Is a tenant justified in terminating a lease for a build-to-suit building when unidentified odors prevent beneficial occupancy? In Wise Development, LLC v. General Services Administration, the United States Civilian Board of Contract Appeals (CBCA) recently held, no. How did the CBCA reach that conclusion and what lessons does it provide for other projects in the federal government and civilian sectors?

In Wise Development, the GSA entered into lease with Wise a build-to-suit, single tenant building in Hickory, North Carolina for use as a service center by the U.S. Social Security Administration (SSA). The project specifications included stringent indoor air quality requirements, including limitations on use of VOCs in paints and adhesives, a 72-hour “flush out” period before occupancy with minimum outdoor air settings, and dedicated HVAC systems to service certain parts of the building.

Wise retained Blue Ridge Enterprises as general contractor to construct the building. Construction and build-out of the facility were completed in late September 2012, after which the GSA inspected and accepted the building. The SSA occupied the building on October 5, 2012 and opened the building to the public one week later.

Four months after moving into the building, SSA employees raised concerns about an odor in the building. Over the next 12 months, the odor would come and go with no discernable pattern. Employees and others described it as “a chemical odor,” “a burning wire smell,” “a new plastic odor,” and “a new vinyl smell, like when you first open a shower curtain.” Not everyone could detect the odor. The on-site SSA property manager was never able to detect it nor were various technicians who serviced the building or Wise or its property manager.

During that 12 month period, Wise and Blue Ridge Enterprises performed a variety of tests and proactive repairs to determine the source and cause of the odor, including the following:

– Had the HVAC subcontractor to Blue Ridge Enterprises evaluate, clean, maintain, and replace various components of the HVAC equipment;
– Retained a third-party contractor to clean the HVAC ducts, an air handling unit and roof top unit at the building;
– Retained a third-party indoor air consultant to perform indoor air quality studies and an air flow evaluation;
– Retained a third-party engineering firm to develop a list of recommendations to identify and eliminate the source of the odor;
– Retained an appliance company to investigate the appliances in the kitchen and break room for potential sources of the odor;
– Had a plumbing contractor perform a smoke test on the sewer system servicing the building; and
– Retained a third-party consultant to investigate moisture drive through the concrete floor slab and the adhesive used for carpet floor tiles.

Despite all of these efforts, neither Wise nor the GSA could ever determine the source or cause of the odor. Some efforts were made to determine whether the furnishings or equipment the SSA or its employees brought to building—including space heaters that SSA employees used in violation of the lease—were the source of the odors. The GSA stated it examined the issue, but never provided test results or any findings in that regard.

On August 14, 2014, the GSA terminated the lease with Wise for cause, asserting that Wise had defaulted under the lease through Wise’s

[F]ailure to maintain, repair, operate, or service the premises as and when specified in this lease, or failure to perform any other requirement of this lease as and when required  provided any such failure shall remain uncured for a period of thirty (30) days next following Lessor’s receipt of notice thereof from the Contracting Officer or any authorized representative.

Wise contested the termination, but during that lengthy process, also found a new tenant for the building, a pediatric therapy practice that offered physical therapy, occupational therapy, and speech therapy to children, some of whom were medically fragile or hypersensitive to sound, smells, and light. At the time the practice took occupancy, the original paint, carpet, mechanical systems, and modular walls were still in place. The only material difference was that SSA had removed its furniture and equipment from the building. The practice occupied the building for 5 years, during which there was only one odor issue, which was when a janitor closet backed up and caused an unpleasant odor.

In holding that the GSA wrongfully terminated the lease with Wise, the CBCA found that the GSA did not identify the failure at issue—that is, the particular act or omission required by the lease which Wise failed to perform.  Under the lease, it is that failure which gave rise to the GSA’s right to terminate the lease for default.

The CBCA noted that the lease did not require an odor-free building. The lease did, however, specify terms related to air quality, health, and safety which, if breached, could substantiate a default termination. None of the evidence presented indicated Wise violated these terms. The lease further required that Wise “maintain [the] buildings and space in a safe and healthful condition according to OSHA standards.” Once again, none of the evidence presented linked the odor to an OSHA indoor air quality requirement which Wise failed to meet.

The CBCA was particularly critical of the GSA’s failure to test the furnishings and equipment supplied by SSA and its employees as potential sources of the odor. That, coupled with the fact that there was no evidence of an odor in the building before the SSA fully scaled up its operations—or after the SSA vacated the building—lent support to Wise’s argument that the SSA’s equipment and its employees’ space heaters could have caused the odor. The fact that a pediatric practice moved into the building without changing the carpet or modifying the shell and did not experience the odors complained of by SSA staff further defeated any claim that Wise violated the lease.

When terminating a contract for cause or default—whether a lease, general contract or subcontract—the language of the contract, in particular the default and termination provisions, is critically important. Depending on the contract language, some questions that should examined before exercising termination for default include, Is there evidence that a default has occurred? What is the nature of the default? Which party caused the default? Is a notice and opportunity to cure required? Is a separate notice of termination required? Were reasonable efforts made to cure or mitigate? How strong is the evidence to support default? Had the GSA asked these questions before terminating the lease with Wise, they may have taken a different course, even if that would have meant testing SSA supplied equipment and furnishings for the source of the odor.

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