Gebhardt & Smith LLP v. Maryland Port Administration

GRAEFF, J. This appeal arises from a dispute between Gebhardt & Smith LLP (“Gebhardt & Smith”), appellant, and the Maryland Port Administration (“MPA”), appellee, over a lease (“Lease”) for office space in the Baltimore World Trade Center (“WTC”). The Lease required that the tenant, Ge-bhardt & Smith, pay to the landlord, the MPA, base rent plus a proportional share of the building’s operating expenses. In 2003, a dispute arose regarding the charges for operating expenses. Gebhardt & Smith continued to pay its base rent, but it did not pay the invoices for operating expenses.

Suit was instituted in the Circuit Court for Baltimore City. Following a bench trial, the circuit court found that Gebhardt & Smith breached the Lease, and it entered a judgment in favor of the MPA for $328,186.88, plus interest. Gebhardt & Smith appealed, and it presents two questions for our review, which we have rephrased: 1. Did the Lease contain a condition precedent to Ge-bhardt & Smith’s obligation to pay its share of operating expenses, and if so, was this condition satisfied? 2.

Where the Lease provided that the determination of operating expenses by “Lessor’s certified public accountant” “shall constitute a final determination,” was Gebhardt & Smith precluded from challenging the operating expenses in court? For the reasons set forth below, we shall affirm the judgment of the circuit court. FACTUAL AND PROCEDURAL BACKGROUND Gebhardt & Smith, a law firm, leased office space from 1977 until 2006 in the WTC, an office building operated by the MPA and located in Baltimore, Maryland. In 1992, the parties ⁵³⁸ executed the Lease at issue, with Gebhardt & Smith renting 30,161 square feet of office space on three floors of the WTC.

Gebhardt & Smith agreed to pay $49,011.63 per month in base rent, plus its proportional share of “additional rent,” which was comprised of “real estate taxes” and “operating expenses.” 1 Article 4 of the Lease defined “operating expenses” as follows: The term “operating expenses shall mean any and all costs and expenses (except real estate taxes) paid, incurred, or charged by Lessor in connection with the operation, servicing and maintenance of the building, including, but not limited to, the following: 1) Wages and salaries and costs of employee benefits of employees or independent contractors engaged in the operation and maintenance of the building, including Lessor’s Social Security Taxes and any other governmental taxes which may be levied on such wages and salaries; 2) All charges and rates connected with water supplied to the building and related sewer use charges; 3) All charges connected with heat and air conditioning supplied to the building; 4) The cost of labor and material for cleaning the building, surrounding areaways and windows in the building; 5) The cost of all electric current supplied to the building; 6) The cost of fire; casualty, liability and such other insurance customarily provided in connection with an office building. ⁵³⁹ The term “operating expenses” shall include only reasonable and bonafide expenses actually incurred by Lessor and shall not include any of the following: depreciation, administrative overhead expenses, leasing commissions, management or rental agents fees, capital expenditures (which shall include, without limitation, the cost of renovating, decorating or otherwise preparing space in the building for tenants), or any other expenses relating to the ownership and management, as distinguished from the operation, of the building. Article 4(c) of the Lease, which was included in an addendum, identified how operating expenses would be billed to Gebhardt & Smith: In the event that the operating expenses incurred by Lessor during any fiscal year following the base year shall exceed the operating expenses incurred by Lessor during the base year Lessee shall pay to Lessor as additional rent for such fiscal year an amount equal to The Percentage [2] of the excess. In the month of June in the base year and each fiscal year thereafter, Lessor shall furnish to Lessee a statement of the estimated operating expenses for the forthcoming fiscal year compared with the base year and shall compute Lessee’s estimated additional rent for such fiscal year as provided herein. If the estimated operating expenses for said fiscal year exceed the operating expenses during the base year Lessee shall pay each month in addition to the base year specified in Article 2 hereof an amount equal to one-twelfth (1/12) of the Percentage of the excess.

When the statements of the actual operating expenses for such fiscal year are issued by the State Legislative Auditor’s Office or Lessor’s certified public accountants, if the estimated additional rent paid by Lessee exceeds Lessee’s Percentage of the excess operating expenses, Lessor shall promptly either refund the overpayment to Lessee ⁵⁴⁰ or credit the amount thereof against subsequent payments of additional rent under this paragraph c. If the estimated additional rent paid by Lessee is less than Lessee’s Percentage of the excess operating expenses[,] Lessee shall pay the additional rent due within ten (10) days after receipt of a statement therefor from Lessor. Article 4(d) of the Lease is the provision central to this appeal. It provided that the statements of operating expenses to be furnished by Lessor “shall be as determined by Lessor’s certified public accountant” and that the statements furnished “shall constitute a final determination” of the amount of operating expenses owed by Gebhardt & Smith to the MPA.

