$850,000 Arbitration Award for Business Fraud

When MCI Telecommunications Co. Suspected it was paying too much to lease a building in So. Natomas, in 1995 it hired a lease-auditing company. And sure enough, the auditor discovered a major goof in the amount of space MCI was actually leasing.  Because of the miscalculation, the company would be overcharged by $1.1 million over the life of the lease.  Now, an $850,000 judgment has been awarded by an arbitration in the case – but not to MCI.

The judgment goes against MCI and to the auditor, who said the telecommunications giant refused to pay him after he discovered the error. In an odd twist of fate, there was no judgment against the landlord that originally made the mistake – a partnership headed by TV and banking magnate Jon Kelly, and some of the principals of KCS Development Co. Real estate brokers say the case is a wake-up call to landlords and tenants alike to be more careful with large leasing deals. “The real estate community will think twice about the way it does leases after this,” said Jeffrey Ochrach, attorney for CRI Advisors Inc., the lease auditor.

Sacramento-based CRI Advisors was hired in 1995 to check the amount of space MCI was leasing at 2495 Natomas Park Drive.  In 1990, MCI signed a 10-year lease for 85,919 square feet in the first class-A office space built in South Natomas. In 1993, MCI added another chunk of space, putting the total lease at 95,305 square feet.  MCI would pay about $21 million over the 10 years, Ochrach said. The lease was in one of two mirror-glass, six-story office buildings put up near Interstate 5 and the garden Highway in 1989 by Kelly and some of his partners from KCS Development.   Five years later, MCI retained CRI Advisors, a three-person company that specializes in precisely measuring the amount of space leased in buildings. Owner Paul Ponzelli said his agreement with MCI was that his firm would  be paid 50 percent of any overcharge it discovered in the lease.   CRI Advisors found that MCI was paying for 5,000 square feet that it wasn’t using.  Ponzelli figured that would result in a $1.1 million overcharge to MCI over the term of the lease.  But to his surprise, MI refused to pay his half of the savings. He took the issue to the American Arbitration Association, a group of retired judges and lawyers who rule on cases the litigants don’t want to take to court.

During hearings in June, MCI claimed it had a prior agreement with the landlord that the extra space would be included in the lease.  MCI and the landlord also claimed it had been measured to their mutual satisfaction.   But the arbitrators found that MCI was being charged for space it wasn’t using, that Ponzelli had discovered the error and that CRI should be paid.  The panel awarded CRI a total of about $850,000.  “I’d say the lease-auditor business is going to pick up,” said John Frisch, a prominent office leasing agent and manager of Cornish & Carey Commercial/ Oncor International. “Anytime anything this high profile happens, your going to have more tenants engaging these people.” All parties to a deal are going to have to be more alert in issues like square footage, he said. “It means everybody in the deal is going to have to do a better job.” Dennis Shorrock, manager of the local Colliers International office, said the CRI/MCI case “will alert people to be more careful in signing leases without having their own representatives measure the space to make sure the landlord’s measurement is accurate.” Space measurement is a difficult science.  “A lot of people aren’t really knowledgeable about it and a lot of people don’t really understand it,” Frisch said.  “I’d say a whole lot of buildings don’t conform to the standards.”