NICOLA VALENTINI vs. JAMES W. SHKLIEW

The defendant, James W. Shkliew, of Haverhill in the County of Essex, leased to the plaintiff, Nicola Valentini, of Georgetown in said Essex County, by an instrument dated October 26, 1984, a portion of the premises at 21-23 West Main Street in said Georgetown for a term of five years beginning November 1, 1984. A dispute subsequently arose as to the proper interpretation of the language of the lease, and the lessee accordingly brought a complaint for declaratory judgment (thereafter amended by allowance of Court) for a construction of the language in dispute.

A trial was held at the Land Court on August 26, 1987 at which the two parties were the only witnesses. A stenographer was appointed to record and transcribe the testimony introduced into evidence. Six exhibits (one of multiple parts) were introduced into evidence.

On all the evidence I find and rule as follows:

1. By instrument dated October 26, 1984 (the "lease") (Exhibit No. 1) the defendant leased to the plaintiff for a term of five years the portion of the premises at 21-23 West Main Street in said Georgetown then occupied by Bill's Restaurant for an annual rent of seven thousand two hundred dollars ($7,200) payable in equal monthly installments of six hundred dollars ( $600). The lease also grants an option to renew the term for an additional period of five years on the conditions set forth therein.

2. In addition to the fixed rent set forth in the lease, the lease also provides as follows:

"The rent shall be adjusted annually by the greater of either

(a) a five percent increase,

(b) the pro rata share of the premises for any increase in real estate tax and insurance over the real estate tax and insurance for the fiscal year ending in 1984."

3. The lease further provides that "the Tenants (sic) agree to pay the Landlord for any increase in insurance premiums on the building occasioned by any . . . use," which might increase the insurance premium on the building.

4. The lease was drafted by counsel for the defendant and reviewed by the plaintiff's counsel.

5. The parties, in negotiating the terms of the lease, agreed that the lessor was entitled to an increase based on an increase in the cost of living, and provision is made for this in the paragraph relative to the second five year term. The defendant also insisted that the rent be increased over that paid by the previous tenant and this was done, but the parties do not appear to have discussed at length the clause relative to the rental adjustment which occasioned this controversy.

6. In computing the amount to be paid by the plaintiff as the adjusted rent, the plaintiff's share has been computed at seventy-eight percent (78%) which he does not dispute.

7. In November 1985 the plaintiff was charged by the defendant and paid fifty-five dollars, per month, as additional rent as his pro rata share of an increase in the amount of the insurance premiums. In November of 1986 the defendant sought to increase the monthly rent by $126.69 representing an increase in insurance premiums, over those for the base year, it appearing that neither increase was due to a change in real estate taxes, and the plaintiff objected. Payments have, however, been made under protest to avoid eviction (Exhibit No. 2).

8. In February of 1985 the insurance coverage was increased from $40,000 to $45,000, and the applicable rate was 2.00 (Exhibit No. 3A). However, when the plaintiff changed insurers, the rate increased as of May 31, 1985 to 4.93 for fire, .242 for extended coverage, and .009 for VMM with the total premium for $45,000 coverage being $2,332 (Exhibit No. 3B). Effective January 22, 1986, the defendant, for an additional premium of $330, raised the coverage to $70,000. For the following year, i.e., May 31, 1986 to May 31, 1987, the rate was the same as those for the preceding year except for an extremely minor change, but the increase in the amount of coverage led to a premium of $3,627 (Exhibit No. 3C). The premium for the next policy year ending May 31, 1988 was the same (Exhibit No. 3D).

9. During the same period of time the valuation of the building by the Georgetown Assessors rose from $42,500 in 1984 and 1985 to $61,400 in 1986 (Exhibit No. 4).

10. The defendant, a licensed real estate salesman with offices in the leased building, testified at trial that his opinion of the current market value of his property at 21-23 West Main Street was about $200,000. [Note 1] There have, however, been no improvements in the building to which any increase in its value can be attributed.

The plaintiff contends that the rental adjustment clause was framed to cover only increases in the rate at which the insurance premiums are computed and not the voluntary increase by the lessor in the amount of coverage. In making this argument, the plaintiff relies on the principle that the lease was drafted by the defendant's attorney, and in case of ambiguity it should be construed most strongly against the lessor. Wood v. Lapidus, 10 Mass. App. Ct. 761 , 764 (1980); Cooley v. Bettigole, 1 Mass. App. Ct. 515 , 521 (1973); LaCouture v. Renaud, 325 Mass. 33 , 37 (1949). As the defendant is professionally engaged in the field of real estate as a licensed salesman, he may also be presumed to know and to intend the usual practice in the field and the ordinary import of the disputed language absent any contrary provision or evidence thereon. See Shea v. Bay State Gas Co., 383 Mass. 218 , 222-223 (1981) (and cases cited); Merrimack Valley National Bank v. Baird, 372 Mass. 721 , 723-724 (1977).

