Lipton-U City LLC desired to acquire three self-storage properties owned by Shurgard Storage Centers, a nationwide owner of such buildings. The parties agreed on a compromise offer of a lease with a purchase option based on a 9.6 percent capitalization rate for the past six months of operating income.

Unfortunately, the written agreement was not clear for one of the properties. The lease annual rent was $636,000 based on a property valuation of $7 million. Shurgard thought the purchase option price was to be determined by multiplying the last six months’ rent by two to annualize the income.

Purchase Bob Bruss reports online.

However, the actual lease inexplicably omitted any reference to annualizing the six-month net-operating income to arrive at the option purchase price. Shurgard’s board of directors approved the lease, including Lipton’s option to purchase.

About eight months after signing the lease option, Lipton exercised its option to purchase based on the lease-option terms for $2.9 million. Lipton calculated the price based on six months of unannualized net operating income. But Shurgard said the option purchase price should be twice that amount, based on annualized net income.

Shurgard sued Lipton to either reform or rescind the lease option based on mutual mistake. Evidence presented at the trial showed Shurgard never would have agreed to sell the property to Lipton at a price reflecting 50 percent of its value.

But Lipton argued the option purchase terms were based on the last six months of unannualized net operating income, as stated in the contract.

If you were the judge would you allow Shurgard to rescind or reform the contract option purchase price based on mutual mistake?

The judge said yes!

Although there was strong evidence presented that the parties intended Lipton’s option purchase price to be based on annualized net operating income, for some unexplained reason the lease-option contract based the option price on the last six month’s of income, the judge emphasized.

Although Shurgard’s board of directors approved the lease-option contract, evidence showed Lipton was aware of the mistake as to the specified option price based on negotiations, he continued.

The basic contract rule is it is voidable if the other party was aware of a mistake in the written agreement, the judge explained. Here, Lipton thought the option price was based on unannualized net operating income but Shurgard thought it was based on annualized net operating income, he noted.

Lipton knew or should have known of Shurgard’s mistake, the judge ruled. To allow Lipton to purchase the property for 50 percent of its market value would therefore be unconscionable, he added. Therefore, Shurgard is entitled to rescind the purchase option based on unconscionability, the judge concluded.

Based on the 2005 U.S. Court of Appeals decision in Shurgard Storage Centers v. Lipton-U. City LLC, 394 Fed.3d 1041.

(For more information on Bob Bruss publications, visit his
Real Estate Center
).

***

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