Appraisers – Renewal, Lease, Date for Valuation of Rent; Property Managers – Doing Business in Washington State #146
CATEGORY: Legally Speaking
TAGS: Appraisal Arbitration Commercial Property Court of Appeal Property Manager Real Estate Act
By Gerry Neely
Any well drawn commercial lease containing an option to renew at a rent to be agreed upon during the renewal term either provides a formula by which the rent can be calculated, or provides that the rent will be fixed by an arbitration done pursuant to the provisions of the Commercial Arbitration Act. If the lease does not provide a mechanism for calculating the rent in the renewal period, then the renewal will be void for uncertainty.
Many renewal clauses require the tenant to exercise its option to renew no less than six months before the term ends, and if the parties cannot agree upon the rent to be paid within the three months following this exercise, then the arbitration process starts.
This happened in a case where notice was given prior to July 1, 1988 to renew a lease for a five year term beginning January 1, 1989. The parties failed to agree upon the rental by October 1, 1988 and an arbitrator was appointed in February, 1989. The arbitrator chose October 1, 1988 as the proper date to value the property in order to calculate the rent to be paid during the renewal. His reasoning was that this was the date when the parties became entitled to submit the rental dispute to arbitration. The problem with the selection of the October 1st date is that rents generally increased by ten percent between October 1 and January 1, 1989. That meant a difference in the tenant's favour of $54,000 over the renewal term. The arbitrator referred in his decision to the general increase but elected to ignore it since it took place after October 1st.
Under the Commercial Arbitration Act, the landlord had to obtain leave from a judge to appeal the arbitrator's decision. It had to satisfy the judge that the results of the arbitration justified intervention upon a point of law which, if not heard, might have resulted in a miscarriage of justice, and that the point of law was important to the class or body of persons of which the landlord is a member, or of general or public importance.
Because arbitration procedures to determine rentals upon renewal of leases are widespread, the judge concluded that the appeal should be heard, because persons engaged in commercial real estate would be affected by the point of law in question. He decided that the arbitrator had made an error of law in choosing a date which preceded the renewal period as a date for valuing the property. The beginning of the renewal period was the date when the property should have been valued to fix the rent for the next five years.1
* * *
A Vancouver property manager signed an agreement in British Columbia to manage an apartment building in the State of Washington. The building was owned by a Washington limited partnership whose general partner was a British Columbia resident. Work under the contract was done in both jurisdictions, although mainly in British Columbia.
The property manager was licensed in British Columbia under the Real Estate Act, but not in the State of Washington under comparable legislation. In that state, anyone who negotiated directly or indirectly for the lease or rental of real estate was compelled to first obtain a licence. The contract could be terminated on three month's notice but was terminated by the owner without notice.
The property manager sued successfully for damages for failure to give notice. The trial judge decided that it was not necessary for the property manager to be licensed as a real estate broker in the State of Washington. This decision was appealed. The Court of Appeal had to decide whether the property manager could enforce a contract valid in British Columbia for the payment of its fees if the performance of that contract in the State of Washington was illegal there. The Court analyzed the property manager's position as follows:
The work done in the State of Washington was essential to the performance of the contract, not incidental to it. It would have been unlawful for the property manager to have done this work in British Columbia without a licence and recover its fees. The State of Washington made it unlawful for a property manager to collect a fee unless licenced. The property manager could not legally do in Washington what it agreed to do under the terms of the contract.
As a matter of policy, the Court of Appeal decided that it would not enforce in British Columbia a contract illegal in the State of Washington, with the result that the property manager lost its claim for damages.2
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