The Legend of the Rent[i]— Applying the GSA’s Integrated Agreement Clause
BY IRVIN GRAY, JD, MBA, CPCM, CFCM, CCCM
By the nature of government contracting, an array of standard contract clauses and provisions is available to agencies and contractors to apply as needed. However, these clauses and provisions are useful only if contract managers understand when and how to apply them correctly.
This month’s Clause Corner examines a case study on the General Services Administration (GSA) Acquisition Regulation (GSAR) Integrated Agreement Clause.[ii] This article will review specific uses for the GSAR Integration Clause, how the clause has been used in practice, and a few best practices that will help agencies and contractors to administer the clause.
Uses for the GSAR Integration Clause:
- ●The Integration Clause excludes extrinsic evidence to add to or modify the terms of a contract.
- ●“Express terms” set forth in a writing intended by the parties as a final expression of their agreement may not be contradicted by extrinsic evidence but may be explained or supplemented by any of the following: course of performance, course of dealing, or usage of trade.
- ●“Extrinsic evidence” is evidence outside of the express terms within the “four corners” of the contract. Examples include negotiations by the parties prior to signing the contract, or actions of the parties before or after signing the contract. Extrinsic evidence may help to determine the parties’ mutual understanding of an ambiguous term.
- ●A “course of performance” is a sequence of conduct between the parties to a particular transaction that involves repeated occasions for performance by a party, where the other party accepts earlier performances without objecting.
- ●A “course of dealing” is a sequence of conduct concerning previous transactions between the parties to a particular transaction that establishes a common basis of understanding for interpreting their expressions and other conduct in the current transaction.
- ●A “usage of trade” is any practice or method of dealing having such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in question.
- ●Order of precedence among express terms, course of performance, course of dealing, and usage of trade:
- Express terms prevail over course of performance, course of dealing, and usage of trade.
- Course of performance prevails over course of dealing and usage of trade.
- Course of dealing prevails over usage of trade.
Case Study—Belle Isle[iii]
In September 1998, the GSA (tenant, lessee) and Belle Isle (landlord, lessor) entered into a lease agreement for an office building in Columbus, Ohio. Under the Supplemental Lease Agreement (SLA) 1, the parties set the lease term from April 1, 1999, to March 31, 2014.
Original Lease in 1998. The lease included four components of rent: 1) base rent, 2) operating cost base, 3) operating cost adjustment, and 4) real estate tax base.
Base Rent. Base rent without operating costs was $292,807.32.
Operating Cost Base. The operating cost base for year 1 was $87,003.08.
Operating Cost Adjustment. Each year from 2000 to 2014, GSA paid the annual rent of $379,810.40 in monthly rent payments for the base rent plus operating cost base. Beginning in the second year, GSA paid an “operating cost adjustment” in addition to the monthly rent. Each year, GSA adjusted the operating cost to adjust changes in the consumer price index (CPI) to account for increased costs for clearing services, supplies, trash removal, and utilities. By 2014, the operating cost adjustment was $3051.16 per month or $36,613.92 annually.
Lease Extension in 2014. GSA and Belle Isle began to negotiate to extend the lease in November 2012. Belle Isle submitted several proposals to GSA, which were rejected. After the original lease expired in March 2014, GSA remained as a “holdover tenant.”[iv]
In September 2014, GSA and Belle Isle held a teleconference. GSA and Belle Isle agreed to a three-year extension of the lease, with annual rent of $22/rentable square footage (rtf) from April 1, 2014, to September 30, 2014, and $24/rsf from October 1, 2014, to March 31, 2017. The GSA
GSA position. GSA believed that the lease extension reset the operating cost base, and set the operating cost adjustment to zero as of March 31, 2014. GSA paid only the increase in cost adjustments between 2013 and 2014.
Belle Isle position. Belle Isle believed that the lease extension’s new rent amounts only changed the base rent, and that the operating cost adjustment remained approximately $3,051 as of March 2014 and would continue to adjust upward based on CPI each year from 1999 to 2014.
