Coin laundry operators frequently secure renewal options during lease negotiations in order to avoid the problem of building up a business for the sole purpose of being required to move at the end of the lease term so that the landlordís son-in-law can take over the business!
Some option provisions set forth the precise amount of rent to be charged during the option period. Other clauses set forth formulas for calculating rent, to include, at the very least, a consumer price index adjustment. Some leases merely state that the rent required to be paid during the option period shall be the then "fair market rental value" without further definition.
The greater the ambiguity in defining the rental charge for an option period, the greater the likelihood that grief and anguish will result when it comes time to determine the rental charge.
Does "fair market rental value" mean a rent based upon the potential highest and best use of the property, or upon the purpose for which it has been rented?
In a case originating in Los Angeles County, the lease provided that if the parties were unable to agree on the rent due during option periods, three appraisers would independently appraise the property and determine the fair market rental value. The closest appraisals would be averaged and the resulting figure would serve as the rent for the option.
Prior to winding up in court, the tenant exercised the first of his options and provided his initial rent check during the option period in the amount of $2,985.55. The landlord promptly returned the check and advised the tenant that the monthly rent would be $8,475! The parties thereupon embarked upon the bumpy road of the appraisal process to determine the new rental amount.
Although the property was used as a movie theater, the landlordís appraiser felt that if the property was used at its highest and best use, retail specialty shops, rent would properly be $9,887 per month. The tenantís appraiser fixed the fair market rental value at $3,000 per month. In accordance with the lease requirements, the tenantís appraiser and the landlordís appraiser selected a third appraiser who fixed the fair market rental value at $3,166.67 per month.
Unable to reach agreement, litigation erupted under which the court concluded that the determination of fair market rental value for the option period required the parties to consider "the particular purpose for which [the property] was leased."
The court concluded that since the lease required the tenant to only use the premises as a theater, unless the landlord consented to another use,
"An interpretation that the rent during the option terms is to be based upon the highest and best use of the property despite the purposes for which lessor and lessee agreed it could be used, would be economically and commercially unreasonable and violate the intent of the parties."
The moral of the story? Sometimes the deferral of a problem only creates a PROBLEM!