Ross Dress for Less, Inc. v. Makarios-Oregon, LLC (191 F. Supp. 3d 1189, 2016)

FINDINGS OF FACT AND CONCLUSIONS OF LAW

Michael H. Simon, United States-District Judge

This case involves a dispute over a lessee’s obligations upon the expiration of two leases—negotiated with two separate landlords for two cónjoinéd buildings—that have spanned more than 50 years. Plaintiff RoSs -Dress For Less, Inc. (“Ross” or “Plaintiff’) is the successor in interest to the original lessee. Defendant Makarios-Oregon, LLC (“Makarios”) and Walker Place, LLC (“Walker Place”) (collectively “Defendants”) are the successors in interest to-the original lessors. Ross brings this action against Defendants, seeking a judicial declaration that Ross’s proposed end-of-lease plans satisfy Ross’s obligations under the relevant leases. Makarios and Walker Place both assert counterclaims for a judicial declaration clarifying-the extent of Ross’s end-of-lease obligations and breach of contract. The parties agreed to bifurcate their declaratory actions (“Phase I”) from Defendants’ breach of contract claims for damages (“Phase II”).

To address the matters at issue in Phase I, the Court held a bench trial from May 2 to May 13, 2016. Having weighed and evaluated all of the evidence in the same manner that it would instruct a jury to do and having fully considered the legal arguments of counsel, the Court makes the following Findings of Fact and Conclusions of Law pursuant to Federal Rule of Civil Procedure 52(a) and DENIES IN PART AND GRANTS IN PART all three parties’ requests for declaratory relief.

FINDINGS OF FACT

The Court finds the following facts by a preponderance of the evidence.

A. Stipulated Facts

1.Ross

1. Ross is a Virginia corporation that operates discount retail department stores across the country.

2. Ross is currently a tenant in two attached buildings in downtown Portland located at 618 SW Fifth Avenue (the “Richmond Building”) and 620 SW Fifth Avenue (the “Failing Building”).

3. Ross leases a portion of the Failing Building (specifically, the basement, first, and second floors) and the entirety of the Richmond Building.

4. Ross operated a “Ross Dress for Less” store at the location from 1996 until the summer of 2014. Ross has operated a “dd’s Discounts” store at the location from the summer of 2014 through the present.

2.The Richmond Building

5. The Richmond Building is owned by defendant Makarios. Makarios is an Oregon limited liability company, owned by members of the Calomiris family.

6. The Richmond Building was constructed in its present form between 1951 and 1953 and consists of five floors and a mezzanine.

7. Persons related to Makarios purchased the Richmond Building from New York Life Insurance Company (“New York Life”) in approximately 1986.

8. New York Life owned the Richmond Building from approximately 1956 to 1986. J.J. Newberry Company (“Newberry”), the original lessee, owned the Richmond Building for a brief period in 1956.

9. From completion of construction in 1953 until the transfer of ownership to Newberry, the Richmond Building was owned by a series of related entities that the parties refer to as the “Failings.”

10. The predecessor to the Richmond Building (also known as the “Richmond Building”) was also owned by the Failings from its original construction until it was razed sometime before 1951.

3.The Failing Building

11. The Failing Building, which is also sometimes referred to as the “620 Building,” is owned by defendant Walker Place, an Oregon LLC.

12. The Failing Building was originally constructed in approximately 1907 as a six-story building. An additional six floors were added in 1913.

13. The Failing Building today consists of twelve floors and is listed on the National Register of Historic Buildings.

14. The Failings owned the Failing Building from 1907 until 1976, when it was purchased by Henry A. Miller, who operated the building as “Pacific 620.”

15. On February 1,1997, Pacific 620 sold the Failing Building to 620 Associates.

16. Walker Place purchased the Richmond Building from 620 Associates on December 1, 2006.

4. Newberry

17. Newberry was a national retail chain operating “variety” stores across the country. It operated a store in downtown Portland, Oregon, from 1927 to 1996.

18. Newberry’s parent corporation, McCrory Corporation, filed for Chapter 11 bankruptcy in 1992, which resulted in Newberry’s closure of the Portland store in 1996.

19. Newberry and Ross negotiated the terms of a Lease Assignment and Assumption Agreement (“Assignment”), dated January 25, 1996, assigning Ross all of Newberry’s rights and obligations under the respective leases. The bankruptcy court then approved the assignment.

5. The Leases

20. On August 20, 1946, at a time when the Failings owned both the Failing Building and the original Richmond Building, the Failings entered into a lease with Newberry (the “1946 Lease”).

21. The 1946 Lease (Ex. 8 and Ex. 301 A) called for Newberry to raze the original Richmond Building and construct a new Richmond Building consistent with various design mandates.

22. Newberry razed the original Richmond Building sometime before 1951 and oversaw the construction of the new Richmond Building, which was completed and dedicated in 1953.

23. The basement, first, and second floors of the Failing Building connected seamlessly with the basement, first, and second floors of the adjacent new Richmond Building. Those combined floors spanning the buildings created Newberry’s retail space.

24.The 1946 Lease was amended twice, in ways not related to this lawsuit. The first amendment occurred on April 5, 1954 (Ex. 532), and the second took place on June 23,1955 (Ex. 533).

, 25. In August 1956, the Failings sold the new Richmond Building to Newberry (Ex. 107). In September 1956, Newberry sold the Richmond Building to New York Life (Ex. 108).

26. Newberry entered into a lease for the Richmond Budding with New York Life on September 24, 1956 (the “1956 Richmond Lease,” Ex. 1 and Ex. 301C).

27. On August 31, 1956, approximately a month before the 1956 Richmond Lease, the Failing^ entered into a new lease with Newberry for the Failing Building (the “1956 Failing Lease,”, Ex. 91 and Ex. 301B).

