Appraisers Have Final Say on Lease Extension Rent

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A panel of the Massachusetts Appeals Court recently grappled with the reviewability of rent-setting calculations performed by professional appraisers pursuant to a commercial lease, and determined that even mistaken appraisers will have the last word so long as they apply any criteria or formula set forth in the lease, and do not exceed the authority the parties have granted them.

In the case styled State Room, Inc. v. MA-60 State Associates, L.L.C., 84 Mass. App. Ct. 244 (2013), the tenant (and plaintiff) had exercised an extension right for premises located in a downtown Boston high-rise office building. The lease provided that if the tenant objected to the landlord’s proposal for fair market rent for the ten-year extension period, the parties would each appoint a qualified independent appraiser. The appraisers engaged respectively by each party would then appoint a third appraiser. Each appraiser was to make an independent determination of rental value. The three values were to be averaged, and the figure farthest from the average value was to be discarded. The two remaining figures were to then be averaged to produce the final rental rate.

In State Room, the tenant initially paid the rent set through this appraisal process without complaint, but thereafter brought suit alleging that the appraisers had made errors in their calculations. Specifically, the tenant, which was using the premises as an event venue, objected to the appraisers’ use of first class, ground level restaurants as comparables. Secondly, the tenant alleged that the appraisers did not take into account all square footage actually rented under two leases executed at different times.

The Court determined that the appraisers’ review was within the authority granted them by the lease, which included a list of factors that was explicitly made non-exhaustive. (The lease stated the appraisers were required to consider certain factors, “but [would] not be limited to such factors.”) See State Room, 84 Mass. App. Ct. at 251-52. Accordingly, the Appeals Court upheld the Superior Court’s dismissal of the tenant’s case. See id. at 252.

Although an answer to the question of whether the appraisers were actually mistaken was not necessary to the outcome, the Court indicated that the lease language authorized the use of ground level restaurants as comparables. Any error as to the square footage was, however, unreviewable as “[a]n error within the appraisers’ authorized responsibility.” Id. at 251. The Court explained that if the enabling language in a contract requiring engagement of expert appraisers includes criteria or a formula for valuation, Massachusetts courts will review whether the appraiser “operated within the boundaries of those standards.” Id. at 250. “Appraisal work and results occurring within those limits, or intra vires, even if allegedly mistaken, remain immune from review. Work and results passing beyond the prescribed criteria or formula, or ultra vires, are reviewable for invalidation, modification, or other appropriate legal or equitable remedy.” Id.

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