This provision provided as follows: The Statements of the real estate taxes and operating expenses to be furnished by Lessor as provided in subdivisions (b) [referring to Real Estate Taxes] and (c) [referring to operating expenses] above shall be as determined by Lessor’s certified public accountant xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx. The statements thus furnished to Lessee shall constitute a final determination as between Lessor and Lessee of the real estate taxes and operating expenses for the periods represented thereby. [3] (Emphasis added). In a letter dated November 8, 2002, the WTC Building Manager advised Gebhardt & Smith that, for the fiscal years ending in 2000 or 2001, there was no increase in the operating expenses: We have received the final Auditor’s report for the actual operating expenses for the World Trade Center for Fiscal Years ending June 30, 2000 and June 30, 2001. These ⁵⁴¹ expenses for Fiscal Years 2000 and 2001 were audited and certified by an independent public accountant.

By this letter, we will adjust the estimated operating expenses per Article 4c of your Lease for the Fiscal Year ending June 30, 2003.... The letter advised, however, that the estimated operating expenses for fiscal year 2003 increased, and Gebhardt & Smith was obligated to pay its proportional share of that increase, $17,871.12. 4 Mark Gaspar, Administrative Partner with Ge-bhardt & Smith, testified that the firm paid this bill without protest or request for additional information because “it was a small amount” and “the letter represented ... that the expenses had been audited and certified by an independent public accountant.” In September 2003, Hurricane Isabel flooded the WTC and the building was closed from September 19, 2003, until November 10, 2003. During this time, Gebhardt & Smith vacated its offices, moved its files and computers out of the building, and occupied temporary office space to continue operating its law practice. While Gebhardt & Smith was displaced from the WTC, it received a letter and an invoice for actual operating expenses for fiscal year 2002 and estimated operating expenses for 2004.

The letter again indicated that the MPA had received “the Auditor’s report for the actual operating expenses” and, similar to the previous year, stated that the expenses “for fiscal year 2002 have been audited and certified by an independent public accountant.” 5 The letter informed Gebhardt & Smith that, for fiscal year 2002, it owed an additional $22,854.38 for actual operating expenses over what Gebhardt & Smith had paid for estimated operating expenses. In addition, Gebhardt & Smith owed $33,512.28 for estimated operating expenses for ⁵⁴² fiscal year 2004. An invoice indicated that Gebhardt & Smith owed MPA a total of $56,366.66. Upon receipt of the invoice, Mr. Gaspar testified that he was “shocked” because “rent was supposedly being abated at that point,” as a result of the firm’s displacement from the WTC due to Hurricane Isabel, and “the invoice was requesting payment of $56,000 right away.” Mr. Gaspar took the bill to Jim Smith and Larry Gebhardt, two of the firm’s partners. 6 In a letter dated December 29, 2003, Gebhardt & Smith responded to the WTC’s building manager regarding the bill it received for actual and estimated operating expenses: We have received your letter of December 22, 2003 relating to the World Trade Center’s operating expenses for fiscal 2002 and its estimated operating expenses for fiscal 2003.

Your letter, together with its attachment, expresses the Maryland Port Administration’s contention as to Ge-bhardt & Smith[’s] responsibility for a percentage of these actual and estimated operating expenses under the terms of the Lease. Gebhardt & Smith, however, has significant concerns-and potentially substantial disagreements-with the Maryland Port Administration’s computation of the amounts claimed due as actual operating expenses for fiscal 2002 and the estimated operating expenses for fiscal 2003. Tenants are responsible solely for operating expenses incurred in connection with “the operation, servicing, and maintenance of the building.” Tenants are not responsible for expenses in connection with the management and ownership of the building. For this reason, Gebhardt & Smith requests a detailed and comprehensive breakdown of all of the items comprising the categories of purported operating expenses set forth in the Ernst & Young Schedule of Actual ⁵⁴³ Operating Expenses for the fiscal year ending June 30, 2002.

Gebhardt & Smith wishes to verify and satisfy itself that the operating expenses aggregated in the schedule are authorized operating expenses under the terms of the Lease, as contrasted to expense of ownership and management. ... Gebhardt & Smith has substantial concerns about whether the Maryland Port Administration has made an accurate, good faith estimate of the operating expenses which it legally, under the terms of the Lease, is entitled to pass on to the tenants as additional rent. In a letter dated January 30, 2004, the WTC’s building manager responded to Gebhardt & Smith’s letter and provided Gebhardt & Smith with documentation regarding the actual and estimated operating expenses. WTC’s building manager attached two reports prepared by Ernst & Young, LLP (“Ernst & Young”), an accounting firm, for the fiscal years ending June 30, 2001, and June 30, 2002.