28. The 1956 Failing Lease was amended five additional times: on September 30, 1983 (the “Fourth Amendment,” Ex. 92 and Ex. 301D); on February 21, 1990 (the “Fifth Amendment,” Ex. 93 and Ex. 301E); on March 1,1996 (the “Sixth Amendment,” Ex. 94 and Ex. 301F); on October 20, 2006 (the “Seventh Amendment,” Ex. 95 and Ex. 301G); and on May 6, 2009 (the “Eighth Amendment,” Ex, 96 and Ex. 301H). '

29. The Fourth Amendment in 1983 and the Fifth Amendment in 1990 were between the Failings and Newberry.

30. The Sixth Amendment in 1996 was between Pacific 620 and Ross.

31. The Seventh Amendment in 2006 was between 620 Associates and Ross.

32. The Eighth Amendment in 2009 was between Walker Place and Ross.

33. Both the 1966 Richmond Lease and the 1956 Failing Lease expire on September 30,2016.

B. Facts the Court Finds Established at Trial

1. The Richmond Building Construction and Failing Building Remodel

34. To accomplish the connection between the Richmond Building and the Failing Building at the basement, first, and second floors, Newberry perfectly aligned the Richmond Building’s floor structure with the existing floor structure of the Failing Building at those levels. After aligning the floors, Newberry poured new concrete slab floors that cross from one building to the next and span the gap between the buildings’ steel framing. The concrete slabs are four to six inches thick on each floor.

35. In contrast to the basement, first, and second floors of the Richmond Building, -the third, fourth, fifth, and mezzanine floors of the Richmond Building are not connected to the Failing Building.' The third floor of the Richmond Building directly touches, or abuts, the Failing Building. At the fourth floor and above, however, the Richmond Building “steps back” from the Failing Building. Thus, although the buildings abut at the northwest stair tower all the way to roofline of the Richmond Building, the Richmond Building does not abut against the Failing Building along most of the fourth, fifth, and mezzanine floors.

. 36. At the basement, first, and second floors of the buildings, there are six columns on each side of the property line. At the basement level, the columns in the Richmond Building are separated from the columns in the Failing Building by 28 inches. On the first and second floors, the columns on each side of the property line are separated by 19 inches. The twelve columns on each floor, are encased in concrete “fireproofing” such that the columns of the buildings are connected and the space between the two sets of columns is not visible.

37. Newberry built escalators between the basement, first, and second floors of the two buildings. The escalators—including escalator beams also encased in concrete fireproofing—crossed the property line. If the beams, which still cross the property line today, were to be severed, the beams would require additional support in each building.

38. At the end of construction, the Richmond Building had- three elevators (two freight elevators and one passenger elevator) serving all of the floors, including the basement. As part of the 1951-53 construction, Newberry did not add or remove any elevators in the Failing Building. The Failing Building continued to have a separate lobby and elevator bank, with service to the basement and office space on the third floors and above, which Newberry did not lease. The Failing Building did not have its own set of elevators for service between Newberry’s retail floors.

39. Several staircases, including a “Grand Staircase” in the Failing Building, connected the basement, first, and second floors of the Richmond Building and the Failing Building.

40. Both buildings hád restrooms that customers could access in the basements and on the second floors. There were also restrooms on the third, fourth, and fifth floors of the Richmond Building.

41. Both before and after the 1951 construction, the Failing Building did not have its own loading door or street loading area. Retail loading occurred through the Richmond Building.

42. On the Failing Building side, the basement extended under the sidewalk. Newberry had access to the area under the sidewalks, referred to as the “sidewalk vaults.”

43. Also on the Failing Building side, Newberry had access to a steel exhaust stack, referred to as the “vent stack,” that predates the 1951 construction. The vent stack is supported by the second floor of the Failing Building and penetrates the second floor ceiling. Where the vent stack penetrates the second floor ceiling, the first and second floors of the Failing Building jut out from the rest of the building such that part of the Failing Building’s second floor has its own roof that is exposed to the elements. The vent stack extends through this second floor roof and continues' up the southeast corner of exterior fagade, past the parapet on the twelfth floor. Newberry used the vent stack to vent exhaust from restrooms and the hood of a lunch counter in the store. The Failing Building landlord could not have sealed off, severed, or otherwise decommissioned the upper levels of the vent stack without interfering with Newberry’s use of the vent stack. No other tenant in the Failing Building used the vent stack.

44. The Richmond Building’s exterior walls directly abut against the adjacent Caplan Building, a building on the same block that was built in approximately 1910. The Failing Building’s exterior walls directly abut against the adjacent Kress Building, another, building-on. the same block that predates the construction of the Richmond Building.

2. The Leases and Deeds

a. The Richmond Building

45. In August 1956, the Failing Landlords deeded the Richmond Building to Newberry. According to the deed (the “Newberry Deed”), “the foundations and footings” of the Richmond Building and the Failing Building “shall be and remain common foundations and footings for the mutual use and benefit of the parties hereto, their heirs, successors and assigns, so long as said foundations and footings, shall stand, and this agreement shall be deemed a covenant running with the land.”

46. Notwithstanding the common foundations and footings, the Newberry Deed also created an easement allowing the parties to enter each other’s property, exercisable at the time Newberry or its successors ceased to occupy the Richmond Building or Newberry’s leased space in the Failing Building, ■

to the extent reasonably required to remove the escalators crossing the property line and properly close up the openings in the floors which accommodate such escalators, construct such good and sufficient masonry curtain walls along the property line between the Failing Building and the premises hereby conveyed as may be required to physically separate said structures, and make such alterations and changes in and to the electrical, plumbing and other systems and apparatuses as may be necessary to completely separate said buildings.

47. In September 1956, Newberry entered into a “sale lease-back” transaction with New York Life. On the same day, Newberry both deeded the Richmond Building to New York Life and signed the 1956 Richmond Lease with New York Life.

48. Similar to the Newberry deed, the deed to New York Life (the “New York Life Deed”) required that the foundations and footings of the Richmond Building and the Failing Building remain in common “so long as such foundations and footings shall stand.”

49. Further, the New York Life Deed echoed the Newberry Deed’s easement provision, granting New York Life an easement to enter the Failing Building, exercisable at the time the grantor or its successors should cease to occupy the Richmond Building or leased space in the Failing Building,

to the extent reasonably required to remove the escalators crossing the property line and properly close up the openings in the floors which accommodate such escalators, construct such good and sufficient masonry curtain walls along the property line between said ‘Failing Building’ and [the Richmond Building] as may be required to physically separate said structures, and make such alterations and changes in and to the electrical, plumbing and other systems and apparatuses as may be necessary to completely separate said buildings.

