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Schivarelli v. Chicago Transit Authority

January 20, 2005

MARY AND PETER SCHIVARELLI, PLAINTIFFS-APPELLEES,
v.
THE CHICAGO TRANSIT AUTHORITY, A MUNICIPAL CORPORATION, DEFENDANT-APPELLANT.



Appeal from the Circuit Court of Cook County. Honorable Aaron Jaffe, Judge Presiding.

The opinion of the court was delivered by: Justice Quinn

In March 1983, plaintiffs, Mary and Peter Schivarelli, entered into a lease agreement with defendant, the Chicago Transit Authority (CTA), to lease the unused space under the Fullerton El stop in Chicago. Under the agreement, plaintiffs agreed to construct and operate a hot dog stand, Demon Dogs, at the site. In 1997, the CTA discovered that it had mistakenly been paying the utility expenses for Demon Dogs with its own utility bills for the Fullerton station. The CTA sent plaintiffs a notice of default for the accrued utility costs, and in response, plaintiffs filed a complaint for declaratory judgment as to who was obligated to pay the utilities. In June 2002, following a bench trial, the trial court ruled in favor of plaintiffs by finding that the CTA was responsible for paying the utilities at plaintiffs' hot dog stand. The court reformed the written lease to reflect this obligation.

[9]     The CTA appeals, arguing that the trial court erred in reforming the lease agreement when (1) the alleged modification of the lease agreement was oral and not intended to be reduced to writing, (2) the CTA did not agree to this oral modification, and (3) plaintiffs' evidence did not support a finding by clear and convincing evidence. We reverse and remand.*fn1

I. BACKGROUND

In the early 1980s, Peter Schivarelli approached Merritt Kotin, head of the CTA's real estate department, to inquire about leasing the unused space underneath the elevated tracks across from the Fullerton Avenue station, at 940-44 W. Fullerton Avenue. On March 1, 1983, Schivarelli and Kotin executed a lease agreement for the property, which had been drafted by Kotin. The lease contained preprinted form lease provisions as well as typewritten additions.

Under the written lease agreement, the rent was set at $325 per month, fixed for a five-year term, with annual escalations of, at most, 25% of the rate of inflation. This monthly rent was set below market rates. The March 1983 lease also contained an investment guarantee for plaintiffs' financial investment. Plaintiffs agreed to construct and operate a freestanding hot dog stand on the property. The CTA agreed to reimburse plaintiffs for the costs of construction in the event the lease was terminated for any reason. The amount of the CTA's obligation was set by amortizing the initial construction cost of $152,513 by straight-line depreciation over 20 years. As written, the lease compelled the CTA to purchase the hot dog stand at the end of its 10-year term for approximately $76,250.

The March 1983 lease provided plaintiffs with one option to renew the lease for an additional five-year term, to begin March 1, 1988. Rent was to be set by an appraiser at the end of the first five-year term. The lease directed the appraiser to consider the value of plaintiffs' unamortized investment in the hot dog stand when setting the rent for the second term.

Section 3 of the March 1983 lease provided for the payment of utilities. Section 3(a) of the lease stated that "Lessee shall pay, as additional rent, all water rents and gas, light, power and other bills and charges." This section also provided that if the utilities were not billed separately then the lessee shall pay an equitable part as determined by the Chicago Transit Authority Board.

The lease also contained sections that were lined out. One of these was section 11. Section 11 contained a preprinted sentence that said: "Lessor shall be under no obligation as to heating, lighting or furnishing power to said premises."

In February 1983, Kotin presented the lease to the Chicago Transit Authority Board (the Board), who approved the lease by a majority vote. During his trial testimony, Kotin said that every agreement between the CTA and an outside party needed to be presented and approved by the Board in order to be final and legally binding. To aid in his presentation, Kotin prepared a lease summary for the Board outlining the terms of the lease. Kotin's summary did not mention the payment of utility expenses.

In August 1985, the parties entered into an amended lease agreement. On its face, the amended lease "cancels and supercedes all leases previously issued for this location." The amended lease contained the same provisions with respect to utilities as the March 1983 lease. The lease gave plaintiffs additional five-year options to renew the lease. Under the amended lease, the rent for 1983 to 1988 was set at $325, for 1988 to 1993 at $425, for 1993 to 1998 at $525, and for 1998 to 2003 at $625. The CTA continued to guarantee plaintiffs' investment, and the amended lease now provided that the CTA buy the building for the unamortized original cost using straight-line depreciation for a 20-year term.

The amended lease was reviewed by the CTA's appraisers, James O. Hamilton & Co. The appraisers concluded that the proposed lease was equitable and in the CTA's best interests. According to the appraisal report, the rent charged under the March 1983 lease was set below fair market value due to a number of factors, one of which was that plaintiffs had "constructed a glass foyer and [they allow] CTA patrons to use this foyer as well as the front (south) portion of the restaurant. This is a valuable rider service in inclement weather."

Again, Kotin presented the amended lease to the Board for approval. On its face, the amended lease stated that plaintiffs were responsible for utilities, and Kotin's lease summary to the Board did not contradict the lease as to who was responsible for payment of the utilities. The Board approved the amended lease.

In 1988, plaintiffs exercised their first option to renew for a second five-year term, and they did so again in 1993. At that time, CTA did not consider plaintiffs in default under the lease for failure to pay utilities.

During 1996 and 1997, Peter Schivarelli negotiated with the CTA for a further extension of the lease agreement that would allow plaintiffs to remain at the property beyond the final expiration in March 2003. A final proposed lease agreement was circulated in October 1997. While in negotiations, the topic of utilities was discussed. An early draft of the proposed lease repeated the earlier lease agreements that plaintiffs pay the utilities. Plaintiffs' attorney edited the draft to change responsibility from "lessee" to "lessor." Upon noticing this edit, counsel for the CTA contacted plaintiffs' attorney to inquire about the change. At that point, plaintiffs' attorney "dropped the whole idea" and returned a draft that made plaintiffs responsible for utility payments.

Peter Schivarelli signed the final copy of the proposed lease agreement, but the CTA never executed it. Plaintiffs contended at trial that an ordinance passed by the Board in December 1995 authorized the chairman of the CTA to execute two additional options to renew and bound both parties to the final draft of the proposed lease agreement.

In late 1997, the CTA discovered that it had inadvertently been paying all of the utilities for plaintiffs' business. The CTA's maintenance department was responsible for receiving, reviewing, and paying utility bills. From the time of construction of Demon Dogs in 1983 until late 1997, the utility bills were sent to the CTA maintenance department and paid in the normal course of business. When CTA senior management learned of the error, it began an investigation. It was revealed that the written leases with plaintiffs obligated plaintiffs to pay for the utilities. In December 1997, the CTA sent plaintiffs a letter requesting that plaintiffs provide the CTA with evidence of payment of the utilities. Plaintiffs' response ...


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