## Facts

- A lessor owned a mixed-use Manhattan property consisting of three adjoining buildings with rent-regulated apartments and retail stores.
- In 1966, the lessor entered into a 20-year net lease with the lessee’s predecessor; the lease provided two additional 20-year renewal options.
- If a renewal option was exercised, rent for each 10-year period of the renewal term would equal 7% of the “value of the demised premises.”
- The lease defined “value of the demised premises” as the value of the land plus the buildings and improvements, and set an appraisal process if the parties could not agree.
- In 2005, the lessee exercised the second 20-year renewal option effective November 1, 2006, and the parties could not agree on value.
- The lessor’s appraiser valued the premises at $7.1 million; the lessee’s appraiser valued them at $3.43 million.
- The key valuation dispute was whether the existing net lease and its terms should be treated as an encumbrance affecting the property’s value.
- The lessee sought a declaration that the lease must be considered in the valuation; the lessor sought a declaration that it must be disregarded.

## Issues

1. Under a rent-reset clause pegging rent to a percentage of the “value of the demised premises,” must appraisers consider the existing net lease and its terms when valuing the property?
2. If the lease does not expressly direct an “unencumbered” valuation, may a court imply such an exclusion from other appraisal instructions in the lease?

## Decision

- The Court of Appeals reversed the lower courts.
- It held that the net lease itself must be taken into account in valuing the demised premises for purposes of setting renewal-term rent.
- Because the lease did not expressly exclude consideration of the lease’s effect on value, appraisers were not permitted to ignore it.

## Legal Principles

- A rent-reset appraisal under a commercial lease is governed by the parties’ contract; unambiguous language is enforced according to its terms, read as a whole.
- When a lease defines value as land plus buildings and improvements and does not state that valuation must be “free and clear” of the lease or “as if vacant,” the appraisal may consider the economic effect of the existing lease.
- Courts will not infer an exclusion of a major factor affecting value (the lease being priced) from appraisal instructions that address the property’s physical or regulatory condition, absent clear contractual language.

## Conclusion

The court required that valuation for renewal-term rent reflect the property’s value as affected by the existing net lease, rejecting an implied rule that the appraisal must assume the premises are unencumbered when the lease text contains no such exclusion.


936 Second Ave. L.P. v. Second Corp. Dev. Co., 10 N.Y.3d 628, 891 N.E.2d 289 (N.Y. 2008)