50. The 1956 Richmond Lease to New-berry also contained a provision for separating the Richmond Building from the Failing Building at the end of the lease. In § 16.02, the 1956 Richmond Lease states:

The Tenant [Newberry] agrees that, pri- or to the expiration of this lease or, in the event of termination of this lease for any reason whatsoever, promptly after such termination, the Tenant, at the Tenant’s sole cost and expense, shall make such alterations to the building then erected on the demised premises as shall be necessary to constitute such building an entirely independent and self-sufficient structure. Such alterations shall include,;without in any way limiting the generality of the foregoing, the removal of escalators, the construction of footings and a masonry curtain wall along the westerly boundary line of the demised premises, the removal of any facing encroaching upon adjoining premises, the removal of signs, the relocation of plumbing, drain pipes, sprinklers, electrical wiring, lighting fixtures and exhaust ducts, the installation of a new soil connection to the city sewer, a new' steam connection and new electrical service conduits and equipment and provision for a new toilet and rest room. The provisions of this Section 16.02 shall survive the expiration or any termination of this lease.

51.Additionally, the 1956 Richmond Lease contained provisions relating to the condition in which Newberry promised to return the building. In § 16.01, the lease states:

The Tenant shall, upon the expiration or termination of this lease for any reason whatsoever, surrender to the Landlord the buildings, structures and building equipment then upon the demised premises, together with all alterations and replacements thereof then on the demised premises, in good order, condition and repair, except for reasonable wear and tear, provided, however, that if-the. Tenant shall have made any alteration or alterations adapting the buildings, structures and building equipment upon the demised premises for multiple occupancy, then, in such event, prior to the expiration or termination of this lease, the Tenant, at the Landlord’s request, shall restore said buildings, structures and building equipment to the order and condition which existed prior to such alteration or alterations.

52. Newberry also agreed to several other provisions in the 1956 Richmond Lease that are relevant to this lawsuit. In § 4.01, Newberry agreed that it would not, without the landlord’s prior permission, use the Richmond Building “for any purpose other than mercantile purposes.”

53. In § 4.02, Newberry agreed that it would, “throughout the demised term, and at no expense whatsoever to the Landlord,” ensure that the condition of the Richmond Building complied “with all laws and ordinances and the orders, rules, regulations and requirements of all federal, state, county and municipal governments, and appropriate departments, commissions, boards and officers thereof.” New-berry agreed to ensure compliance with all laws, ordinances, rules, and regulations, both “foreseen and unforeseen, ordinary as well as extraordinary, and whether or not the same shall presently be within the contemplation of the parties hereto or shall involve any change of governmental policy or require structural or extraordinary repairs, alterations’ or additions.” Moreover, Newberry agreed to ensure compliance “irrespective of the cost thereof.”

54. Section 7.01 obligated Newberry to, “throughout the demised term, at no expense whatsoever to the Landlord, take good care of the demised premises ... and ... not do or suffer any waste with respect thereto.” This requirement meant that Newberry agreed .to “promptly make all repairs, interior and exterior, structural and non-structural, ordinary as well as extraordinary, foreseen as well as unforeseen, necessary to keep said buildings and improvements in good and lawful order and condition.” The lease expressly defines “ ‘repairs’ as applied to building equipment” as including “replacements, restoration and/or renewals when necessary.” The section further requires New-berry to “keep and maintain all portions of the demised premises, including, without limitation, all building equipment, heating plant and system, air conditioning plant and system, and the sidewalks adjoining the same, in a clean and orderly condition, free of accumulation of dirt, rubbish, snow and ice.”

55. In § 9.01, the 1956 Richmond Lease requires Newberry to “make no structural alterations to the building or buildings now or hereafter erected upon the demised premises.” Section 9.01 further requires Newberry to refrain from “mak[ing] any other alterations which would change the character of said building or buildings, or which would weaken or impair the structural integrity, or lessen the value of said building or buildings, without the prior written consent of the Landlord, which consent shall not be unreasonably withheld”

56. The 1956 Richmond Lease is a “triple-net lease,” meaning that the tenant is responsible for taxes, insurance, and all other expenses for the operation, repair, and maintenance of the leased premises.

57. The Richmond Lease’s original term was for 30 years, expiring in September 1986. The Richmond Lease provided, however, that Newberry had the option to exercise three ten-year extensions, with the term of the last extension expiring on September 30, 2016. Newberry and its successors could exercise these renewal options provided that the tenant “shall not be in default, at the time when any such option shall be exercised by the Tenant hereunder, or at the expiration of the current term of the lease.”

b. The Failing Building

58. The 1946 Failing Lease provided that ‘the Richmond Building “shall be so constructed that by the installation of partition walls between it and the Failing Building, it can be used as a self contained [sic] building as regards plumbing, heating, wiring and vertical transportation.”

59. On August 31, 1956, the Failing landlords and Newberry amended and restated the Í946 Failing Lease with the 1956 Failing Lease. This latter lease; among its many provisions, stated that at the termination of Newberry’s tenancy in the Failing Building, Newberry would “at [Newberry’s] sole cost and expense do and perform such work as shall be necessary to physically separate, and constitute entirely independent and self-sufficient, the [Failing Building] from the adjacent ‘Richmond Building’ premises.” The lease, “Without limiting the generality of the foregoing,” stated that this work must include:

removal of the escalators and the closing in of the openings in the floors and walls of the Failing Building which accommodate the same; construction of footings and masonry curtain walls along the easterly boundary line of the demised premises; and such appropriate alterations, changes and relocations of portions of the plumbing, electric, and other systems and apparatuses as may be necessary to make the ‘Failing Building* space independent of the ‘Richmond Building1.1 The material used in said work shall conform to the material of said Failing Building, and the work shall be done in a good and workmanlike manner.

60.Among its other provisions, the 1956 Failing Lease contained requirements relating to the condition in which Newberry covenanted to reten the premises at the end of the lease. Newberry agreed, among other things, to “at its own cost and expense keep the leased premises in good condition and repair” during’the term of the lease and, at the expiration of the term of the lease, to “surrender the premises to the Lessors .., in the same condition as that in which the Lessee is, by the terms of this lease, obligated to put the premises, reasonable use and wear thereof, ... excepted.” Newberry also agreed “[n]ot to commit or suffer any strip or waste of the leased premises.”

