K.C. Air Cargo Services, Inc. v. City of Kansas City

Citations: 523 S.W.3d 1; 2017 Mo. App. LEXIS 119; 2017 WL 892548Docket: WD 79786

Court: Missouri Court of Appeals; March 6, 2017; Missouri; State Appellate Court

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The City of Kansas City, Missouri, appeals a circuit court’s summary judgment in favor of K.C. Air Cargo Services, Inc. (KCACS) regarding a lease agreement for land at Kansas City International Airport. The court ruled that a specific clause in the lease granted KCACS an unqualified right to renew the lease indefinitely and established a clear mechanism for determining the rental rate upon renewal. Additionally, KCACS was awarded attorneys’ fees due to special circumstances. The City presents four arguments on appeal: (1) the lease clause is void ab initio as beyond the City’s authority; (2) even if valid, the clause does not provide KCACS a perpetual renewal option; (3) the court misapplied the law in awarding attorneys’ fees; and (4) the lease clause is a right of first refusal, not an option to renew. The appellate court affirms part of the circuit court’s decision but reverses and remands in part, emphasizing that assessments of summary judgment are made in favor of the party against whom judgment was entered. The record confirms that KCACS, a Missouri corporation, has a lease with the City, with the original lease starting on June 18, 1986, and amended four times since. The lease allows KCACS to develop air cargo facilities and includes a clause that provides for a rental rate based on fair market value at the end of the lease term.

On July 17, 2013, KCACS initiated a lawsuit against the City for damages to its leasehold premises, caused by subsurface water migration from City property, claiming lost profits due to an inability to retain subtenants and seeking compensation extending beyond the lease's expiration on September 30, 2017. The City contested the claim, filing a motion in limine to exclude lost profit damages after the lease's expiration, asserting that the renewal clause in the lease was unenforceable. The circuit court overruled this motion, deeming the renewal clause sufficiently detailed to be enforceable for an additional ten years. The case was settled, resulting in the signing of the Fourth Amendment to the lease. Following the settlement, Assistant City Attorney Chad Stewart commented that the City was uncertain about KCACS's ability to renew the lease, suggesting that direct rental by the City could recoup the settlement costs in three to four years. On April 21, 2015, KCACS's counsel sought confirmation from the City regarding the renewal option, to which the City replied that no final decision had been made due to the lease's remaining term. KCACS subsequently filed a declaratory judgment action, challenging the City’s position and claiming inconsistency with the prior court order. The City responded, asserting the renewal clause was a right of first refusal and potentially void under the City's Charter. KCACS then moved for summary judgment, supported by an affidavit from its president, indicating that the City's indecision on the renewal clause jeopardized its negotiations with potential subtenants requiring longer lease terms than the remaining lease period.

The City responded to KCACS’s uncontroverted facts by denying the allegations in Haith’s affidavit, citing insufficient information. The City then filed a cross-motion for summary judgment, arguing that the disputed clause was a right of first refusal and, if considered an option to renew, violated a 50-year term limit in the City’s Charter. On March 17, 2016, the circuit court granted KCACS’s summary judgment motion, declaring that the renewal clause allowed KCACS an unqualified right to renew the Lease indefinitely. The court permitted KCACS to seek attorneys’ fees, which it later granted based on special circumstances, including the City's lack of substantial grounds for its position and interference with KCACS’s property rights. The City did not contest the amount of fees, totaling $66,196.00 and $3,248.80 in costs. 

In its appeal, the City argued that the circuit court erred in denying its cross-motion for summary judgment, asserting the lease clause was a right of first refusal, not an option to renew. Although generally, a denial of summary judgment is not reviewable, the court found that the City’s claim was closely related to the summary judgment granted to KCACS. The City maintained that the lease clause was a matter of contract interpretation, which the court could resolve as a question of law. However, the circuit court disagreed, confirming the renewal clause was enforceable, allowing KCACS to renew the lease every 30 years under the same terms and conditions, thus affirming KCACS’s perpetual right to renew the lease.