The first report, which covered the fiscal year that ended on June 30, 2001, stated that Ernst & Young “audited, in accordance with auditing standards generally accepted in the United States, the general purpose financial statements of the Maryland Department of Transportation as of and for the year ended June 30, 2001.” The report explained that its “audit was made for the purpose of forming an opinion on the general purpose financial statements of the Maryland Department of Transportation taken as a whole” and “to meet the reporting requirements of the World Trade Center standard lease agreement....” The report then identified the following operating expenses: (1) utilities costing $1,064,288; (2) maintenance costing $752,104; (3) janitorial costing $447,172; (4) security costing $280,490; (5) insurance costing $59,718; and administration costing $73,983. The second report, which covered the fiscal year that ended on June 30, 2002, stated that Ernst & Young “audited, in ⁵⁴⁴ accordance with auditing standards generally accepted in the United States, the basic financial statements of the Maryland Department of Transportation as of and for the year ended June 30, 2002.” The report continued: The information set forth in the accompanying Schedule, which is the responsibility of the Maryland Department of Transportation’s management, is presented for purposes of additional analysis and to meet the reporting requirements of the World Trade Center standard lease agreement and is not a required part of the basic financial statements of the Maryland Department of Transportation. As described in Note 1, the Schedule referred to above has been prepared in accordance with the basis of accounting as defined by Article 4 of the Standard World Trade Center Lease Agreement, which Agreement requires reporting expenses • at amounts that vary materially from those which would be reported if presented in conformity with accounting principles generally accepted in the United States. [7] The Schedule is not intended to be a complete presentation of operating expenses in conformity with accounting principles generally accepted in the United States or other comprehensive basis of accounting. The information set forth in the accompanying Schedule has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, is fairly stated in all material aspects in relation to the basic financial statements taken as a whole.

The report then identified the following operating expenses: (1) utilities costing $1,006,724; (2) maintenance costing $764,841; (3) janitorial costing $548,888; (4) security costing 393,372; (5) insurance costing $95,105; and (6) administration costing $76,311. ⁵⁴⁵ Upon reviewing the reports created by Ernst & Young, Mr. Gaspar concluded that Ernst & Young had not issued “a standard audit opinion” because “it simply states that they’ve audited the financial statements of the Department of Transportation without indicating that they’ve done anything to review the financial statements of the Port Administration itself.” Moreover, Gebhardt & Smith concluded that the audit was insufficient because Ernest & Young “had not determined the operating expenses that they’re required to under the lease.” The reports did not indicate that the auditor “reviewed the backup information,” and Gebhardt & Smith believed that the auditor “should have gone back to the Maryland Port Administration’s records to review their invoices” and the lease “to determine what categories of expenses are properly passed onto tenants.” Consequently, Gebhardt & Smith refused to make any further payment of operating expenses because “we wanted more information to show that they were going to calculate the amount based on what’s required under the lease and we never received that [information].” The MPA continued to send statements regarding Gebhardt & Smith’s share of the operating expenses. 8 Gebhardt & Smith did not pay any bills for operating expenses from 2004 to 2006. In 2006, Gebhardt & Smith decided to file suit due to concerns “that if [Gebhardt & Smith] actually did owe money it was building up,” and Gebhardt & Smith “felt that was the only way that we could force the state to actually give us some ⁵⁴⁶ proper calculation of what we owed.” On April 6, 2006, Gebhardt & Smith filed a complaint in the Circuit Court for Baltimore City, requesting that the court issue a declaratory judgment to determine, among other things, “the actual operating expenses” for 2002 to 2006. Gebhardt & Smith alleged that, as a result of deficit concerns facing the State in 2003, the State decided to sell the WTC, and it “set out to increase the revenue generated by the building.” Gebhardt & Smith contended that “the only avenue for MPA to generate additional revenue from the building was to increase the operating expense pass throughs that were billed to tenants as additional rent.” It claimed that, “[b]y inflating the operating expenses passed on to the tenants, MPA could increase its profit from the leasing activity” and this would “deceptively make the building appear more profitable than it actually was and potentially enable the building to command a higher price upon its sale.” Gebhardt & Smith cited costs for security and the apportionment of liability insurance as “egregious example[s]” of “inflated, improper and unauthorized charges[.]” Gebhardt & Smith also requested that the court declare that it “is not responsible for paying its percentage of the increase in annual real property taxes that will result from MPA selling the World Trade Center to a person that is not tax exempt[,]” that “MPA is estopped from including the salary and benefits of MDTA Police as an operating expense[,]” and that Ge-bhardt & Smith “does not owe pre-judgment or contractual interest on the amount of any additional rent for increase in operating expenses for any fiscal year after the base year that may be its obligation under the lease[.]” On June 30, 2006, MPA filed an answer and a counterclaim. The counterclaim alleged that Gebhardt & Smith breached the Lease agreement when it failed to pay operating expenses from September 30, 2003, to June 2006, the MPA requested that the court enter a judgment against Gebhardt & Smith for $302,882.45, plus fees and interest.