61. The 1956 Failing Lease-further required Newberry to comply with, “at its own expense,” all relevant federal, state, and city “laws, ordinances, rules and regulations ... pertaining to the leased premises, occasioned by or affecting the use of the leased premises by Lessee.” Under the lease, however, Newberry was not responsible for compliance “in so far as such laws, ordinances, rules and regulations may require structural changes in or additions or improvements to the foundation, exterior walls, roof or sidewalks thereof.” The lease prohibited Newberry from making alterations that “change the general structural character of the building.”

62. Under the Premises Clause of the Failing Lease, Newberry leased “certain space in the building,” defined as: .

All of the first or ground floor of [the Failing Building] except the building entrance, elevator lobby, elevators and main stairway; all of the basement under said building except the space occupied by the heating plant and necessary space now used by Lessors in the operation and management of said building .., ; and all of the second floor of said building except the portion thereof used for elevators and stairways.

63. The “heating plant” for the Failing Building is not located in the sidewalk vaults.

64. The 1956 Failing Lase also specifies: The Lessors do not warrant to the Lessee a continued use of the open space under the sidewalks adjoining the leased premises, but the Lessee shall have the use of this space and shall enjoy all the ■rights to such space as would accrue to the Lessors had they remained in full possession of the premises.

65. The 1956 Failing Lease is a “triple-net' lease,” meaning that the tenant is responsible for taxes, insurance, and all other expenses for the operation, repair, and maintenance of the leased premises.

66. The 1956 Failing Lease’s original term was for 36 years, expiring in February 1987. The lease was amended on or about September 30, 1983; February 21, 1990; March 1,1996; October 20, 2006; and May 6, 2009, giving the tenant the option to extend the lease up to January 31, 2043. The current term is set to expire on September 30, 2016, and Boss does not seek to extend the léase beyond that date.

3. Ross’s Tenancy

a. Ross’s Acquisition of the Leasehold Rights and Obligations

. 67. Newberry and Ross negotiated the terms of the Assignment, dated January 25, 1996, and submitted that Assignment to the bankruptcy court for approval on February 9,1996.

68. The Assignment provided that Ross would assume from Newberry “all of Assignor’s leasehold estate and right, title, interest and obligations in, to and under [the 1946 Failing Lease as restated by the 1956 Failing Lease] and [1956 Richmond Lease] and [the Failing Building] and , [the Richmond Budding] in their respective existing ‘AS IS’ physical conditions.”,

69. Under the Assignment, Ross, as the Assignee, retained the right to void the Assignment on or before February 15, 1996, if Newberry did not satisfy a number of conditions before closing the transaction. One of the conditions was “[i]nspection and approval by Assignee of the physical condition of [the premises] including, without limitation, structural matters, mechanical and utility systems, roof and drainage systems and environmental consideration.”

70. Another condition in the Assignment was the receipt by Ross of “[a]n estoppel certifícate, in a form satisfactory to As-signee, executed by each landlord/lessor in form reasonably satisfactory to Assignee, verifying, among other things, that there are no defaults under the respective Lease by Assignee and no circumstances which, if uncorrected, would become a default, other than defaults which will be cured by Assignor at the close of escrow as a result of this Assignment.” Such certificates are commonly used in the industry to effect waivers of lease rights.

71. Newberry never obtained and, thus, never provided to Ross any estoppel certificate from the landlords of either the Richmond Building or Failing Building as discussed in the Assignment. Ross did not insist on receiving any estoppel certificate and accepted the rights and obligations of the Assignment despite the failure of this condition.

72. Ross took no steps to void the Assignment. On February 15,1996, the bankruptcy court approved the Assignment.

73. On March 1, 1996, Ross entered into a Sixth Amendment to the Failing Lease. Ross affirmed that it had assumed all of Newberry’s existing obligations, “including speciftcally, but not by way of limitation, the obliyation to physically separate and restore the premises at the expiration or upon termination of the Lease, as described in the paragraph entitled ‘Severance’ on page 3 of the August 31, 1956 amendment and restatement of the Lease.”

74. The Sixth Amendment also gave Ross the right to remodel the Failing Building after obtaining written approval of the plans from the landlord. “In altering or remodeling the leased premises,” Ross agreed that it would “not injure or change the general structural character of the leased premises or the building of which the premises are a part” and that Ross would do all work “in full compliance with all federal, state and municipal laws and regulations.” Ross further agreed that it would “bear any responsibility for costs and expenses associated with any modifications to the building which, as a result of Lessee’s work or other activities in the building, may be required by federal, state or local laws.” Such laws included but were “not limited to the Americans with Disabilities Act, seismic laws, fire and life safety laws, environmental or hazardous material laws and regulations.”

b. Ross’s Modifications to and Use of the Buildings

75. In June 1996, Ross submitted remodel plans to the City of Portland (“the City”). Ross proposed renovating the two buildings’ first and second floors to make the.new Ross store look consistent with Ross’s other retail stores. Ross did not propose any renovations or repairs to the upper floors of the Richmond Building. Plans for the remodel were publicly on file with the City.

76. As part of the remodel plans, Ross proposed removing one staircase and covering the Grand Staircase between the first floor and the basement of the buildings. Ross wanted to remove or close these staircases because Ross did not plan to use the basement space for retail purposes.

77. In its plans submitted to the City, Ross designated the unused area in the basements as “VACANT NO OCCUPANCY—NO STORAGE SEPARATE PERMIT REQUIRED FOR OCCUPANCY.” The “vacant” designation meant that Ross would not have to meet certain code obligations required for areas with occupancy.

78. The basements of the two buildings remained accessible by elevators and a small staircase for storage and office space.

’ 79. The City approved Ross’s plans, and the Ross store opened for business on October 17,1996.

80. During Ross’s tenancy, Ross elected to decommission or remove certain heating, ventilation, and air conditioning (“HVAC”), electrical, and plumbing systems and building equipment, particularly in the unused portions of the basements and in the third through mezzanine floors of the Richmond Building. In the spaces that no long had heating, Ross installed freeze-protection systems. These changes in the buildings were not shown in th¿ plans submitted to the City in 1996.

81. Ross left systems, equipment, and other elements of the buildings that were already decommissioned by Newberry or deteriorating (such as the restrooms on the unused floors of the Richmond Building) in their then-existing state. As of May 12, 2016, the portions of Failing Building leased by Ross had no working restrooms.

82. Additionally, Ross decommissioned one of the freight elevators in the Richmond Building. As the other two elevators in the Richmond Building wore down from use, Ross used the decommissioned elevator for spare parts to repair the other two elevators.

