Fixing Rent Under a Lease Option

March 2014Articles In the Zone

A recent case, Cablevision of Oakland, LLC v. CK Bergen Holdings, LLC, Superior Court (Appellate Division) (2014 WL 923226), shows that an arbitration provision in a lease to establish rent for an option term, can be enforced, notwithstanding obstacles imposed by one of the parties.

CK Bergen Holdings, LLC, as landlord, and Cablevision of Oakland, LLC, as tenant, were parties into a lease that provided for rent during an extension term to be based on the then fair market value of the premises. The lease provided that each of the landlord and tenant would appoint an appraiser who, if they could not agree as to fair market rent, would appoint a third appraiser to determine fair market rent.

The tenant’s appraiser opined that the fair market rent was $12.00 per square foot, while the landlord’s appraiser opined that the fair market rent was $25.00 per square foot. Not only could the two appraisers not agree on the rent, but they also could not agree on the appointment of a third appraiser. Since the lease also provided that if the two appraisers could not agree on a third appraiser, a court could appoint the third appraiser, which is what happened.

In due course, the third appraiser opined that the fair market rent was $11.00 per square foot. Since the lease provided that the third appraiser’s decision would be final, that would have seemed to end the matter. However, the landlord, obviously frustrated by not getting a rent anywhere close to what it had demanded, filed an appeal, challenging the validity of the third appraiser’s determination of fair market rent.

The landlord’s arguments on appeal, attacking the methodology of the third appraiser, were less than persuasive.

The lease provided that the area to be used by the appraisers for establishing their comparables, was to be within a 20 mile radius of the premises, and then listed nine towns within that radius, that could be included for purposes of the appraisals. The landlord argued that the reference to the nine towns meant that there needed to be in the third appraisal a comparable from each of the nine towns. However, since the landlord’s appraiser’s report included only two of the nine towns, this argument bore little weight. Additionally, the reference in the lease provided that the comparables were to be within an area “including but not limited to” the nine towns. The Court was not persuaded that this reference would require a comparable from each of the nine towns. Although the Court termed this argument by the landlord as “creative,” the Court was not persuaded.

The second argument that the landlord used was that the third appraiser should have taken into account the brokerage costs that would be incurred by the landlord in computing fair market rent. However, since the landlord’s appraiser, in its appraisal, stated that no brokerage commissions were payable, the Court held that the third appraiser was entitled to rely on this, especially since the landlord’s counsel did not provide any information relating to any brokerage commission to the third appraiser.

The Court stated that a review of a business valuation appraiser is afforded the same finality as an arbitrator’s decision. Thus, it is reviewed only for fraud, corruption, or similar wrongdoing. Since the lease provided that the third appraiser’s decision would be final, there was no grounds to overturn that decision.

So, finally, the tenant prevailed despite the landlord’s efforts to establish a higher rental. This case confirms that appraisal provisions in leases remain enforceable, although they may not protect a party from the cost and time of litigation to enforce them.

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