It has been nearly two years since a Raleigh landlord filed a lawsuit against the state Department of Health and Human Services, accusing the agency and the state of illegally terminating two of its leases in 2011.
While the office space the state vacated remains empty, the lawsuit is still very much alive. Efforts by the state to get the case dismissed have thus far failed, and its progress continues to be watched by landlords who frequently deal with the state.
To recap: DHHS vacated 43,451 square feet at the 3301 Terminal Drive building just outside the Beltline in northeast Raleigh. The 277,000-square-foot building is owned by the Williams family of upstate New York. The family, using the corporate entity Can Am South, acquired the property for $5.5 million in 1995.
In terminating the two leases, DHHS cited the “availability of funds” clause, which is commonly found in government leases but rarely invoked. The clause gives governments an annual out should funding not be in place to live up to a lease.
The leases were canceled around the time that then-Gov. Bev Perdue’s administration was seeking to consolidate all of DHHS’ workers in a single location. While the state solicited developer proposals for the project, it has not been pursued by Gov. Pat McCrory’s administration.
In its lawsuit, Can Am argues that the state legislature did not change its funding for the government functions and employees who used the space. The leases expired earlier this year, and Can Am is seeking $2,096,722.67, or the amount the state would have paid had it not terminated the leases. The state, DHHS and the Department of Administration are all named as defendants in the suit.
At the time it filed its lawsuit, Can Am was concerned that the state would terminate a third lease – and by far the largest – that DHHS had in the Terminal Drive building. But the agency continues to occupy 168,049 square feet on that lease, which is set to expire in 2019.
However, the lawsuit has temporarily eliminated any chance that Can Am could back fill its vacant space with other state tenants.
The State Property Office informed Can Am in December that it won’t entertain any other proposals for space in the Terminal Drive building until the lawsuit is settled. In its lease termination letters to Can Am in 2011 – sent before the lawsuit was filed – the State Property Office had said it would attempt to find a substitute tenant for the space it was vacating.
In seeking to get the lawsuit dismissed, the state cited both the availability of funds clause and sovereign immunity, arguing that DHHS never waived its immunity from a lawsuit when it entered into its leases with Can Am.
In May, Wake County Superior Court Judge Donald Stephens ruled against the state in its motion to dismiss. The state subsequently appealed the decision to the N.C. Court of Appeals, which unanimously affirmed Stephens order denying its motion.
“Because it is undisputed that plaintiff and defendants entered into three facially valid lease agreements, we hold that defendants impliedly waived their sovereign immunity from suit as to those contracts,” the three judges wrote in their ruling.
The state has now asked the N.C. Supreme Court to review its motion, but reversals are rare in cases where the Court of Appeals decision is unanimous.
Officials with the Department of Administration and DHHS referred questions about the lawsuit to the state Attorney General’s office. The AG’s office declined to comment on the litigation.
Through its Raleigh attorney, the Williams family issued a statement saying they look forward to their day in court.
“We look forward to learning whether the state had any basis to claim there were no funds to pay rent and why the state believes it does not have to honor its commitments like other commercial tenants,” the statement said. “Obviously, the state’s positions could be important to every existing and potential landlord.”