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Sills Cummis & Gross, P.C. v. Matrix One Riverfront Plaza, L.L.C.

A-3630-08T3 (N.J. Super. App. Div. 2009) (Unpublished)

LEASES; INTERPRETATION — Parties to a lease are free to set their own definition for what would otherwise be commonly understood terms and if they define “fair market rental” to mean the value of the property as if it were vacant and unencumbered by their lease, this means that the parties have agreed to turn back the hands of time and treat the new or extended lease as if the past had not existed.

A law firm had a twenty-five year lease for office space in a high rise building. During the first twenty years, the lease was formally amended a number of times resulting in an original lease, “at least eight lease supplements, plus two letter agreements that adjusted [the parties’] respective rights, duties, and obligations under the lease.” The original lease provided 150 parking spaces at no additional cost to the tenant. The parking area, however, was not controlled by the landlord. Therefore, the landlord entered into an agreement with the garage owner for those parking spaces. Under the agreement with the parking garage operator, the spaces were personal to the tenant. This meant that if a different tenant took over the same premises, the landlord could not give that tenant these parking spaces.

One of the supplemental agreements shortened the initial twenty-five lease to nineteen years and granted two three-year renewal options to the tenant. The rent under each such extension, if exercised, was to “be equal to ninety percent (90%) of the fair market rental value of the premises, as determined by the [landlord].” If the tenant disagreed with the renewal rent proposed by the landlord, then the tenant would submit the following question to arbitration: “What is the fair market rental value for the premises for the three (3)- year extension period?” The term “fair market rental” had a very specific definition, reading as follows: “In determining fair market rental value, the arbitrator shall consider the premises in its ‘as is’ condition, as if the premises were vacant and unencumbered by the Lease, as herein amended, and shall take into account all appropriate factors including, without limitation, that (1) the [landlord] will not pay a brokerage commission in connection with such extension; (2) the [tenant] will not receive a finishing allowance or free rent period or other concessions then being offered to tenants entering into new leases for space of comparable size to the premises at the [building] or in comparable office buildings located in the [defined] submarket; (3) no consideration is to be given to the fact that the building in which the premises is situated is owned by a subsidiary corporation of a public authority; and (4) the relevant market for determining fair market rental value of the premises for the extension period consists of comparable space in comparable office buildings located in [the particular city].”

Although triggering the arbitration provision, the tenant also filed a complaint in the Chancery Division seeking a judgment from the court: “[d]irecting and instructing the arbitrators that ‘the premises’ for which they are to determine fair market rental value does not include any consideration of the value, if any, of the parking spaces currently provided to [the tenant] through the [agreement between the landlord and the parking operator].” The landlord responded with a request that the court issue a judgment that the arbitrators had to consider the value of the parking spaces. The lower court judge agreed with the landlord’s position and ordered that “fair market rental value” include the value of the 150 parking spaces included within the lease. It “reasoned that it would be an unduly strained interpretation of the lease supplement to value the premises without the parking spaces, as [this particular tenant,] not another tenant, would be occupying [the] premises during the three year extension, and would therefore be entitled to the very same parking spaces.” The lower court also ordered that the phrase “unencumbered by the Lease,” as included in the “rules” for determining fair market rental value, be interpreted as meaning that the arbitrators “were not to fix the value by reference to the prior rental rates set forth in the earlier lease.”

The parties continued to argue about various interpretations such as the meaning of the term “premises” and the phrase “vacant and unencumbered.” The arbitrators made alternative determinations, “one presumably includ[ing] the value of the 150 parking spaces,” and the other – not.

Before the lower court, the tenant “argued that while the arbitrators were permitted to consider ‘all appropriate factors’ to render a calculation of fair market rental, they can only do so after considering the premises vacant and unencumbered by the lease.” According to the tenant, the phrase, “vacant and unencumbered” meant that “there is no current tenant; if [it] the tenant does not occupy the premises, then there is no parking agreement, as it is personal to [this tenant] only, and therefore the complement of 150 parking spaces does not exist.” Further, the tenant argued that the “precise definition of premises in the lease never included a parking amenity” and the definition was never changed by any subsequent lease amendments. In contrast, the landlord “argued that parking is an appropriate factor for the arbitrators to consider when calculating fair market value, especially because it was not specifically excluded from the factors to be considered.” In further support of its argument, the landlord contended that the “‘unencumbered by the lease’ language [did] not mean that [the tenant] and the 150 parking spaces [did] not exist, but only that the current actual rental should not be used as a basis for determining fair market rental value.”

On appeal, the Appellate Division was piqued that the parties were using “the machinery of the judiciary to resolve a commercial dispute that was initially entrusted to the sound determination of specialized arbitrators.” Nonetheless, it considered that the parties, as sophisticated business people, were entitled to agree that they could waive their right to arbitration in part, and demand arbitration in part. That left the Court with the need to determine if the definition of fair market value was ambiguous.

Based upon the record, the Court concluded that the lease’s terms were not ambiguous and therefore, in the mind of the Appellate Division, because the lease was “clear and unambiguous” there was “no room for interpretation or construction” and the Court was required to enforce the lease as written. Specifically, it found that “the parties agreed that the fair market rental value of the premises would be calculated in a precise and narrow fashion.” In the Court’s mind, this was not “unusual.” Specifically, it believed that “[f]air market rental value is not necessarily a self-defined term.” In particular, the landlord and tenant “subtracted [an] ingredient from the fair market rental value of the premises. They agreed to treat ‘the premises in its “as is” condition, as if the premises were vacant and unencumbered by the Lease as herein amended.’” To the Court, this meant that “the parties agreed to turn back the hands of time and treat the extended term of the lease as if the past had not existed.” It characterized this “artificial construction” as something that might “not reflect the real world,” but, according to the Court, there is nothing to prevent the parties from agreeing to this delusion.” What convinced the Court was that the landlord (actually, its predecessor in interest) bargained away the right to deliver the same 150 parking spaces to a new tenant of the same premises. This meant that a new tenant would get the same lease, for the three year extension period, but without the parking spaces. Consequently, it reversed the lower court’s decision that the value of the parking spaces was to be considered as part of the fair market rental value and directed that the arbitrators’ determination of fair market rental value not include the value of those parking spaces.

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