In July 2006, Gebhardt & Smith vacated its leased office space in the WTC. The Lease expired on September 30, 2006, ⁵⁴⁷ and Gebhardt & Smith paid all base rent owed through the termination of the Lease. On July 27, 2006, Gebhardt & Smith filed an amended complaint, adding a claim that the MPA engaged in “constructive fraud.” It alleged that the MPA “owed a limited fiduciary duty to Gebhardt & Smith ... to account for the actual operating expenses ...” which it “failed to fulfill” “by asking for operating expenses it knew were not due.” Gebhardt & Smith alleged that “Ernst & Young LLP falsified the operating expense calculation to assist and to aid and abet MPA in its efforts to defraud Gebhardt & Smith.” On October 10, 2006, Gebhardt & Smith filed a motion to dismiss its Declaratory Judgment Complaint on the ground that it involved the same issues as the counter-claim, ie., “MPA asserts that additional rent is due, and Gebhardt & Smith denies that any additional rent is owed.” Gebhardt & Smith explained: “Because of the counter-claim, the case is fundamentally a collection case for an alleged breach of lease,” and “MPA is the natural plaintiff and Gebhardt & Smith, the natural defendant.” The court granted Gebhardt & Smith’s motion and dismissed Gebhardt & Smith’s complaint for a declaratory judgment. 9 On April 23, 2007, MPA filed an amended counterclaim. Count I alleged that Gebhardt & Smith breached its contract with the MPA when it did not pay for “additional rent” under the Lease.

Count II alleged that Gebhardt & Smith was unjustly enriched when Gebhardt & Smith received “the benefit of services for which other WTC tenants have paid,” but it has refused “to pay the operating expense increase required under its lease[.]” MPA requested that the court enter judgment in its favor for $400,502.84, plus prejudgment interest at 12 percent per year, and a 17 percent fee “to cover all State collection and administrative costs.” ⁵⁴⁸ On May 7, 2007, Gebhardt & Smith filed a Motion to Dismiss or for Summary Judgment, arguing that the Lease is “void and unenforceable” because the MPA “may not, within the limitations of the Maryland Constitution and the Maryland Port Administration’s governing statute, operate a commercial office building catering to and occupied predominantly by businesses that have nothing to do with maritime trade or activities.” The court denied Gebhardt & Smith’s motion. On June 18, 2007, the MPA and the State of Maryland, Central Collection Unit (“CCU”) filed a second amended counterclaim, which added CCU as an additional plaintiff. On June 27, 2007, Gebhardt & Smith responded and filed a Motion to Strike Second Amended Counterclaim, arguing that “delinquent accounts which are referred to the CCU for collection are subject to a 17% collection fee” and “it appears that the MPA’s real motive for referring its claim against [Gebhardt & Smith] to the CCU is simply to artificially inflate the amount of its claim by 17%.” The court granted Gebhardt & Smith’s motion. On February 25, 2008, the MPA filed a motion for summary judgment, raising three arguments why judgment should be entered in its favor.

First, the MPA argued that, “[b]ecause G & S has identified no fraudulent or bad faith conduct by MPA in compiling the operating expenses for relevant fiscal years, G & S is bound by the ‘final determination’ of these expenses.” Second, the MPA argued that it was entitled to summary judgment based on sovereign immunity. Third, the MPA argued that “G & S waived its right to rescind or avoid its obligations under the 1992 WTC Lease” when it continued to occupy the office space after receiving the documentation provided by the MPA regarding operating expenses. The circuit court denied this motion. On February 26, 2008, Gebhardt & Smith moved for summary judgment, arguing that the contract was unenforceable because the MPA failed to satisfy a condition precedent in the contract, that an independent, certified public accountant cer ⁵⁴⁹ tify the amount of operating expenses.

The circuit court denied this motion. On June 23, 2008, trial commenced. Michael Miller, Director of Maritime Commercial Management with the Maryland Port Authority, testified that the MPA is part of the Maryland Department of Transportation (“MDOT”), and the MPA operates the WTC on behalf of MDOT. He testified that there are costs associated with operating the World Trade Center, including basic management costs, utility costs, security, insurance, operating expenses, and leasing costs, and each tenant, pursuant to its lease agreement, pays its proportional share of operating expenses.

Joe Ford, the assistant comptroller with the Maryland Port Administration, testified that he was involved in the preparation of the operating expense schedules for MPA beginning in 2000. The MPA uses an electronic accounting system called Financial Management Information System (“FMIS”) to track invoices and payments. Mr. Ford’s office made the initial determination whether an invoice should be classified as an operating expense that would be billed and paid by the WTC’s tenants. After Mr. Ford compiled the numbers and accumulated all the supporting documentation, the MDOT Office of Audits reviewed the information and made adjustments to the numbers, where necessary.

