Renewal Rent Must Be Determined by Appraisers, Not Court

Facts: An office building owner rented space to a bank under a five-year lease with two five-year extension options. Under the lease, if the tenant exercised its options to extend, the owner and tenant were to attempt to agree on the renewal rent. If they were unable to agree, the lease provided that the rent would be determined by appraisals conducted by two appraisers selected by the owner and tenant. If the appraisals differed by less than 10 percent, the rent would be the average of the two appraisals; if the appraisals differed by more than 10 percent, the rent would be determined by a third appraiser whose sole responsibility would be to determine which of the determinations made by the first two appraisers was most accurate.

At the end of its original term, the tenant exercised its right to extend the lease for an additional five years. The tenant and owner each selected an appraiser, whose resulting appraisals were more than 10 percent apart. When the tenant and owner couldn't agree on a third appraiser, the tenant asked a trial court to appoint one. The owner opposed the tenant's request for an appraiser to be appointed by the court, contending that a third appraiser shouldn't be appointed because the tenant's first appraisal wasn't consistent with the terms of the lease.

The trial court agreed with the owner and denied the tenant's request. The tenant appealed. A California appeals court reversed the decision in favor of the owner. The appeals court concluded that under the plain language of the lease, a third appraiser—not a court—was to determine which appraisal most accurately reflected the fair rental value of the space. The appeals court sent the case back to the trial court for further instructions.

The tenant and owner then submitted their dispute to a third appraiser whom they jointly selected. The appraiser determined that the tenant's appraiser's proposed rent was the most appropriate. The trial court confirmed that decision, and the owner appealed.

Decision: A California appeals court upheld the trial court's confirmation of the award in the tenant's favor.

Reasoning: On appeal, the owner contended again that the court's award in favor of the tenant didn't comply with the lease's provisions. Rather, the trial court should have made an independent determination of the award's compliance with the lease.

The appeals court disagreed. It said that the appraisal provisions of the lease constituted an agreement to arbitrate, and thus the appeal “must be resolved with reference to statutory arbitration provisions.” It stated that several well-established arbitration cases make clear that a court's review of arbitration awards is permitted in “extremely limited circumstances,” none of which are present in this case. The appeals court further concluded that, under the plain language of the lease, the tenant and owner intended a third appraiser, not a court, to review the appraisals' accuracy and whether it conformed to the appraisal provisions of the lease in the first instance. Therefore, the trial court mistakenly failed to order the appointment of a third appraiser in the first instance. It shouldn't have itself made a determination on the case.

The appeals court explained that the lease explicitly specifies that appraisers should make substantive determinations about the content of the appraisals—but provides no such role for the court. Specifically, it provides that the initial two appraisers “shall use their best efforts to fairly and reasonably appraise and determine rent in accordance with the terms of this Lease,” and it provides that the appraisers' sole function shall be to determine rent “in accordance with this Section” of the lease.

Further, the lease states that the third appraiser shall decide which of the determinations made by the first two appraisers “is most accurate.” Thus, it expressly charged the appraisers with making determinations “in accordance with” the lease's terms, the appeals court stressed. But it doesn't provide for any such determination by the court. Instead, it provides that the presiding judge of the trial court shall appoint a third appraiser if requested to do so by either the owner or tenant. The appeals court concluded that the lease “seeks no substantive determinations by the court regarding the appraisals' content.”

• Wells Fargo Bank, N.A. v. Camden Properties, LTD, February 2012