SO YOU EXERCISED A LEASE OPTION! HOW MUCH IS YOUR RENT?
Dry cleaning 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 landlord’s 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 inappropriately state that the rent required to be paid during the
option period shall be the then “fair market rental value” without further
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.
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
Although the property was used as a movie theater, the landlord’s
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 tenant’s appraiser fixed the fair market
rental value at $3,000 per month. In
accordance with the lease requirements, the tenant’s appraiser and the
landlord’s 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
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
The moral of the story? Sometimes the deferral of a problem only
creates a PROBLEM!
[This column is intended to provide general information only and
is not intended to provide specific legal advice; if you have a
specific question regarding the law, you should contact an
attorney of your choice. Suggestions for topics to be discussed
in this column are welcome.]
Reprinted from Fabricare
Myles M. Mattenson © 2007