In 936 Second Ave. L.P. v. Second Corporate Dev. Co., Inc. , Second Corporate Development Co. (Second) leased three adjoining buildings -- with 22 rent-regulated apartments and four retail stores -- to 936 Second Avenue by way of a 20-year net lease. The parties' agreement provided that if 936 exercised a renewal option, "the annual rent would be seven percent of the value of the [leased] premises as of the date of commencement of each successive 10-year period."
The document provided that if the parties couldn't agree on the property's value, they could each seek their own appraisal.
When a dispute arose, Second's appraiser valued the property at $7.1 million, 936's appraiser came back with $3.43 million -- with the latter expert having "considered the effect of the net lease on the value of the premises."
936 later filed suit asking a court to declare that the net lease and all its terms had to be considered when calculating the property's value. When the New York County Supreme Court disagreed with 936's position, the company appealed to the Appellate Division, First Department, which affirmed.
On appeal to our state's highest court, the New York State Court of Appeals determined "valuations of land must take into consideration all encumbrances, including restrictions as to its use, unless there is a clear provision to the contrary." Since it impeded the property's "highest and best use," the net lease couldn't be disregarded. ["If the parties to a lease desire to exclude that encumbrance in valuing the property, they need only include language to that effect in their agreement. Indeed, courts have routinely enforced such provisions."]
We'll second that!
To download a copy of the Court of Appeals' decision, please use this link: 936 Second Ave. L.P. v. Second Corporate Dev. Co., Inc.