwest succeeded to or were assigned any rights and obligations created under the Management Agreements. Jefferson Commercial and Uniwest were not parties to the Management Agreements, were entities legally distinct from Jefferson/LBG, did not merge with Jefferson/LBG, acquired no stock and no assets from Jefferson/LBG, and entered into no contracts with Jefferson/LBG. Simply put, Jefferson Commercial and Uniwest were strangers to the Management Agreements when those express contracts were executed, and remained strangers to the Management Agreements even as Jefferson Commercial and Uniwest provided management services for the commercial buildings. Although an asset purchase agreement was executed between Jefferson Commercial and Uniwest, Jefferson Commercial could not sell the Management Agreements to Uniwest because Jefferson Commercial never acquired an interest in those express contracts. Thus, the Management Agreements were express contracts that governed only the relationship between Spectra-4 and Jefferson/LBG, and between Spectet and Jefferson/LBG. The circuit court did not err in holding that the Management Agreements did not directly govern Uniwest's management services.

In the absence of an express contract, and implied contract may exist. Like an express contract, an implied-in-fact contract is created only when the typical requirements to form a contract are present, such as consideration and mutuality of assent. However, an implied-in-fact contract "is arrived at by a consideration of [the parties'] acts and conduct." The circuit court concluded that, between Spectra-4 and Uniwest, and between Spectet and Uniwest, implied-in-fact contracts governed Uniwest's management services for each commercial building. This was not error.

Even though no oral or written agreement was executed between the parties, Uniwest provided Spectra-4 and Spectet management services for approximately twelve (12) years. For each commercial building, Uniwest provided a building manager, collected rent from tenants, addressed problems raised by tenants, oversaw building maintenance and engineering, and maintained an operating account from which it withdrew operating costs and paid itself a monthly fee for its services. These actions establish that an implied-in-fact contract existed between Spectra-4 and Uniwest, and between Spectet and Uniwest, and that those implied-in-fact contracts governed Uniwest's management services.

The circuit court concluded that these implied-in-fact contracts "effectively incorporated" the previously expired, expressly created Management Agreements in their entirety for purposes of the implied-in-fact contracts' terms and conditions. This was error. The threshold error in this reasoning was the determination that mutuality of assent existed in light of the factual finding that Spectra-4, Spectet, and Uniwest held the "subjective belief" that they were operating under the entirety of the Management Agreements. A meeting of the minds cannot exist simply because the parties independently believe the exact same thing. Instead, mutuality of assent exists by an interaction between the parties, in the form of offer and acceptance, manifested "by word, act[,] or conduct which evince the intention of the parties to contract." In other words, the parties' belief of what the agreement is must coincide with written or spoken words, if an express contract is to be formed; or must coincide with the parties' conduct, if an implied-in-fact contract is to be formed. Accepting that belief must exist in tandem with words or actions is only a starting point. With implied-in-fact contracts, the parties' conduct must also establish what the terms of the contract are. In limited circumstances, an implied-in-fact contract may encompass the totality of an express contract simply by way of the parties acting in a manner consistent with such an express contract. But it is only when the parties to an express contract continue to act as if that contract is still operative even after it expires that the entirety of "the material terms of the prior contract . . . survive intact" by way of a subsequently formed implied-in-fact contract.