For example, in 2001, they recommended adjustments of $128,000. When the audit by MDOT was complete, they sent the “formal audit report” to the outside auditor, who was either Ernst & Young or SB & Company, and also provided Mr. Ford with a copy of the report. 10 Once Ernst & Young or SB & Company completed its procedures, it provided Mr. Ford with a copy of the report that it created. When Mr. Ford received the report from Ernst & Young or SB & Company, the bill was sent to tenants for actual operating expenses. ⁵⁵⁰ Mr. Ford testified that he understood the phrase “Lessor’s certified public accountant,” as used in Article 4(d) of the Lease, to refer to the work performed by Ernst & Young or SB & Company, not the Office of Audits. Mr. Ford is not a certified public accountant, but he has an “internal auditor certification.” Mark Gaspar, Administrative Partner with Gebhardt & Smith, testified that he was responsible for paying the rent for the office space rented by Gebhardt & Smith.

Mr. Gaspar testified that, ordinarily, the operating expense bills were “fairly small,” and he did not spend very much time reviewing the bill before it was paid. In 2002, Mr. Gaspar paid a bill for operating expenses for approximately $4,800 “[b]ecause it was a small amount” and “the letter represented to me that it had been ... audited and certified by an independent public accountant.” Mr. Gaspar stated that, if the letter had not included this statement, he would have asked “for further information to make sure that they were not just calculated by [the WTC’s building manager] or someone with the building.” Upon receiving the bill for $56,000 in operating expenses in 2003, however, Mr. Gaspar took the bill to two other partners with Gebhardt & Smith. Gebhardt & Smith initially requested additional information from the WTC building manager, but it ultimately decided not to pay the bill because, after the reviewing the documentation provided by the WTC, it did not believe that the MPA had complied with the terms of the Lease. James Smith, Managing Partner with Gebhardt & Smith, testified that Gebhardt & Smith leased office space in the WTC beginning in 1977.

Following Hurricane Isabel, while Gebhardt & Smith was displaced from the WTC, Mr. Gaspar brought to his attention a bill for operating expenses. Mr. Smith characterized the increase from the prior year as a “very de minimus amount.” Mr. Smith testified that he understood the phrase “Lessor’s certified public accountant” to refer to “somebody independent” of the MPA and MDOT, and it was “of great importance to us that an independent ⁵⁵¹ public accountant] following audit standards verified [the operating expense] numbers.” Christine Carmon, Fiscal Accounts Manager with the MPA, testified that she prepared invoices for operating expenses for each tenant of the WTC. She testified that the letter that she sent to Gebhardt & Smith, indicating that WTC’s operating expenses were “audited and certified by an independent public accountant,” was a “form letter that was handed off’ to her by her predecessor. She explained that, upon receiving “the report from the independent auditor,” she would mail invoices for operating expenses to each tenant of the WTC.

She testified, however, that the report from the accountants was not required by the Lease. She further testified that Ge-bhardt & Smith paid all of its base rent, but it had not paid its share of the operating expenses. Joseph Lambdin, 11 Director of the Maryland Department of Transportation, Office of Audits, testified that he is a certified public accountant. He oversees the work of his office, which conducted audits on the WTC’s operating expenses for fiscal years 2001-2006.

Mr. Lambdin testified that he has managers that “do the first line supervision of the work,” but he monitors the progress and signs the work. The Office of Audits employs three managers and six staff auditors; some of these auditors are certified public accountants. Mr. Lambdin testified that, pursuant to government auditing standards, there was no independence issue with regard to his office performing audit procedures on the MPA. He testified that his office was free from any impairments, including personal, organizational, and external impairments. 12 He ex ⁵⁵² plained that he reports directly to the head of the agency, the Secretary of the Department of Transportation, as one method used to allow the office to remain independent.

Mr. Lambdin testified that his office performed auditing procedures relating to the WTC’s operating expenses. The procedure involved obtaining a schedule of operating expenses from the MPA for the World Trade Center,” selecting a sample for each category of expense, and looking for documentation “to support the samples for the items that were selected in the sample.” 13 Mr. Lambdin’s staff reviewed the expenses to determine if they were bona fide, if they were reasonable, and if the expense related to ownership as opposed to operation of the facility. 14 ⁵⁵³ In 2001, after performing these procedures, the auditors from his office “determined that there were several expenditures not allowable in accordance with the standard lease agreement.” These items included: (1) “$91,051 of capital renovations and administrative overhead expenses,” which are specifically excluded in the lease as operating expenses; (2) “$42,904 for telephone costs that were not attributable to the operation and maintenance of the WTC”; (3) telephone costs of $16,690, which were allocated to WTC operation, but “could not be verified”; and (4) $25,000 “for 21st floor room rental admin assistant expenses,” which “could not be verified.” 15 For fiscal year 2002, Mr. Lambdin’s office again performed audit procedures on the WTC’s operating expenses. It identified two errors in the initial calculations: (1) an error in the security expenses in the amount of $1,838; and (2) “[t]he calculation of liability insurance attributable to the operation of the WTC was overstated by $3,755.” Mr. Lambdin’s office also audited the WTC’s operating expenses for fiscal years 2003 through 2006. For each of these years, Mr. Lambdin sent a letter advising that the Office of Audits had “determined” that the MPA’s operating expenses for those years were “adequately documented” and “allowable” in accordance with the standard lease agreement.

