Lawsuit erupts over lease-option purchase price

Lipton-U. City LLC leased a large self-service storagebuilding from Shurgard Storage Centers Inc. A provision in the lease gaveLipton an option to acquire the property.

However, the lease-option did not specify the optionpurchase price. Lipton thought the option price was based on the unannualizednet operating income. But Shurgard thought the option purchase price was basedon annualized net operating income, thus resulting in a much higher optionprice.

Purchase Bob Bruss reports online.

Because the landlord and tenant disagreed on the method ofsetting the option purchase price, Lipton sought to enforce the arbitrationclause in the lease to set the price. But Shurgard argued the arbitrationclause in the lease was only to resolve lease disputes other than setting theoption purchase price.

Lipton offered $185,805 to purchase the property. Shurgardargued the property is worth at least $2.9 million, according to its formula.

The tenant sued the landlord to enforce the arbitrationclause in the lease to determine the option purchase price. But landlordShurgard refused to arbitrate, arguing the arbitration clause in the lease didnot include arbitration of the option purchase price.

If you were the judge would you rule the lease arbitrationclause includes power to arbitrate the option purchase price?

The judge said no!

Under the lease-option contract, the judge began, neitherlandlord nor tenant contemplated arbitrating a term as crucial as the optionpurchase price. Under a valid lease-option contract, he continued, thatagreement should have set forth the option price or a method of determining it.

Lipton concedes there is no stipulation in the lease-optionfor the option price, the judge explained. Nor does the contract provide forarbitration of the option price, he noted.

Because the lease-option contract was indefinite as to howthe option purchase price is to be determined, the arbitration clause is notavailable to decide such an important term, the judge ruled. Therefore,arbitration cannot be used to set the tenant’s option purchase price, the judgeconcluded.

Based on the 2006 U.S. Court of Appeals decision in Lipton-U.City LLC v. Shurgard Storage Centers Inc., 454 Fed.3d 934.

(For more information on Bob Bruss publications, visit his
Real Estate Center
).

Copyright 2006 Inman News

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