Summary judgment is reviewed de novo, with the record assessed in favor of the party opposing the judgment. Summary judgment is affirmed if no genuine issues of material fact exist and the moving party is entitled to judgment as a matter of law. The lease clause in question states that at the end of the lease term, the lessee has the opportunity to lease the premises at the higher of the fair market rental rate or a rate offered by another party. The City argues this clause constitutes a right of first refusal, asserting that its interpretation sustains the clause's validity and reflects the parties' intent. In contrast, the court finds that the clause creates an option for the lessee rather than a right of first refusal. The distinction lies in that an option compels the lessor to lease at a specified price regardless of their willingness, while a right of first refusal allows the lessee to lease only if the lessor decides to lease the property. The court concludes that the language of the lease clearly indicates an option, as it forces the City to lease at a stipulated price without allowing it discretion over whether to lease, which contradicts the characteristics of a right of first refusal.

The City’s argument that the lease clause constitutes a "classic right of first refusal" is rejected, as the clause guarantees a renewal at fair market value without necessitating a third-party offer. If no third-party offer exists, its value is zero, establishing that KCACS would pay fair market value. The use of "opportunity" within the clause does not imply an intent for a right of first refusal; instead, contract interpretation relies on the language used rather than specific terminology. Although the clause lacks the terms "option" and "renewal," courts avoid overly technical interpretations. The circuit court equated "opportunity" with "option," aligning with the Merriam-Webster definition of "option" as the right to choose. Therefore, the clause is interpreted as an option to lease rather than a right of first refusal, supporting the circuit court's denial of the City’s summary judgment motion. The City further contends that if the clause is an option, it renders the lease invalid due to exceeding 50 years, violating the City’s Charter. However, the court disagrees, noting that the original lease was for 30 years, which is within the allowable term according to Kansas City’s Charter. Thus, the lease clause is valid and enforceable.

The clause allows KCACS to renew the lease, but exercising this option will not result in a continuous 60-year lease as claimed by the City. Instead, it signifies the possibility of executing a new lease for another term of 30 years, reflecting a distinct tenancy rather than an extension of the original lease. The legal precedent established in Bussen v. Del Commune supports this interpretation, indicating that a renewal is essentially a new agreement for a new term.

The City references Software A.G. of North America, Inc. v. City of Columbia to argue against an indefinite lease term, asserting that such an interpretation would violate the City Charter, which mandates rebidding for contracts over five years. In Software, the City sought to avoid rebidding after five years by treating annual payments as independent contracts, a position the court rejected, reinforcing that renewing or extending contracts must adhere to the ordinance's intent.

The Software case is not applicable here, as its ordinance explicitly limits service contracts to five years without rebidding, contrasting with the lease renewal terms at issue in the current case.

The ordinance stipulates that contracts for services are limited to a maximum of five years and cannot be extended beyond this period. The Software court determined that an unpaid invoice was merely an offer to extend a contract beyond this limit, rendering any acceptance void under the ordinance. Conversely, Section 82 of the City Charter allows leases for up to fifty years but does not address lease renewals. Interpreting the ordinance to prevent renewals would imply that a lessee could never renew after a fifty-year term, which is not supported by the City's intent. Therefore, the renewal option in the lease does not violate Section 82 as it does not extend the lease beyond fifty years. 

The City contends that the circuit court incorrectly interpreted the lease as granting KCACS a perpetual renewal option. Missouri case law generally opposes the notion of contracts creating perpetual rights or obligations unless explicitly stated. A lease cannot confer a right of perpetual renewal unless the lease language clearly indicates such intent. The circuit court found that the lease's language implied a right to perpetual renewal based on several factors: an indefinite rent escalation provision, an agreement allowing KCACS to continue as long as it meets financial terms, and other provisions indicating adaptability to future circumstances. However, the legal principle discourages interpretations of perpetual renewals unless explicitly expressed.