In addition to the audits performed by his office, which he identified as internal government auditors, Mr. Lambdin’s office contracted with a private accounting firm to audit the WTC’s operating expenses. For fiscal years 2001 through 2004, the contract was with Ernst & Young, and for fiscal years 2005 and 2006, the contract was with Abrams, Foster, Nole, & Williams, who subcontracted with SB & Company, LLC to perform this work. The procedures that his staff performed were auditing procedures agreed upon with these two accounting firms. Mr. ⁵⁵⁴ Lambdin sent the accounting firms the reports of the audits his office performed.

Mr. Lambdin testified to his belief that he was not “Lessor’s certified public accountant,” as identified in the Lease. The MPA next presented the testimony of Lawrence Klumpp, a certified public accountant and a former manager in Ernst & Young’s public sector group. Mr. Klumpp testified that he worked on the operating expense schedules for the WTC as part of the MDOT audit for most of fiscal years 2003, 2004 and 2005. Mr. Klumpp testified that independence is a key concept in auditing, and the independence requirement was satisfied when, pursuant to the applicable accounting standards, Ernst & Young had the MDOT Office of Audits perform an internal audit.

The MDOT auditors followed established audit procedures that were for the purpose of documenting the allowable “operating expenses in accordance with the standard lease agreement.” Mr. Klumpp explained the procedures Ernst & Young performed after it received the report of the internal audit: [Ernst & Young] reviewed the schedule of operating expenses prepared by the lessor, the MPA, in accordance with Article Four of the standard lease agreement in order to determine the amount of additional rent that may be due under the term of the lease. [Ernst & Young] reviewed Article Four of the standard lease agreement in order to determine that the charges that were to be included or excluded in the operating expenses. Mr. Klumpp explained that if an expense did not fit with the Lease definition of operating expenses: “We would have brought it to the attention of management. We would have asked for clarification on those expenses and then determine[d] whether or not it met the criteria.” In response to the court’s question regarding what happened when they noticed “this gigantic jump in operating expenses,” Mr. Klumpp testified: We actually performed within our procedures an analytical view to compare some of the costs. And we asked for ⁵⁵⁵ explanations of those.

We actually tested on a sample basis some of those expenditures to make sure they were reasonable as per the lease agreement. As well as that they made—the explanations made sense. So, for instance, if something increased why did it increase and what was the quantifiable and qualifiable reason for that increase so that we really understood it, because a lot of that is our own professional judgment and if we don’t get the answers that make sense we continue to dig to get the correct answers. Mr. Klumpp gave as an example expenses with respect to security.

He testified that an increase in expenses was expected after the events of September 11, 2001. Mr. Klumpp subsequently testified, however, that Ernst & Young did not spend time to determine whether expenses that were incurred in the operation of the WTC were reasonable expenses pursuant to the requirement in the Lease. Mr. Klumpp testified that Ernst & Young did not do a “stand alone audit” of the WTC expenses. Rather, it performed an audit “in relation to” the MDOT financial statements.

Mr. Klumpp explained that the procedures were not different for an “in relation to” audit, but the standards for materiality would be different. Materiality, he explained, is a “calculation that we do in determining whether a number ... is materially incorrect,” which for MDOT “is around $2 million,” but for the WTC would be “about $30,000 to $40,000.” He further testified that, given MDOT’s “very large balance sheet,” materiality would be different in an “in relation to” audit as opposed to a “stand alone” audit. He testified that the schedule of operating expenses for the WTC, as part of MDOT’s total consolidated financial statements, “is actually immaterial.” Monique Booker, a certified public accountant with SB & Company, testified that, in 2005 and 2006, her accounting firm contracted with Abrams, Foster, Nole, & Williams to “perform the procedures” and determine whether the operating expenses that were provided to her firm “were in accordance ⁵⁵⁶ with the lease.” She explained that an audit does not encompass a review of 100 percent of the material provided. Rather, “[y]ou determine the materiality threshold and you perform testing in order to issue an opinion that those statements are not materially misstated, which would not cover 100 percent of any sample, in order to issue that opinion.” The MDOT internal auditors selected a sample of the operating expenses compiled by the MPA, they reviewed the invoices and documentation, and they verified the propriety of the expenses.

