Friday, December 19, 2008

Church Loses Land Lease Lawsuit in California

Court of Appeal, Fourth District, Division 3, California.
2151 MICHELSON, L.P., Plaintiff and Respondent,
No. G039654.
(Super.Ct.No. 04CC05362).
Dec. 11, 2008

2151 Michelson Avenue in Irvine, California (the Property). The 55 year ground lease governing the parties' relationship provides lessee with the right to construct and operate an office building at the previously unimproved Property for the term of the lease, whereupon the rights to use and possession of the Property (including all improvements made by the lessee) revert to lessor. In exchange, the lessee pays $88,165 in annual rent for the first 25 years of the lease (until June 1, 2002), plus a minimum annual rent of $88,165 for the remainder of the lease term. The rent is subject to upward adjustment in the 25th and 40th years of the lease, but such adjustment must be calculated under the hypothetical assumption that the lessee's improvements do not exist; in other words, the adjusted rent is what lessor could obtain (in 2002 and 2017) on the “open market” for a 55 year ground lease at the Property without any of the improvements actually constructed.

Michelson filed a declaratory relief action, claiming no upward adjustment in rent was justified as of June 1, 2002. CPB requested the court to find annual rent for 2002 to 2017 in the amount of $513,000. The court found in favor of Michelson after weighing the percipient and expert testimony introduced by the parties. The court found the lease did not call for the straightforward application of the sales comparison approach advanced by CPB (appraising the value of the land by using contemporary sales of comparable properties, then multiplying the appraised land value by a market rate of return for commercial leases to obtain the adjusted rent number). Instead, the court credited evidence submitted by Michelson's experts tending to establish the Orange County commercial real estate market in 2002 would not support a ground lease transaction as contemplated by the lease-thus, the Property could not get a higher rent on the “open market” with the same terms of the lease at issue. Because we agree with the court's interpretation of the lease, and because there is substantial evidence supporting the court's application of the rent adjustment provision to the facts in this case, we affirm.

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