Raleigh landlord sues DHHS over lease terminations

Former landlord says agency falsely claimed the loss of state funds

dbracken@newsobserver.comOctober 31, 2012 

A Raleigh landlord has filed a lawsuit against the state Department of Health and Human Services accusing the agency of illegally terminating two of its leases last year.

The lawsuit, filed by Can Am South, says DHHS had no grounds to cite the “funds termination clause” when it vacated 43,451 square feet of space in 3301 Terminal Drive. In its lease termination letters, DHHS said that funds were no longer available for the state to continue making the lease payments.

Can Am argues that the state legislature did not change its funding for the government functions and employees who used the space.

The state, DHHS and the Department of Administration are all listed as defendants in the case, which was filed Oct. 23 in Wake County Superior Court. Can Am is seeking damages of nearly $2 million, or the amount DHHS would have paid had it not terminated the leases. The leases were both scheduled to expire in 2014.

Speros Fleggas, deputy secretary of the Department of Administration, said he could not comment on active litigation other than to say the lawsuit was referred to the state Attorney General’s office. Can Am declined to comment beyond statements issued by its managing partner Doug Matthews.

Most government leases include a clause that provides an annual out should funding not be in place to live up to the lease. But that clause is rarely invoked, and Can Am claims in its lawsuit that a Department of Administration representative told the landlord that no leases had ever been terminated by the state for such reasons.

The representative told Can Am that it would never do so because the state would not be able to enter into subsequent leases if it did, according to the lawsuit.

“DHHS had assured us it would stay through the end of the leases, and we relied on those assurances when we borrowed money to upfit the premises to the agency’s specifications,” Matthews said. “I doubt that the legislature intended for DHHS to leave our space to rent higher cost facilities.”

The lawsuit comes as the state is seeking to consolidate DHHS in a single location somewhere in the Triangle. The Department of Administration is now evaluating proposals submitted by 10 developers for a new campus, and hopes to get approval to move ahead with one of the projects in January.

The first DHHS employees to move to the new campus would be the 1,400 workers at the Dorothea Dix campus in Raleigh. Matthews said he believes the DHHS employees who left his company’s building were relocated to Dix.

“It’s not clear exactly how many DHHS employees were transferred from our property, but we believe all of them were moved to offices on the Dorothea Dix campus,” he said.

The office building at the center of the lawsuit is a 277,000-square-foot behemoth that sits just outside the Beltline in northeast Raleigh. DHHS still occupies 168,049 square feet in the building on a lease that doesn’t expire until 2019.

The state has yet to terminate that lease, but Can Am’s lawsuit says if it does it should also be considered an illegal breach of contract.

The “funds termination clause” was a topic of discussion at a meeting with developers in July to discuss the DHHS consolidation project. The state intends to enter a long-term lease for the new DHHS campus, which means the developer that is awarded the project will be required to borrow millions of dollars to finance it.

The new campus will be paid for using existing funds now used to pay leases and other operational costs at DHHS’ existing facilities, including Dix. The agency’s 4,300 workers currently work out of 30 state-owned and -leased facilities in Wake County.

Bracken: 919-829-4548

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