They advised SB & Company that they had “determined” that the WTC operating expenses were “adequately documented and allowable in accordance with the standard lease agreement.” Ms. Booker testified that it was her understanding that the MDOT auditors were not engaged to perform a full audit of the operating expenses for the WTC in accordance with generally accepted government auditing standards. After her firm was provided the operating expenses for the WTC, she looked “at the supporting documentation for that expenditure,” to verify that the expenditure related to the description. Her firm then “determined that the expenses that were provided to us were in accordance with the World Trade Center lease.” She testified that they looked to whether the expenses were included as operating expenses pursuant to the lease and they verified that the expenses were supported by proper documentation, but they did not determine whether an invoice was for a reasonable amount. For example, she testified that, with respect to insurance, “[w]e confirmed that it was insurance and that there was proper invoice support that that was the amount of the insurance incurred” by the MPA, but her firm did not determine whether the MPA’s $150,000,000 liability policy on the WTC was a reasonable amount for an office building. 16 ⁵⁵⁷ Brent Solomon, a certified public accountant with the Res-nick Group, a certified public accounting and consulting firm, testified on behalf of MPA as an expert witness in “commercial leases and accounting.” He testified that it is typical in a commercial lease for the tenant to share increases in operating expenses.

Operating expenses “[t]ypically included ... any expense required to run the building,” including utilities, maintenance, security, cleaning, and insurance. Mr. Solomon testified regarding the Lease provision that “operating expenses” “shall be as determined by Lessor’s certified public accountant.” He testified that “if the intent is to require an independent audit,” “it is typical to be more clear to say independent.” He testified that the language in this Lease did not require an audit of the schedule of operating expenses, and the reference to a “certified public accountant” described “a person holding a license.” Mr. Solomon testified that the procedures for review of the operating expenses in this case, with internal accounting, internal auditors, and external auditors, were “extensive.” He explained: [T]here’s no rule in accounting that says that you have to have internal auditors involved or you have to have external auditors involved. In my experience, I see it all across the board. I work with many properties where there are no internal or external audits.

Statements are just provided to tenants. And I’ve worked with clients that have external audits of their statement of operating expenses. So I think the two—the two levels of independent audit, if you will, in my mind are fairly extensive based on my experience. When asked by the court whether the internal audit alone would have been sufficient to satisfy the requirements of the Lease, Mr. Solomon answered in the affirmative, stating that “the [MDOT] internal auditors would qualify as the lessor’s certified public accountant.” On cross-examination, Mr. Solomon characterized Ernst & Young’s report as a “supplemental opinion.” He testified that ⁵⁵⁸ “[n]o completely independent certified public accountant ever issued a stand alone statement [of operating expenses].” He testified, however, that there was no requirement in the Lease for such an audit.

The MPA called several witnesses to testify regarding the reasonableness of the operating expenses charged. Witnesses testified, among other things, regarding the basis for, and the reasonableness of, liability insurance carried by the WTC and the security at the WTC. Gebhardt & Smith called three expert witnesses. Paul White, a consultant on property management, testified as an expert in commercial office building management.

Mr. White testified that the Lease provision for a determination of operating expenses by “Lessor’s certified public accountant” implied that a third party, an independent accountant, would review the operating expenses. He agreed that, if that is the intent, it should say “independent,” but he testified that “this is a lease out of the 70s, and they were ambiguous.” He agreed that an audit by a certified public accountant would satisfy the Lease “[a]s specifically written,” but “it would not be the spirit of the agreement.” He further agreed that “an outside auditor like Ernst [&] Young would satisfy the requirement,” “[i]f they did a complete audit.” Mr. White testified that an audit conducted by the MPA or MDOT would not satisfy the Lease because they are not independent, they are “under the control and guidance of their bosses and their superiors.” He admitted, however, that he is not an accountant, and he did not know whether “generally accepted government accounting standards would consider” an audit by MDOT auditors of the MPA to be independent. Mr. White also testified that certain costs billed to Gebhardt & Smith were included improperly as operating expenses under the lease, including costs related to security, janitorial services, and administration. Mr. White testified that tenants sometimes negotiate a limit, “in terms of dollar amount or percentage increase,” on operating expenses, but no such limit was included in this Lease. ⁵⁵⁹ Paul Amoruso, an insurance consultant, testified as an expert in commercial insurance.

