Daily Development for
Wednesday, June 19, 1996

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

LANDLORD/TENANT; RENT: Provision in long term ground lease providing that rent is to be fixed pursuant to an appraisal at a percentage of the "then value" of the land, where a party desiring the appraisal is to give notice no earlier than "twelve months prior to the "expiration of any such . . . term," requires the determination of the rent for the term to take place a year before the expiration of such term, even if this defers determination of the rental amount until 32 years after lease term commences. Wallace v. 600 Partners Co., 634 N.Y.S.2d 669 (Ct. App. 1995).

The lease provided for an initial term of 33 years with two options to renew. When the parties could not agree on the rent for the renewal term, the tenant sought to invoke the appraisal process contained in the lease so that the rent could be fixed. If the parties could not agree on the rent, then the either party could give notice to invoke an appraisal clause. Under the clause, the rent was to be set as 6% of the "then value of the land." But the appropriate provision of the lease said that with respect to renewal terms, "neither party shall give such written notice to the other party earlier than 12 months prior to the expiration of any such renewal term."

The court determined that this provision should be read literally, and required that the determination of the rent amount for the first renewal term take place 32 years after such term began. The effect was to freeze the rent for the first renewal term at the then current amount, requiring the tenant to make a lump sum payment at the end of the renewal term representing the difference between the amount arrived at pursuant to the retrospective appraisal and the rent actually paid during the renewal term.

The court decided that the contract was negotiated by sophisticated business parties and that the language was unequivocal.

It ruled that the statute of limitations on an action for reformation of the lease had run.

Note 1: The court did not indicate the correct referrent of the "then" value. Does this mean the value at the time of appraisal, or the value at the commencement of the term, or the value for each year of the term? Perhaps other parts of the lease made this more clear.

Note 2: Interestingly, it is the tenant who is asking for an earlier determination of the rent, arguing that the uncertainty of the whole process will make it impossible to borrow against the building or to fix sublet rates. The property is on Madison Avenue between 57th and 58th Streets. The tenant has a 26 story office tower on it. One would think that the current rent, now frozen for 32 years, would be lower than the rent established by the appraisal, and that the tenant would get a good deal, but this conclusion depends in part upon the meaning of the term "then."

Comment: Believe it or not, the editor agrees with the basic conclusion that when sophisticated parties "short sheet" their own bed, they nevertheless must lie in it. A dissenter at the intermediate court argued that the literal reading of the lease was so far at odds from ordinary business practices that the lease ought to be viewed as inherently ambiguous. But what then? It is clear that the parties probably didn't intend the result established by the literal language of the lease. But it is 33 years since they entered into this agreement. How can we know what they really did intend? It would seem inappropriate to rescind the whole deal at this point, and any result reached by a court necessarily could be as far afield from the result anticipated by one or more of the parties as the result that the parties will reach by negotiation when the court battles are over.

In fact, didn't the parties spend so much time in court because one of them, at least, couldn't believe that a modern court would refuse to rescure sophisticated commercial parties from consequences of their own carelessness? If that party had saved the attornies' fees, there would have been that much more available to apply to a settlement.

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