83. In 2004, with the knowledge and consent of the landlords, Ross removed most of the ■ escalator structures that spanned the property line. Ross did not remove the escalator beams. These beams still cross the property line between the two buildings. Nothing in Ross’s correspondence with the landlords indicates, one way or the other, whether the landlords expected that Ross would remove or sever the escalator beams at the expiration of the leases.

84. During its tenancy, Ross did not use the portions of the basements that it specified as “vacant” in the plans submitted to the City. Ross did, however, occasionally use the sidewalk vaults of the Failing Building for storage. Ross had continuous access to the sidewalk vaults.

85. Ross did not use the third floor and above of the Richmond Building. Nor did Ross use the vent stack in the Failing Building. Ross did, however, have unlimited access to all floors of the Richmond Building. Ross also had access to the vent stack on the second floor of the Failing Building, such that Ross could have chosen to make use of that apparatus.

. 86. Separate gas meters for both buildings are located in the Richmond Building. The Failing Building does not. have its own gas meter.

c. Ross’s Communications with its Landlords Regarding Modifications and Lease Obligations

i. Correspondence and Interactions with the Richmond Building Landlords

87. On February 5, 1997, Ross sent a letter to the Calomiris family’s representative, Bradley Miller. The letter stated that Ross had previously “overlooked” any requirement to send construction plans to the Richmond Building landlord. The letter added that Ross was sending copies of the plans for the landlord’s records. The letter also stated that Ross would provide copies of any certifícate of occupancy when it became available. Makarios offers no evidence that Ross failed to send to Mr. Miller the construction plans in February 1997, and the Court finds that Mr. Miller, serving as the Calomiris family’s agent, did receive Ross’s construction plans in February 1997.

88. On April 14,1997, Mr. Miller notified Ross that the Calomiris family believed that Ross had made unauthorized alterations to the Richmond Building basement that changed the character of the building and decreased the building’s value. On April 23, 1997, Ross responded to Mr. Miller, stating that the changes to' the basement did not constitute structural changes and did not decrease the value of the budding.

89. On April 17,1998, Mr. Miller notified Ross that Ross needed to make repairs to the Richmond Building because the Calo-miris family “has a very serious concern regarding the repair and maintenance of the Building, its condition- and whether it is structurally sound.” The letter stated that if Ross did not cure the lease violations, “the landlord will pursue its remedies under the Lease.”

90. On December 22, 1998, Ross replied that it had hired structural engineers to evaluate the building and that it “is in excellent conditions structurally.” Ross added that it “consider[ed] this matter to be closed.” Between 1998 and the commencement of this litigation, neither the Calomiris family nor Makarios notified Ross that any alterations to the Richmond Building basement would still need to be remedied at the lease’s expiration or that the landlord considered the matter still open. When the time came to renew Ross’s lease in 2006, the Calomiris family allowed Ross to do so and did not mention this subject.

ii. Correspondence and Interactions with the Failing Building Landlords

91. On June 20, 1996, Gary Brannan, Ross’s director of real estate, sent a letter to Charles Fettig, the representative of the Failing Building landlord (Pacific 620 at the time). The letter stated that Ross’s architect was delivering a set of plans to Mr. Fettig that day for the proposed remodel and alterations to the Failing Building. Mr. Brannan requested that Mr. Fet-tig contact the lessor and obtain approval of the plans. The letter further stated that Ross would deem such plans approved if Mr. Fettig did not notify Ross of a reasonable basis for withholding approval within ten days. The letter was faxed to Mr. Fettig, and a communication report confirms receipt.

92. On July 16, 1996, Mr. Fettig responded to Mr. Brannan. Mr. Fettig stated, “Enclosed are the construction drawings which have been approved by the ownership of the 620 Building.” The letter makes no mention of any plans that the landlord did not approve, indicating that Pacific 620 approved the entirety of the construction plans that Ross submitted to the City in June 1996. The Court draws the reasonable inference that the Failing Building landlord approved the entirety of Ross’s submitted plans.

93. Before Walker, Place’s purchase of the Failing Building .in 2006, Walker Place undertook a due diligence process. As part of that process, Waterleaf Architects and T.M. Rippey Consulting Engineers analyzed the building for Walker Place. Walker Place also hired a property management group to do a “lease digest,” analyzing the leases of all tenants in the Failing Building, including Ross.

94. After this due diligence process, Walker Place undertook structural repairs to the building. As part of the repairs, Walker Place installed a “shear wall” on the basement, first, and second floors of the Failing Building. The shear wall is a load-bearing wall that provides seismic support to the Failing Building. Because the concrete slab floors of the buildings are continuous and the columns of the buildings are connected, the shear wall in the Failing Building also provides some seismic support to the Richmond Building.

95. At no time during the due diligence process or structural repairs did Walker Place notify Ross that Ross would be required to restore the occupancy capacity of the basement to pre-1996 levels.

96' In October 2006, Ross and Walker Place’s predecessor in interest entered into a Seventh Amendment to the 1956 Failing Lease. The Seventh Amendment stated, “Lease in Full Force and Effect.” On May 6, 2009, Ross and Walker Place entered into an Eighth Amendment to the Failing Lease. Again, the amendment stated, “Lease in Full Force and Effect.”

97. On May 17, 2013, Brandon Anderson, the principal of Walker Place, sent a letter to Ross concerning Ross’s separation obligations. The letter listed concrete masonry unit (“CMU”) walls at the basement, first, and second floors as a separation requirement, The letter also discussed “[s]aw-cut[ting] and removing] concrete slab-on-grade,” which is the concrete floor at" the basement level. This saw-cutting discussion was in the section of the letter in which Mr. Anderson discussed the 'installation of a new elevator pit. Mr. Anderson made no indication that he expected Ross to cut through the first and second floors in order to install a multi-story wall. The Court infers that Walker Place did not, in 2013, interpret the lease to require such a wall or even desire such a wall.

4. Separating the Buildings

a. Ross’s Initial Separation Analysis

98. In 2009, Ross began exploring how to comply with its separation obligations under the leases. A contractor, Cameo Construction (“Cameo”), began analyzing what types of walls Ross should construct. On March 16, 2009, Gen Grover of Cameo sent an email to Ross’s Vice President of Construction for the Portland area, Michael Post, stating, “I’m figuring double masonry walls because, if separated, one future, owner may have the option to demolish ‘his’ building without the whole thing coming down.” Cameo also came up with a list of work necessary to separate the Richmond Building from the Failing Building and an estimated cost for each work item.