Mr. Amoruso testified that the $150,000,000 liability policy on the WTC was an excessive amount of insurance, which he characterized as “highly unusual.” He also opined that MPA’s method of determining the proper level of insurance on the building, i.e., a method based on revenue projection, bore no “relationship to the exposure produced by this particular building.” With respect to the amount of casualty insurance on the building, he similarly testified that the “amount of the insurance on the building was extremely high.” Andrew Lombardo, a certified public accountant with Sturn, Wagner, Lombardo & Company, LLC, testified as an expert in financial accounting. He testified that the Lease required that “outside accountants determine the expenses of the World Trade Center,” which can be done in one of two ways: “They can do the bookkeeping or they can audit somebody else[’]s bookkeeping, and neither was done.” With respect to the determination of operating expenses, he testified that Mr. Ford, and not a certified public accountant, determined Ge-bhardt & Smith’s operating expenses. Mr. Lombardo testified that, although not unusual for a person such as Mr. Ford to initially compile the data, “for it to be deemed to be determined by a CPA, the CPA would have to audit it themselves.” Mr. Lombardo testified that the MDOT auditors did not consult “outside expertise,” and they “simply accepted the charge from the State and verified that thats [sic] what the State ... allocated to the Port Authority.” Mr. Lombardo distinguished an audit, which he contends was never performed, and the procedures that the private firms performed here: An audit is a comprehensive approach that includes the study, analysis of internal control. It includes a study and consideration of fraud being a possible audit risk.

It includes outside confirmation of certain items that would verify the expenses that, the items that they found within the books of the World Trade Center. It includes consultation with experts in areas that the auditors are not expert to ⁵⁶⁰ determine the reasonableness and bona fide-ness of certain expenses. It includes confirmation with the entities!’] attorney to determine that there are no other expenses or contingencies that must be considered and included and accrued into that or should the attorney advise them of such matters. And I could go on.

It[’]s a very comprehensive approach to that body of procedures that must be done in order for us to render an audit opinion ... it[’]s the highest level of assurance that we as professionals can give the users of that report or any set of financial statements. What they did was selected procedures that were determined by the Maryland Department of Transportation, not by Ernst & Young or SB & Company or anyone else. Mr. Lombardo further explained how, in his opinion, the work of the two accounting firms was deficient: They should have, on their own, planned the work. They should have, on their own, independent from the employees of the entity to which the procedures were performed, they should have determined what should have been, the scope of the work that had to be done to sign their name to that report.

They should have [] had their own employees supervise and test and re-perform the work done by the internal auditors to make sure that what they said they did on their work papers they actually did. And the way you do that is the report signing auditor, when they take responsibility for somebody else[’]s work, ask to retest their work to make sure that they say this invoice agreed to this record in the books. They have to put their own eyes on that and make sure that that[’]s, what they said they did, they did. And I do not see them having done any of that in the work given to me with regard to this case.

Moreover, he testified that based on the size of the World Trade Center in relation to the size of the Maryland Port Administration, and more importantly the size of the Department of Transportation, that the World Trade Center ⁵⁶¹ expenses are so insignificant to the overall expenses and accounts of those entities that, in my opinion, most probably [ ] never fell under ... scrutiny of an auditor because of its relative insignificance to the overall entity that was, in fact, audited. Mr. Lombardo further testified that several expenses were charged improperly to Gebhardt & Smith. He specified certain invoices, some administrative costs, and charges for operating expenses while the WTC was closed following Hurricane Isabel. The parties also submitted depositions of three certified public accountants employed by Ernst & Young.

Mr. Stephen Baloga stated in his deposition that Ernst & Young was the auditor for MDOT for fiscal years 2001 through 2004. He explained the in-relation-to reports that they prepared regarding the operating expenses of the WTC. Mr. Baloga stated that, under government auditing standards, the MDOT auditors could qualify as independent auditors. He stated that Ernst & Young did not do an audit of the operating expenses.

They did an audit of MDOT and then “issued an in-relation-to report relative to the schedule of operating expenses.” On July 15, 2008, the court issued an order entering judgment in favor of the MPA for $328,186.88, plus interest. In its written opinion, the court rejected Gebhardt & Smith’s argument that the Lease imposed a requirement on MPA to have its operating expenses audited by an independent certified public accountant: G & S maintains that as a condition precedent, MPA was required to have an independent certified public accountant determine the actual operating expenses at year’s end. The lease does not refer to an independent certified public accountant. It required Lessor’s certified public accountant to determine the operating expenses.

The confusion may have been caused by MPA’s annual form letter which stated that the expenses were “audited and certified by an independent public accountant.” ⁵⁶² The lease is unambiguous and the plain meaning of written words in an unambiguous lease govern the rights and obligations of the parties, not the subjective intention of one of the parties. The lease is read to have the meaning that a reasonable person in the position of the parties would understand it to have. Walton v. Mariner Health of Md. Inc.[,] 391 Md. 643, 660 , 894 A.2d 584, 594 (2006). While Joe Ford, assistant controller [sic] for MPA, is not a certified public accountant, Joseph Lambdin, the head of the MDOT audit team, is a certified public accountant.

Certified public accountants are held to professional ethical and work standards by the very nature of their training and certification. This Court found Mr. Lambdin’s testimony credible. He explained that the audits performed by his office were consistent with government auditing standards and performed by certified public accountants. According to the testimony, the MDOT Office of Audits obtained a schedule of operating expenses from the MPA, selected a statistically valid random sample of entries, and verified that those entries were allowable in accordance with the lease agreement.

The MDOT