Claim and Appeal. Belle Isle filed a claim for $71,769.85 (later adjusted to $85,432.48) on October 31, 2014, for the difference in operating cost adjustments for approximately two and a half years. The contracting officer denied the claim on February 3, 2015. Belle Isle timely appealed to the Civilian Board of Contract Appeals, which has jurisdiction over appeals from General Services Administration contracting officer final decisions on claims.
Case Study Findings
- ●Extrinsic evidence may not be used to add or modify the unambiguous terms of a fully integrated agreement.
- ●The GSAR Integrated Agreement clause establishes that the document is the entire agreement unless the document is incomplete or ambiguous.
- ●The 2012–2014 negotiations did not establish a common basis of understanding through a course of dealing, since the parties had two different understandings of how the operating cost adjustments would be calculated.
- ●The lease was not ambiguous regarding the meaning of base rent or how operating cost adjustments would be calculated, so extrinsic evidence (course of performance, course of dealing, usage of trade) could not be introduced.
- ●Belle Isle was entitled to $85,432.48 for operating cost adjustments from 1999 to 2013 as applied to lease payments from April 1, 2014, to October 31, 2016.
Practice Points for the Agency
- ●When awarding or modifying a contract, be clear about how future adjustments will be calculated. It is sometimes helpful to write out the math formula or provide an example calculation.
- ●Avoid holdover tenancy by beginning negotiations three years before the end of a lease, by timely extending existing leases, or timely awarding follow-on leases.
- ●If holdover is unavoidable, consider a “standstill agreement” to preserve the status quo as of the last year of the lease, and to establish the rent amount, the time period, and any cancellation terms.[v] A “standstill agreement” will override unexpected outcomes based on the original lease terms and the state law regarding holdover tenants.
Practice Points for Contractors
- ●Avoid ambiguities when negotiating with federal agencies who may be unfamiliar with usage of trade in your industry. Here, the two parties had two different assumptions about operating cost adjustments that differed by approximately $36,000 per year.
- ●When a dispute arises, file a request of equitable adjustment or a claim to the contracting officer in a timely manner, as Belle Isle did here.
- ●If the agency denies the claim in a contracting officer final decision, consider appealing the denial to the relevant board of contract appeals or the U.S. Court of Federal Claims.
Irvin Gray, JD, MBA, CPCM, CFCM, CCCM
- ●Assistant General Counsel, Honeywell Federal Manufacturing & Technologies, LLC, Kansas City, MO.
- ●Provides legal advice to executives, buyers, and contract managers with an emphasis on federal government contracts and commercial subcontracts.
- ●LLM candidate, government procurement, The George Washington Law School, anticipated graduation in May 2022.
- ●President, NCMA Kansas City Chapter.
The information provided in this article is for informational purposes only and does not, and is not intended to, constitute legal advice. With respect to any particular legal matter, readers should consult with an attorney.
[i] Linklater, R. (2003). School of Rock. Paramount Pictures.
[ii] Currently GSAR 552.270-27 Integrated Agreement (Sep 1999). Full text at Figure 1.
[iii] Belle Isle Inv. Co. Ltd. P'ship, Appellant, 18-1 B.C.A. (CCH) ¶ 37022 (Sept. 25, 2017); Belle Isle Inv. Co. Ltd. P'ship, Appellant, 16-1 B.C.A. (CCH) ¶ 36416 (June 30, 2016) (hereinafter “Belle Isle”). All facts and holdings are provided from this case without further citation.
[iv] Depending on the lease terms and the relevant State law, a “holdover tenant” either pays the original rent amount monthly or a higher percentage of rent, e.g. 200 perceny . In some cases, the lease term converts from annual to month-to-month where either party can terminate the lease with one month’s notice. In other cases, the lease cancellation terms remain in effect, e.g. 90-day notice required.
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