Fair Market Value of Leased Bare Land #216

By Gerry Neely
B.A., LL.B.

It's remarkable how often those who draft contracts, including leases and contracts of purchase, and those parties who sign them, find that a term of the contract that seemed perfectly clear to everyone is ambiguous and requires the aid of the court to decide what it means.

An example of this is found in a commercial lease of bare land for a term of 50 years that restricts the use of the land for hotel and related hospitality businesses. The base rent is to be renegotiated periodically to arrive at a rent equal to 10% of the fair market value of the land as bare land.

The obvious meaning is to value the property as if it did not have a building or other improvements constructed upon it. It meant this and more to the tenant who argued that the restricted hotel use is to be considered in determining the fair market value of the land.

There must have been a higher and better use for the land because the landlord presented an argument for a third meaning, namely that the evaluation should be made as if there was no lease and no restricted use affecting the land. The Chambers judge agreed with the tenant, but a majority of the Court of Appeal disagreed, accepting the landlord's position that fair market value could only be obtained if the lease and restricted use were ignored.

The dissenting judge said that the restriction prevented the tenant from utilizing the highest and best use of the land. Therefore the landlord should not be entitled to a fair market value based upon that highest and best use, when it was the landlord who was responsible for the term in the lease which restricted the use for hotel purposes.

While a ground lease is a rarity, the significance of this case for a licensee preparing a commercial offer to lease bare land, is to obtain instructions from the licensee's principal, (landlord or tenant) as to whether a restrictive use is to be a factorin determining fair market value.¹

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A clause in leases dealing with an assignment often allows the landlord to cancel the lease if substantial control of a corporate tenant changes without the consent of the landlord. Rarely does the clause distinguish between a transfer of shares to outsiders and a rearrangement of shares among existing shareholders of the company. That is understandable because a factor in the landlord's decision to grant the lease, may have been the landlord's confidence in the shareholders who had control of the company when the lease was negotiated.

However a judge has decided that this type of clause does not apply to a change of control resulting from transfers among existing shareholders. The result of this decision is that the more or less typical clause that is used will have to be changed to make it clear that the landlord's consent is required where there is a change in the effective control of the corporate tenant from the persons holding a majority of the shares at the date of the lease.²

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A commercial lease required the tenant to give 180 days written notice by registered mail, postage prepaid, of the tenant's wish to renew the lease. On the 180th day the tenant faxed the notice to a receiver of the landlord, who received the notice during business hours. The renewal rent, which was fixed by the terms of the lease, was $110,000 per annum less than market rent.

The landlord refused to renew the lease, arguing that the notice was invalid. in the judge's mind, the only issue was whether actual notice had been given within the 180 day period. He held that since the renewal clause did not prohibit other methods of service, the faxed notice was valid.³

	1.	No. 100 Sail View Ventures Ltd. vs. Janwest Equities Ltd., BCSC, Vancouver Registry CA 106336.
	2.	Delilah's Restaurants Ltd. vs. 8-788 Holdings Ltd., SCBC, C926186 Vancouver March 26, 1993.
	3.	Canada Safeway vs. A. Schiel Const., 34RPR 322.

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