99. On June 11, 2012, Mr. Post forwarded the March 16, 2009 email from Mr. Grover to Ross’s new Portland-area Vice President of Construction, Benjamin Wheeler. Mr. Post attached to the June 11, 2012 email the cost estimate that Cameo had completed in 2009.

100. On June 15, 2012, Dave Parry of Cameo sent Mr. Wheeler an updated cost estimate for separating the Richmond Building from the Failing Building. The cost estimate included a masonry wall on both sides of the property line. The cost estimate also included a “saw cut” of the concrete slab floors and removal of the section of the slabs between the buildings. Cameo estimated that cutting the concrete slabs would involve sawing through 400 lateral feet of concrete. Both the sawing and removal of the concrete would cost an estimated $2,500.

101. On June 19, 2012, Mr. Wheeler responded to Mr. Parry that he “need[ed] creative ways (if they exist) to satisfy the lease but reduce the cost as much as possible.”

102. On July 19, 2012, Mr. Wheeler sent ids boss, John Haskins, an email summarizing the scope of work for separating the buildings. Mr. Wheeler stated that the work “includefd] reinstallation of masonry walls.”

103. By the fall of 2013, Ross had stopped working with Cameo in connection with the Richmond Building and Faffing Building project. Instead, Ross hired MCG Architects (“MCG”) to come up, with construction plans for separating the buildings.

104. On September 4, 2013, Mr. Wheeler emailed Brian Bowles ' at MCG. Mr. Wheeler explained that the Ross store in Portland “is specifically occupied in two separate buildings and we have a lease obligation to do a demising wall and utility split to return the space to two separate buildings.” Mr. Wheeler continued, “The wall is assumed to be a double masonry wall but [we] are open to not doing that if code allows.” '

105. On September 23, 2013, MCG completed a survey report describing an alternative to masonry walls. MCG proposed constructing metal stud gypsum walls.

b. The Parties’ Respective Separation Proposals

106. MCG drew up a set of construction plans for" Ross for separating the buildings. The plans include metal stud gypsum walls between the Richmond Building and the Faffing Building instead of masonry walls. The plans do not include any provisions for severing the continuous concrete slab floors or removing or cutting the escalator beams. Ross submitted the plans to Defendants as Ross’s proposal for separating the buildings.

107. As an alternative to its metal- stud gypsum walls, Ross now proposes metal stud gypsum walls with masonry veneer. A metal stud gypsum wall with a masonry veneer would not have masonry as the primary construction material.

108. Defendants have proposed their own walls. Catena Consulting Engineers, an engineering firm hired by Defendants, came up with several options for separating the buildings. “Option A” is equivalent to the metal stud gypsum wall proposed by Ross but also involves severing the escalator beams that cross the property line. “Option B” calls for a masonry wall on both sides of the property line with severed escalator beams and a reinforced concrete shear wall that provides seismic support for the Richmond Building, similar to the shear wall in the Failing Building. “Option C” provides for the same features as Option B, but, in addition, Option- C involves cutting through the concrete slab floors and columns, removing the concrete between the buildings, and thereby creating a 12-to 18-inch gap, or “seismic joint,” between the Richmond Building and the Failing Building to ensure that the buildings meet current seismic code requirements. Options A, B, and C all call for three one-story walls at the basement, first, and second floor levels, rather than a single, continuous multi-story wall on both sides of the property line.

109. In April. 2016, Waterleaf Architects, the architecture firm hired by Defendants, came up with another option for separating the buildings. This option reflects the “best guess” of architect William Bailey, Defendants’ expert, of what the parties to the 1956 leases meant by “masonry curtain walls.” At trial, the parties referred to this option as the “1956 Fit” Option.. The 1956 Fit Option entails cutting through the concrete slab floors and installing a single, multi-story masonry wall on both sides of the property line. Each wall would pass through the severed floors and would be positioned outside the steel framing of the buildings in the 19-to 28-inch gap between the buildings’ columns.

110. Mr. Bailey also discussed a “1956 Fit Plus” Option that would have all the features of the 1956 Fit Option plus severed escalator beams and a shear. wall built in the Richmond Building. At trial, Defendants argued that the leases require this 1956 Fit Plus Option.

c. Comparison of the Proposals

111. ' “Masonry” consists of modular block, such as brick or concrete masonry units (CMU), held together by mortar;

112. Masonry walls have several advantages over light-weight, metal stud gypsum walls. First, masonry resists water intrusion better than gypsum board. The material on the outside of gypsum board is paper, which is subject to mold and decay. Masonry is not subject to such problems. Second, masonry is more secure than gypsum board. Unlike masonry, gypsum board can be penetrated with an inexpensive, hand-held jab saw. Third, masonry generally has superior acoustical properties to gypsum board, providing more sound-protection.

113. Even when a metal stud gypsum wall receives a waterproofing finish, such as masonry veneer, that wall still does not have the same level of water resistance as a wall constructed entirely of masonry.

114. Cutting the concrete slab floors is not a prohibitively expensive activity. Cutting the concrete floors could cost as little as $2,500. Such cutting could be done if and when either the Richmond Building or the Failing Building is demolished.

115. Defendants’ structural engineering expert, Christopher Thompson, testified that with the exception of separating the seismic loads of the buildings, cutting through the floors of the buildings offers no structural benefits.

116. Both a multi-story, non-load-bearing, or non-structural, wall and a single-story, non-load-bearing wall may require footings where the wall reaches the grade, or the soil. “Footings” are features that support walls and keep the walls from sinking. A multi-story, non-load-bearing wall would require footings to support its weight. A series of single-story, non-load-bearing walls might' or might not require footings depending on whether the walls are light enough for the floor plates to support the weight of the walls. Such a series of walls would require footings in the basement if the weight of the upper-story walls and construction design (such as the omission of deflection heads that prevent the structure above from putting a load on the non-structural wall) caused the weight to be transferred through the floor beams down to the wall in the basement; The installation of footings would require cutting the concrete slab floors at the basement level.

d. The Meaning of “Curtain Wall” in 1956

117. In 1956, architects and engineers had the technology to construct both masonry and light-weight metal stud walls that are equivalent to modern metal stud gypsum walls. Jn 1956, architects and engineers also would have known the technology of veneers on- the outside of walls.

