Owner Shuwa comes out on top in Chase Plaza spat; but law firm tenant wins refund on rent overpayment.

Settling a "rental rate" dispute between a major downtown L.A. law firm and its landlord, an arbitrator recently ruled substantially in favor of Chase Plaza's owner, Shuwa Investments Corp. However, Shuwa can't really claim a total victory in the dispute surrounding the method of measuring floors at the 22-story highrise at 801 S. Grand.

Citing an "estoppel certificate" Morgan Lewis & Bockius signed as Shuwa was negotiating to buy the building, arbitrator Michael Ring ruled that Shuwa does not have to repay Morgan Lewis & Bockius for apparent overpayment of rent on the top three floors the firm "pre-leased" from Chase Plaza's developer. However, Ring's ruling does require Shuwa to a refund rent overpayed for office space on the 19th floor that Morgan Lewis subsequently leased directly from Shuwa.

The ruling refunds to the tenant about $265,000 including interest, significantly less than the $1 million-plus the firm had sought. But this amount is to be offset by the related amount Shuwa over-allocated to Morgan Lewis for 19th-floor tenant improvements. As Ring designated Shuwa the "prevailing party" in the arbitration, Morgan Lewis must also pay Shuwa's attorney's fees.

The dispute arose when Morgan Lewis notified Shuwa in July 1992 that, according to the definition of "rentable area" specified in the law firm's leases, the firm had been overpaying by more than $10,000 monthly since it started paying rent on the top three floors in 1987.

In fact, the firm unilaterally began reducing its monthly payment by $10,314.06 last May. This amount had been deducted from the monthly rate of about $153,700 the firm had been paying for the building's top three floors under the original lease.

However, as Ring noted in his ruling, Morgan Lewis had executed for Shuwa an estoppel certificate in August 1986, confirming its monthly rental obligations. Morgan Lewis officers signed the document when Shuwa was negotiating to purchase the building from developer Treptow Development Co.

Essentially, an estoppel certificate represents the material aspects of a contract -- such as the rent structure of a lease -- and prohibits the signer from subsequently denying the representations, attorneys explained.

Ring's ruling states that the firm must continue to pay rent at the rate specified in the estoppel certificate -- even though the calculation of that rate is inconsistent with terms of the original lease contract. While Ring noted that he could find little legal precedent for his ruling, he stressed that Shuwa "relied on the accuracy" of the certificate while negotiating to buy the building.

The measurement method specified in Morgan Lewis' lease actually equates to a total of 59,850 square feet of rentable area on the top three floors the firm originally pre-leased while the 22-story tower was under construction. Nevertheless, the ruling holds that Morgan Lewis must continue to pay its rent for those floors based on 64,155 square feet of rentable space for the balance of the 15-year lease term. The lease of 19th-floor space expired in August 1992.

But Ring also agreed with Jack Orr, Morgan Lewis' in-house attorney in the dispute, that rentable area under the original lease was not to include the firm's "allocable share" of the building's common areas. Shuwa's attorney, Devan Beck of Milbank Tweed Hadley & McCloy, also conceded that the estimated rentable area cited throughout the pre-lease negotiations mistakenly included the firm's common-area allocation.

The lease gave Morgan Lewis the right to measure the 20th through 22nd floors after the build-out was completed. But partners "trusted that the landlord would be using the correct square-footage figure" in calculating the firm's rent, said Morgan Lewis partner Bill Ellis. He added that the firm had hoped to recover more than $1 million in excess rent.

While the dispute focused primarily on the difference between the appropriate and faulty calculations of the pre-leased three-level office -- a total of 4,305 square feet -- Morgan Lewis also sought a refund for "excess" rent it paid for space the firm subsequently leased in two stages on the 19th floor. And Ring agreed, ruling that Shuwa owes Morgan about $265,000 in rent refund and interest.

But Ring also ruled that if Morgan Lewis overpaid its rent for the 19th-floor space due to an over-calculation of the floor size, then Shuwa likewise granted Morgan Lewis an excessive "tenant improvement allowance." Hence, Shuwa is entitled to offset the rental overpayment due Morgan Lewis by the amount of the corresponding improvement allowance overpayment.

In addition to attorneys' fees and costs, Morgan Lewis must also pay the $10,000-plus in monthly rent the firm has been withholding for 18 months, plus interest.

"I feel (Ring) made the correct decision," commented Anton Natsis, a leasing attorney with Allen Matkins Leck Gamble & Mallory. "Purchasers have to rely on estoppel certificates as part of their due diligence - and tenants need to realize this. You can't expect a prospective buyer to remeasure all the space in a building."