Fabricare Article December, 2007

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 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 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 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!

[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

	Myles M. Mattenson ATTORNEY AT LAW 5550 Topanga Canyon Blvd. Suite 200 Woodland Hills, California 91367 Telephone (818) 313-9060 Facsimile (818) 313-9260 *Email:* MMM@MattensonLaw.com *Web:* http://www.MattensonLaw.com	So You Exercised A Lease Option! How Much Is Your Rent?
Myles M. Mattenson engages in a general civil and trial practice including litigation and transactional services relating to the coin laundry and dry cleaning industries, franchising, business, purchase and sale of real estate, easements, landlord-tenant, partnership, corporate, insurance bad faith, personal injury, and probate legal matters. In providing services to the coin laundry and dry cleaning industries, Mr. Mattenson has represented equipment distributors, coin laundry and dry cleaning business owners confronted with landlord-tenant issues, lease negotiations, sale documentation including agreements, escrow instructions, and security instruments, as well as fraud or misrepresentation controversies between buyers and sellers of such businesses. Mr. Mattenson serves as an Arbitrator for the Los Angeles County Superior Court. He is also past chair of the Law Office Management Section of the Los Angeles County Bar Association. Mr. Mattenson received his Bachelor of Science degree (Accounting) in 1964 and his Juris Doctorate degree from Loyola University School of Law in 1967. Bi-monthly articles by Mr. Mattenson on legal matters of interest to the business community appear in alternate months in The Journal, a leading coin laundry industry publication of the Coin Laundry Association, and Fabricare, a leading dry cleaning industry publication of the International Fabricare Institute. During the period of May 1995 through September 2002, Mr. Mattenson contributed similar articles to New Era Magazine, a coin laundry and dry cleaning industry publication which ceased publication with the September 2002 issue. This website contains copies of Mr. Mattenson's New Era Magazine articles which can be retrieved through a subject or chronological index. The website also contains copies of Mr. Mattenson's Journal and Fabricare articles, which can be retrieved through a chronological index. In addition to Mr. Mattenson's trial practice, he has successfully prosecuted and defended appeals on behalf of his clients in various areas of the law. Some of these appellate decisions are contained within his website.