Articles

With Contracts, Sometimes Actions Speak Louder Than Words

By: Paul F. Millus

Background

The Second Department's recent decision in the matter of Coliseum Towers Associates v. County of Nassau, 769 N.Y.S.2d 293, 2003 N.Y. Slip Op. 19441(2d Dept. Dec 15, 2003) reinforces the proposition that post-contractual actions are instrumental when determining the true nature of an agreement where the agreement's language has been deemed ambiguous. In this case, Coliseum Towers Associates ("CTA"), former owner of EAB Plaza, and Nassau County entered into a 99-year lease agreement in 1981, which was eventually followed by the construction of the familiar EAB Plaza buildings in the Mitchell Field complex in Uniondale. The lease was the subject of intense negotiations involving a number of Nassau County officials, members of the DeMatteis Organization, and a multitude of law firms and lawyers including the once infamous and now long defunct Finley Kumbel firm.

The CTA lease became the prototype for many other lease agreements in the Mitchell Field complex whereby the County leased the land and the tenants were authorized to build structures on the demised premises at their own expense. Under the lease, CTA was required to pay all taxes on the buildings to be built as well as taxes on the land. The land taxes alone amounted to almost $330,000 per year as of 1988, with almost $1.75 million in land taxes previously paid through 1988. However, a dispute became apparent in 1991 when CTA began to pay its land tax portion of its real property tax bill under protest. Thereafter, in 1993 CTA commenced litigation in Nassau County Supreme Court alleging that it was not required to pay taxes on the land under the terms of its lease with the County. If true, CTA would have been entitled to a refund of over $26 million in land taxes paid after its protest. CTA would also save upwards of $200 million over the remaining 89 years of the lease. This would not only force the County to compensate for shortfalls within its own budget, but would also require the County to make up the shortfall for the Town of Hempstead and the local school district's lost tax revenue as well. A daunting prospect indeed.

Normally, the construction of a plain and unambiguous contract is within the court's purview based on the four corners of the document. Circumstances extrinsic to the agreement will not be considered where the intention of the parties can be determined from the instrument itself. Thus, the court must find, as a matter of law, that contractual language is ambiguous before considering extrinsic evidence.⁽¹⁾ After initial motion practice, and based on the decision in Atria Associates v. County of Nassau, ⁽²⁾ the trial court held that the contract terms were indeed ambiguous. Thus the issue framed for trial was to determine the intent of the parties as to who was responsible for payment of land taxes. This would prove a difficult question to determine almost 20 years after the lease was negotiated. The difficulty was compounded by the fact that three relevant witnesses to the negotiations were deceased by the time of the trial.

A number of principles abound to assist the court in discerning the parties' intentions after a contract has been deemed ambiguous. In CTA, the County argued that the principle of "practical construction," also known as "practical interpretation," was applicable. New York courts have long recognized that "[t]here is no better way of ascertaining the meaning and construction of a written contract than to look at the acts and conduct of the parties under it." ⁽³⁾ However, CTA countered with the rule of contra proferentem, which states that an agreement is construed "against the party who prepared it, and favorably to a party who had no voice in the selection of its language."⁽⁴⁾ CTA maintained that Nassau County initially drafted the document and was therefore responsible for its contents. It further argued that as landlord, the County was responsible to pay the land taxes absent a specific provision shifting that responsibility to the tenant.

After a one-week trial and extensive post-trial submissions, the Hon. Frank Rosetti issued a memorandum and order finding, inter alia, that the application of the doctrine of contra proferentum mandated a holding in CTA's favor. In so holding, the Court rejected the evidence proffered in support of the County's practical interpretation argument.

Pre-Execution Negotiations versus Post-Execution Behavior

The trial court accepted CTA's version of events as it credited the testimony of witnesses who stated that they were present during pre-execution negotiations concerning the land taxes. CTA's main focus was on the lease document and its ambiguous language. From CTA's perspective, the County was in a better position to make it clear that any tax burden had been shifted to the tenant. By failing to specify such responsibility in the language of the lease, CTA argued that the County was foreclosed from seeking to do so after the negotiations had long since concluded. Against this backdrop, CTA countered the County's practical interpretation or practical construction argument with the excuse that CTA's personnel had simply made a mistake by paying taxes on the land for seven years without protest.

The Appellate Division rejected CTA's "mistake" argument, reinforcing the proposition that a party's actions are a more reliable indicator of initial intentions than its excuses made in hindsight when interpreting a contract. The Appellate Division focused on numerous examples of CTA's behavior which were inconsistent with its position that it never intended to pay taxes on the land. For example, CTA's true intent was evidenced by the fact that CTA challenged tax assessments on the land in certiorari proceedings on a yearly basis up to1991, despite its adopted litigation posture that it was never required to pay such taxes in the first instance.

The Appellate Division also rejected the trial court's application of the contra proferentum doctrine. It held that the doctrine was inapplicable because the lease was not solely the creation of Nassau County and its agents. Rather, the evidence demonstrated that CTA played a very significant role in the preparation of the lease, thereby undermining CTA's argument. In fact, even if the lease was the sole work product of Nassau County, the doctrine of contra proferentum should be applied only as a last resort to determine the parties' intent in any event.⁽⁵⁾ Finally, the Court implicitly upheld the principle that there is no general rule, contrary to the argument presented by CTA, which requires lease agreements to be construed automatically against the landlord in the first instance solely because of its position in the leasing process. ⁽⁶⁾

Paul F. Millus is a member of the law firm of Snitow Kanfer Holtzer & Millus, LLP located in Manhattan. He was trial counsel for Nassau County in this case and assisted the County on its brief. He is presently Vice Chair of the NCBA Federal Court's Committee.

1. West Weir Bartel Inc. v. Mary Carter Paint Co., 25 N.Y.2d 535, 307 N.Y.S.2d 449 (1969).

2. 181 A.D.2d 47, 582 N.Y.S.2d 439 (2d Dept, 1992)

3. Seymour v. Warren, 179 N.Y. 1, 6 (1904); Nicoll v. Sands, 131 N.Y. 19, 24 (1892) ("The

practical construction put upon a contract by the parties to it, is sometimes almost conclusive as to its meaning.")

4. Jacobson v. Sassower, 66 N.Y.2d 991, 993, 499 N.Y.S.2d 381 (1985).

5. Albany Savings Bank v. Halpin, 117 F.3d 669 (2d Cir. 1997).

6. Schering Corp. v. Home Ins. Co. 712 F.2d 4 (2d Cir. 1983).