118. One of Ross’s expert witnesses, Kevin Kaplan, testified that a curtain wall is an exterior wall that keeps the elements out of a building and the occupants in the building. Additionally, Mr. Kaplan testified that a curtain wall is a non-load-bearing wall. Another expert for Ross, Brian Bowles, also testified that a curtain wall is an exterior wall. Defendants’ expert witnesses, Mr. Bailey and ‘Mr. Thompson, agreed that a curtain wall is an exterior, non-load-bearing wall.

119. The 1942 Building Code of the City of Portland (“1942 Code”) governed the construction of the Richmond Building and was in effect, at the time the two 1956 leases were signed. The 1942 Code defines “curtain wall” as “a wall running between columns which carries its own weight but no other loads and extends through more than one story.”

120. The Fifth Edition of Architectural Graphic Standards from 1956 depicts a curtain wall as an exterior outer-most wall extending through multiple stories. The curtain wall is wider at the base in order to accommodate the increasingly heavier load of the wall as it'extends past multiple floors.

121. The Architectural and Building Trades Dictionary, published in 1950, defines “curtain wall” as “[a] thin wall, supported by the structural steel or concrete frame of the building, independent of the wall below.” This definition does not require that a curtain wall extend multiple stories.

122. The Dictionary of Architecture, published in 1952, defines “curtain wall” as “a wall supporting no more than its own weight, the roof or floor above being carried ‘by the framework of the structure.” This definition does not require that a curtain wall extend multiple stories.

123. The preponderance of the evidence supports the conclusion that in 1956, the term “curtain wall” meant simply an exterior, non-structural wall that supports only its own weight. In 1956, a curtain wall could either be multi-story or single story. Both types of curtain walls may require footings at the basement level.

5. The May 2015 State Court Forcible Entry and Detainer (“FED”) Action

124. In January 2015, Makarios served Ross with a notice of default, and in May 2015, Makarios commenced eviction proceedings in Oregon state court. Makarios’s notice to Ross invoked Makarios’s rights under § 7.01 of the 1956 Richmond Lease.

125. The parties tried the case before Multnomah County Circuit Judge Jerry B. Hodson, and the trial lasted appfoximately six days. At trial, Makarios presented evidence of the condition of the Richmond Building.

126. At the conclusion of trial on July 29; 2015, Judge Hodson determined that Makarios was not entitled to evict Ross and that Ross was entitled to retain possession of the Richmond Building until the end of the 1956 Richmond Lease.

6. Procedural Background

127. Ross, Makarios, and Walker Place all filed motions for partial summary judgment in this case. The motions focused on Ross’s separation obligations, including whether the severance provisions require “moving” the buildings apart and complying with current seismic codes, whether the judgment in the FED proceeding bars Makarios’s § 16.01 claims based on issue or claim preclusion, whether Ross is obligated to restore allowable occupancy levels to the buildings’ basements, and whether Ross has any evidence to support its affirmative defenses of waiver, laches, breach of contract, estoppel, and unclean hands.

128. Regarding Ross’s separation obligations, ' Defendants argued that the current Portland Building Code requires Ross to construct a seismic joint between the Richmond Building and the Failing Building to ensure that the buildings meet current seismic requirements. According to Defendants, creating the joint would require Ross to sever and move existing columns and beams in the Richmond Building away from the Failing Building, such that when two masonry curtain walls are constructed in the space between the buildings, there is an additional 12 inches of space between the buildings.

129. After hearing argument from the parties, the Court - determined -that the original parties to the 1956 leases intended that the buildings be separated by abutting masonry curtain walls that physically touch each other. The Court therefore granted Ross’s motion on separation insofar as the leases do not require the elimination- of shared lateral forces or the creation of a new joint or gap between the buildings.

130. The Court ruled against Ross on its preclusion arguments. The Court held that the § 16.01 obligations are distinct from the § 7.01 obligations and therefore are not the same claim that Makarios pursued in the FED action. The Court also held that issue preclusion does not apply because the FED court did not rule on Ross’s duties under § 16.01. Further, the Court determined that the FED action was limited to addressing the tenant’s right to possession and did not fully address issues relevant to damages.

131. The Court also determined that no statute of limitations bars Defendants’ surrender claims because surrender obligations do not arise until the end of the respective leases.

132. Additionally, the Court determined that Defendants consented to Ross’s alterations to the basement that reduce the allowable level of occupancy and that such alterations do not constitute statutory waste.

133. The Court ruled in favor of Defendants oh all of Ross’s affirmative defenses with the exception of waiver. The Court determined that Ross did not present evidence to support its defenses of laches, estoppel, breach of contract, and unclean hands. In contrast, the Court held that a genuine issue of material fact existed regarding Ross’s affirmative defense of waiver.

134. The parties proceeded to Phase I of the bifurcated trial to determine the extent of Ross’s obligations under the separation provisions of the 1956 leases, including, among other things, (1) whether Ross’s proposed walls are abutting masonry curtain walls with footings; and (2) whether Ross correctly interprets the scope of its obligation to surrender the premises in “good order, condition, and repair, except for reasonable wear and tear,” as required by the leases.

CONCLUSIONS OF LAW

A. Contract Interpretation Under Oregon Law

1. In this case based on diversity jurisdiction, Oregon’s substantive law governs. See Getlin v. Maryland Cas. Co., 196 F.2d 249, 250 (9th Cir.1952) (“The case is in federal court by diversity of citizenship only. The law of the state in which the court sits must apply.”); Snook v. St. Paul Fire & Marine Ins. Co., 220 F.Supp. 314, 316-17 (D.Or.1963) (“This being a diversity case, jurisdiction is grounded on that fact and the [insurance] policy must be interpreted and construed in accordance with the Laws of Oregon, the place where the contract was made.”).