It is axiomatic that in the leasehold setting both the lessor and lessee have an "insurable interest" which interest has been universally defined as: "any benefit or advantage the insured would receive by reason of the continued existence of the property or any loss he would or might sustain by reason of its destruction." Womble v. Dubuque Fire & Marine Insurance Co., 310 Mass. 142 , 144 (1941); 5 Real Prop., Prob. & Trust J. 532, 551 (1970) citing Wainer v. Milford Mutual Fire Insurance Co., 153 Mass. 335 (1891); 3 Couch on Insurance 2d s. 24:60 (1985). In a net lease it is customary for the tenant to obtain liability and fire insurance and the usual practice is to specify that such coverage is set at certain minimum amounts governed by provision for periodic appraisals. This customary practice assures the lessor of the adequacy of the coverage. Conversely, in a gross lease the insurance burden customarily would be factored into the rent, and the policy obtained by the lessor. The gross lease therefore, usually includes an "escalation clause" so-called which permits the lessor to raise "operating costs" as taxes or insurance increase but which sets a ceiling for such increases at a certain agreed percentage. The lease at issue has elements of each of these two types although the provision for the lessee to pay a pro rata share of tax and insurance increases is similar to that "escalation clause" usually found in the gross lease except that the percentage contained therein is a floor, not a ceiling.

The plaintiff does not object to paying his pro rata share of the increase in insurance premiums attributable to the increase in rate which has nearly tripled during the term of the lease. It is voluntary increases in the amount of the coverage itself which is under scrutiny. Understandably, a factor which the lessor controls, the major portion of which he seeks to transfer to another, is bound to be suspect.

The language under consideration here, the construction of which is the subject of this dispute imposes on the lessee the obligation to pay the pro rata share of "any increase" in taxes and insurance applicable to the premises. It is clear that this applies to an increase in real estate taxes whether due to an increase in the assessment or the rate and to an increase in insurance due to an increase in the rate which indeed has happened, and the parties do not dispute this construction.

As previously stated, the language in any instrument, if in doubt, must be construed most strongly against the party who drafted it. The construction for which the lessor contends would allow him to increase at will the amount of the insurance coverage and require his lessee to pay the major portion thereof. If, therefore, this were the intention of the parties it should have been made clear when the provision was drafted. The association of an increase in insurance with an increase in taxes imputes an involuntary increase in the burden of ownership which it would be equitable to have shared. Here the lessor increased the insurance coverage to have the value of the building in line with the increase in the local property tax valuation and, presumably, to avoid any co-insurance problems. This was a prudent action on his part, but the question before the Court is whether it is fair for the lessee to pick up charges voluntarily increased by the lessor when it is not clear from the lease nor from the evidence that this was the intention of the parties.

In spite of the broad sweep of the disputed language neither party sought to insert the usual periodic appraisal or "escalation clause." [Note 2] Ordinarily, particular covenants are made regarding the tenant's liability for increased rates and, separately, for increased coverage. 3 Friedman on Leases s. 38.1 (2d ed. 1983); 5 Real Prop., Prob. & Trust J. 532, 539 (1970). A lease, as does this one, may provide for increased insurance costs to be paid if based upon use, but such provisions are generally held inapplicable to general rate increases. Friedman, at 1487, and n. 31. The lease clause referred to herein in finding no. 3 represents such a standard "increased risk clause". See, e.g., King v. Murphy Varnish Co., 188 Mass. 66 (1905); 51C C.J.S., Landlord and Tenant, s. 384 (1968).

On all the evidence I find and rule that the lessor had it within his control to have specifically reserved the right to increase the amount of the insurance coverage to correspond to increases in the property tax valuation and that, as an experienced real estate professional, he may be charged with knowledge of such usual practice. I further find and rule that it is not clear from the language of the paragraph relative to the adjusted rent that the lessor unilaterally could increase the amount of the coverage and look to the lessee to bear the cost thereof to a large extent. The reference to a 5% increase, as an alternative method of computing the adjusted rent, buttresses the conclusion that the increase which the parties had in mind was intended to be less than one which represents approximately 20% of the reserved rent and which would be greater if the real estate taxes also had increased. The lessee therefore is entitled to a declaration that he is required to pay only an increase in the insurance charges attributable to an increase in the rate and is entitled to a refund of the amount of the overpayments which he has made.

Judgment accordingly.