The rent escalation provision in the lease applies throughout the lease term and does not imply a perpetual lease. The lease states that ground rentals are subject to renegotiation every five years, and the Fourth Amendment specifies annual adjustments based on the Consumer Price Index starting January 1, 2016. The lease renewal clause allows the Lessee to lease the Premises at fair market rates at the end of the term but does not express or imply perpetual renewal intentions, lacking language typically used for such agreements. The circuit court's interpretation that the lowercase "term" indicated an intention for rights and obligations to extend beyond the initial 30 years was found incorrect, as it did not indicate a right to perpetual renewal. The general language of the lease renewal provision suggests authorization for only one renewal of the lease terms. The circuit court's summary judgment favoring KCACS regarding a perpetual renewal right is reversed, clarifying that any renewal right is for one additional term only. Additionally, the City argues that the circuit court erred in awarding attorneys' fees to KCACS, citing a lack of special circumstances justifying such an award. In Missouri, under the American Rule, litigants generally bear their own attorney's fees unless specifically authorized by statute or contract.

Section 527.100, RSMo 2000, permits circuit courts in Missouri to award "costs" deemed "equitable and just" in declaratory judgment actions, as affirmed in Smith v. City of St. Louis. The Missouri Supreme Court clarified that "costs" does not inherently include attorneys’ fees, but may do so under "special circumstances," a concept that is narrowly defined and strictly applied. In this case, the circuit court allowed KCACS to submit further arguments on whether special circumstances warranted an award of attorneys’ fees. KCACS subsequently filed a motion detailing its request for fees totaling $66,196.00 and litigation expenses of $3,248.80, supported by affidavits outlining attorney and paralegal rates and billable hours. The City opposed this motion, but the circuit court awarded attorneys’ fees to KCACS without a hearing, citing familiarity with the case records and the circumstances surrounding the City’s actions, including a lack of substantial legal grounds and interference with KCACS’s property rights.

However, upon review, it was determined that there was insufficient factual basis in the summary judgment proceedings to confirm the existence of "special circumstances" necessary for awarding attorneys’ fees. Thus, the court reversed the circuit court’s award and remanded the case for further proceedings to allow both parties to present evidence regarding the existence of special circumstances. Additionally, it was noted that KCACS had filed a motion for attorneys’ fees on appeal, which the circuit court should also address if special circumstances are found on remand.

The circuit court’s judgment granting summary judgment to KCACS is affirmed, confirming that the lease's option to renew does not violate section 82 of the City Charter, as it will not extend the lease beyond 50 years. The court also affirms the denial of the City’s cross-motion for summary judgment. However, the court reverses the summary judgment related to KCACS's right to perpetual renewal, clarifying that KCACS is entitled to a single additional renewal term only. The award of attorneys’ fees to KCACS is reversed, with instructions for further proceedings to assess any special circumstances that may justify such fees. KCACS entered the lease through a complete assignment from Haith Company on August 26, 1986. The lease's area was significantly reduced in 2015 to a 50-foot strip adjacent to the warehouse. The City acknowledged the accuracy of an article from Missouri Lawyers Weekly but denied other allegations. The court finds no unreasonable implications in the lease’s renewal clause, establishing that renewal terms are inherently understood to carry the same conditions as the original lease. The renewal option specifies that rent will be based on the higher of the fair market rate or the rate offered by another party. The Fourth Amendment adjusts ground rent annually based on the Consumer Price Index. Section 82, which limits lease terms to 50 years, was in place when the original lease and its first amendment were signed but was repealed in 2006 with a new City Charter. The distinction between renewal and extension of the lease is also clarified, emphasizing the nature of each provision in lease agreements.

A renewal provision in a lease creates a new tenancy through a new lease upon the expiration of the original term, while an extension continues the existing tenancy without creating a new one. Courts typically overlook the distinction between renewal and extension unless a new lease is explicitly required, particularly if the new terms differ significantly from the original. In the referenced case, the lease clause clearly states that the lessee will have the opportunity to lease the premises again, suggesting a renewal with a new lease rather than merely extending the original lease. The circuit court maintained that even if construed as a lease exceeding 50 years, such a renewal provision is valid under Missouri law. The court found no violation of the City Charter, making it unnecessary to determine the City’s authority to enter into long-term leases for airport property. Although the City did not raise the issue of perpetual renewals at the circuit court, KCACS, as the moving party, had the burden to prove that the renewal option constituted a perpetual renewal, which it did not establish. The City did not contest the attorneys' fees and costs claimed by KCACS.