Importantly, the same parties must be engaged in the same course of dealing both during and after the expiration of the express contract. Absent such circumstances, an implied-in-fact contract may include only the particular terms of a previously expired express contract which the parties' subsequent actions, embodying their mutuality of assent, specifically encompass. This logic does not apply to the factual circumstances of this case. The previously expired express contracts in the form of the Management Agreements were between Spectra-4, Spectet, and Jefferson/LBG. The implied-in-fact contracts were between Spectra-4, Spectet, and Uniwest. Jefferson/LBG and Uniwest were legally distinct parties. Consequently, Spectra-4, Spectet, and Uniwest could not simply act consistent with the Management Agreements in order for their implied-in-fact contracts to include the full terms of the Management Agreements. The implied-in-fact contracts included only the specific terms of the Management Agreements encompassed by the parties' conduct. Thus, on the record, no basis existed for the circuit court to hold that the implied-in-fact contracts permitted Uniwest to withdraw $13,847.61 in premature termination fees from Spectra-4's operating accounts, and $22,605.72 in premature termination fees and $1,751.30 in copying costs from Spectet's operating accounts. The record demonstrated that the implied-in-fact contracts incorporated only some provisions of the Management Agreements. For example, evidence at trial established that Spectra-4 and Spectet not only permitted Uniwest to calculate their management fees in a manner consistent with the Management Agreements, but that the parties specifically referenced and relied upon Article 17.3 of the Management Agreements in order to recalculate Uniwest's management fees. Thus, the implied-in-fact contracts encompassed, among other terms, the terms and conditions of the Management Agreements relating to the calculation of the management fees.

No evidence, however, established that Spectra-4, Spectet, and Uniwest engaged in conduct supporting the conclusion that the implied-in-fact contracts encompassed those terms and conditions of the Management Agreements governing premature termination fees. The Management Agreements' liquidation clause was the only basis for Uniwest withdrawing premature termination fees from Spectra-4's and Spectet's operating accounts. At most, evidence showed that Uniwest actually withdrew premature termination fees upon the termination of Uniwest's management services. But as the circuit court recognized, "the parties only terminated [the implied-in-fact contracts] once. And there[ is] no pattern of conduct of termination."

Further, Spectra-4 and Spectet did not acquiesce to Uniwest's withdrawal of funds, but consistently disputed it. Thus, no conduct established a mutuality of assent that the implied-in-implied-in-fact contracts encompassed the Management Agreements' liquidation clause. Accordingly, Uniwest's withdrawal of $13,847.61 was not authorized by the implied-in-fact contract between Spectra-4 and Uniwest, and Uniwest's withdrawal of $22,605.72 was not authorized by the implied-in-fact contract between Spectet and Uniwest. Additionally, no evidence established that Spectra-4, Spectet, and Uniwest engaged in conduct so that the implied-in-fact contracts encompassed terms and conditions permitting Uniwest to charge for copying costs. Uniwest's Chief Financial Officer testified at trial that it withdrew $1,751.30 in copying costs from Spectet's operating accounts not based on the Management Agreements, but based only on "standard procedure." Also, the Management Agreements themselves permitted the "Agent" to "pay or reimburse itself for all expenses and costs of operating the Project." Uniwest's Chief Financial Officer, however, further testified that, while Uniwest would occasionally bill for "FedEx charges or something like that," she could not recall Uniwest ever charging Spectra-4 or Spectet for copying costs. No other evidence was introduced pertaining to Uniwest's history of charging for copying costs. Thus, no conduct established a mutuality of assent that the implied-in-fact contracts encompassed a term allowing Uniwest to charge copying costs. Accordingly, Uniwest's withdrawal of $1,751.30 was not authorized by the implied-in-fact contract between Spectet and Uniwest.

Uniwest provided management services for the commercial buildings owned by Spectra-4 and Spectet. As between Uniwest and Spectra-4, and between Uniwest and Spectet, two separate implied-in-fact contracts existed. These implied-in-fact contracts could, and did, encompass specific portions of previously expired express contracts executed by a different set of parties. However, these implied-in-fact contracts did not include terms and conditions permitting Uniwest to withdraw premature termination fees or copying charges from Spectra-4's and Spectet's operating accounts. The Court therefore reversed the circuit court's judgment that the implied-in-fact contracts permitted Uniwest's withdrawal of premature termination fees and copying charges from Spectra-4's and Spectet's operating accounts. The Court vacated the circuit court's order dismissing Spectra-4's and Spectet's claims with prejudice and entering judgment in favor of Uniwest. The case was remanded to the circuit court for further proceedings consistent with the opinion.