Lipton-U. City LLC leased a large self-service storage building from Shurgard Storage Centers Inc. A provision in the lease gave Lipton an option to acquire the property.

However, the lease-option did not specify the option purchase price. Lipton thought the option price was based on the unannualized net operating income. But Shurgard thought the option purchase price was based on annualized net operating income, thus resulting in a much higher option price.

Purchase Bob Bruss reports online.

Because the landlord and tenant disagreed on the method of setting the option purchase price, Lipton sought to enforce the arbitration clause in the lease to set the price. But Shurgard argued the arbitration clause in the lease was only to resolve lease disputes other than setting the option purchase price.

Lipton offered $185,805 to purchase the property. Shurgard argued the property is worth at least $2.9 million, according to its formula.

The tenant sued the landlord to enforce the arbitration clause in the lease to determine the option purchase price. But landlord Shurgard refused to arbitrate, arguing the arbitration clause in the lease did not include arbitration of the option purchase price.

If you were the judge would you rule the lease arbitration clause includes power to arbitrate the option purchase price?

The judge said no!

Under the lease-option contract, the judge began, neither landlord nor tenant contemplated arbitrating a term as crucial as the option purchase price. Under a valid lease-option contract, he continued, that agreement should have set forth the option price or a method of determining it.

Lipton concedes there is no stipulation in the lease-option for the option price, the judge explained. Nor does the contract provide for arbitration of the option price, he noted.

Because the lease-option contract was indefinite as to how the option purchase price is to be determined, the arbitration clause is not available to decide such an important term, the judge ruled. Therefore, arbitration cannot be used to set the tenant’s option purchase price, the judge concluded.

Based on the 2006 U.S. Court of Appeals decision in Lipton-U. City LLC v. Shurgard Storage Centers Inc., 454 Fed.3d 934.

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

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