2. Because the resolution of the parties’ dispute turns upon the interpretation of a phrase in the parties’ leases, ordinary principles of contract interpretation apply. Harold Schnitzer Props. v. Tradewell Grp., Inc., 104 Or.App. 19, 23, 799 P.2d 180 (1990) (“Oregon treats a commercial lease as a contract and, in the absence of a provision in the lease to the contrary, ordinary contract principles apply.”). Under Oregon law, the “central issue” in interpreting a lease is “the intent of the parties at the time of the execution of the lease.” Stark St. Props., Inc. v. Teufel, 277 Or. 649, 658, 562 P.2d 531 (1977) (emphasis added). In addition, the Ninth Circuit recently confirmed that the “ ‘fundamental goal of contract interpretation is to give effect to the mutual intent of the parties as it existed at the time of contracting.’ This fundamental axiom is widely accepted and uncontested.” Pauma Band of Luiseno Mission Indians of Pauma & Yuima Reservation v. California, 813 F.3d 1155, 1165 (9th Cir.2015) (citation omitted) (emphasis in original).

3. The leading Oregon case on contract interpretation is Yogman v. Parrott, 325 Or. 358, 937 P.2d 1019 (1997). In Yogman, the Oregon Supreme Court established a three-step process for interpreting a disputed contractual provision. First, the court must determine whether, as a matter of law, the relevant provision is ambiguous. Id. at 361, 937 P.2d 1019. A contractual provision is ambiguous if it can “reasonably be given more than one plausible interpretation.” Williams v. RJ Reynolds Tobacco Co., 351 Or. 368, 379, 271 P.3d 103 (2011). “The court must, if possible, construe the contract so as to give effect to all of its provisions.” Id. Further, when construing a contract provision, the court is “not to insert what has been omitted, or to omit what has been inserted.” Or. Rev. Stats. (“ORS”) § 42.230; see also Yogman, 325 Or. at 361, 937 P.2d 1019 (citing ORS § 42.230 at step one of the analysis).

4. The analysis ends if the meaning of the provision is clear from the text and context of the contract. Williams, 351 Or. at 379-80, 271 P.3d 103. The court then applies the contractual term to the facts. See Yogman, 325 Or. at 361, 937 P.2d 1019. If the provision is ambiguous, however, the court proceeds to the second step. Id., at 363, 937 P.2d 1019. At the second step, the trier of fact examines extrinsic evidence of the contracting parties’ intent and construes the contractual provision consistent with that intent, if such a resolution can be determined. Id. Oregon follows the objective theory of contracts, and relevant evidence at step two may include actual “manifestations of intent, as evidenced by the parties’ communications and acts.” Holdner v. Holdner, 176 Or.App. 111, 120, 29 P.3d 1199 (2001) (quotation marks omitted). If, after examining extrinsic evidence, the “provision remains ambiguous,” the court applies appropriate maxims of construction at the third step. Yogman, 325 Or. at 364, 937 P.2d 1019.

B. Physical Separation of the Buildings at Surrender

1. Construction of “Masonry Curtain Walls”

5. Both 1956 leases call for “masonry curtain walls” or “a masonry curtain wall” with footings at the time of separation. Both 1956 leases also call for making the buildings “entirely independent and self-sufficient.” Ross argues that at the time of separation, the parties to the 1956 leases intended “masonry curtain wall” to mean a light-weight exterior wall, possibly covered with masonry veneer, that extends from the floor to the ceiling on each floor. Defendants argue that the parties intended exterior masonry walls, built entirely ■ of brick or CMU, that are multi-story, extending continuously from the basement to the third floor.

6. The Court begins at Yogman step one to determine whether the phrase “footings and masonry curtain wall(s)” is ambiguous. Other than calling for “entirely independent and self-sufficient” buildings, the leases offer no definition of the term “masonry curtain wall.” The term “footings” also is left undefined. Because the text and context of the leases offer no further clarification of the meaning of “masonry curtain wall(s)” with footings and both sides offer reasonable interpretations, the Court finds that the lease provisions are ambiguous at Yogman step one.

7. The Court proceeds to step two of the Yogman .analysis and examines extrinsic evidence of the original parties’ intent. As discussed in the Court’s Findings of Fact, the extrinsic evidence shows that in 1956, several different architectural definitions of “curtain wall” existed, such that a “curtain wall” could mean either a multi-story wall or several single-story walls.- In 1956, however, a curtain wall had to be an exterior, non-structural wall that supports only its own weight. In the leases, although the original parties specified other types of work that they intended the tenant to do at separation, they did not specify what type of curtain wall they meant or wanted. Moreover, Defendants’ course of dealing with Ross, as established through Catena’s analysis, Mr. Bailey’s reports, and Mr. Anderson’s correspondence with Ross, indicates that Defendants did not understand the term “masonry curtain wall” in the leases to require a multi-story wall rather than a series of single-story walls, until litigation commenced.

8. Defendants now argue that the original parties could not have intended a series of single-story walls because the leases call for a wall or walls with footings. According to Defendants, only a multi-story wall would require footings. As discussed in the Court’s Findings of Fact, however, a series of single-story walls may require footings, which are elements of a building that support a wall at grade-level, depending on the weight and design of the walls. Further, regardless of whether a curtain wall is multi-story or one-story, footings provide additional support to the wall at the basement level.

9. Defendants also argue that the leases require a single, multi-story wall for each building because the 1956 Richmond Lease requires a singular “masonry curtain wall.” According to Defendants, the use of the plural “walls” in the 1956 Failing Building Lease, which governed both properties at the time of execution, underscores that the tenant, Newberry, always understood that the Richmond Building and the Failing Building would each have its own curtain wall. In contrast, the 1956 ■ Richmond Lease, executed after the 1956 Failing Lease and the sale of the Richmond-Building to New York Life, concerned only one property and provides that the tenant must build one multi-story wall for an individual building. Defendants’ argument is unpersuasive, however, because both the Newberry Deed and New York Life Deed use the plural term “curtain walls.” Further, a wall system comprised of multiple floor-to-ceiling walls between two buildings could be described as a single “wall.” Therefore, the Court concludes that the use of the singular term “curtain wall” in the 1956 Richmond Lease does not resolve the dispute.

10. In light of the extrinsic evidence, the Court concludes that the parties intended a “masonry curtain wall” to be either a multi-story exterior, non-loadbear-ing wall or a series of single-story exterior, non-loadbearing walls on each floor, but constructed of masonry. Use of the word “footings” indicates the parties’ intent to ensure that the walls are sufficiently supported so as not to sink or put excessive weight on the buildings’ framing. Footings can be used to support a series of single-story exterior, non-loadbearing walls at the basement level, and thus, the requirement that the tenant construct footings is consistent with eithe