Opinion ID: 622804
Heading Depth: 2
Heading Rank: 2

Heading: Renewal of a Governmental Lease

Text: Polar Star contends the Government’s May 18, 2006 renewal notice was insufficient to renew the Project Lease because the renewal option did not specify the amount of rent 1794 UNITED STATES v. POLAR STAR for the renewal term, and because the parties were not able to reach agreement on the rent for the renewal term. Polar Star reasons that therefore a taking occurred when the Government filed its eminent domain claim and declaration of taking. The Government responds that the parties need not agree on the rent to make the renewal effective because the option contained a method for determining the rent and because the option only required notice to effect a valid renewal. Specifically, Article V of the Project Lease provides: Upon expiration of the twenty (20) year lease term, this Lease may be renewed for subsequent annual periods at the Lessee’s [Government’s] option. The rent for such subsequent periods must be renegotiated based upon the remaining equity investment. The renegotiated rent each year will not exceed ten (10%) percent of the fair market value of the improvements erected on the land as determined by a duly qualified appraiser selected with the approval of the Lessor and Lessee. Any disagreement with the appraisal shall be subject to Article XIV, Disputes, herein. Lessor will submit to the Lessee all required evidence necessary for renegotiation. . . . The statement of intent of the Lessee to renew the Lease must be mailed to the Lessor no later than sixty (60) days prior to the expiration of the lease term. [1] Both parties agree that federal law governs construction of the agreements. Where Congress prescribes no rule by statute, federal courts generally “apply to the construction of government contracts the principles of general contract law.” Priebe & Sons, Inc. v. United States, 332 U.S. 407, 411 (1947). Because we have not previously addressed whether the amount of rent for a renewal term must be specified in the option to renew a governmental lease to make that renewal valid, we look to such general contract law principles. Where a contract provides a practicable method for establishing the amount of rent in the event the parties cannot themselves UNITED STATES v. POLAR STAR 1795 agree, the option is enforceable. Altman v. Alaska Truss & Mfg. Co., Inc., 677 P.2d 1215, 1221 (Alaska 1983) (citing 2 M. Friedman, Friedman on Leases § 14.1, at 561 (1974) (“[T]he amount of the renewal rent is sometimes left for future determination. If the determination is to be made by arbitration or appraisal, the renewal is enforceable.”)). See also Arbitron, Inc. v. Tralyn Broad., Inc., 400 F.3d 130, 137 (2d Cir. 2005) (applying New York law); Baer v. Chase, 392 F.3d 609, 619 (3d Cir. 2004) (applying New Jersey law). We see no reason for a different rule when the Government is a party to the lease. [2] Because the Project Lease included a method the court could apply to determine the rent, we hold that the option was enforceable. The fact that the parties did not ultimately agree on the rent prior to the renewal date did not render the option invalid, because the option clause does not expressly require agreement on the rent prior to renewal. [3] An option to renew a lease can only be exercised in the manner specified in the agreement, and if exercised in that manner, the lease is renewed. Wapato Heritage, L.L.C. v. United States, 637 F.3d 1033, 1040 (9th Cir. 2011) (citing Williston on Contracts § 46:12 (4th ed. 2010) (“[T]he party giving the option is protected only by the condition that the optionee can only exercise it strictly in accordance with its terms.”)). The only requirement for renewal stated in the Project Lease renewal option is notice, which must be provided no later than 60 days prior to the expiration of the term. Although the option provided that renewal rent had to be negotiated, it did not require that an agreement be reached prior to the renewal or that renewal was conditioned on an agreement as to the rent. The Government provided timely notice on May 18, 2006. Thus, the Project Lease was renewed for a year in accordance with its terms. Furthermore, the record indicates that Polar Star believed the Government’s notice of renewal was effective to renew 1796 UNITED STATES v. POLAR STAR the Project Lease for a year. Shortly after receiving the Government’s renewal notice, Polar Star acknowledged the Government’s “unilateral right to renew the lease,” and stated that the Government has the “right to continue to use the houses and has told us they plan and intend to do so.” Polar Star’s letter is contrary to its assertion that the Government’s option to renew the Project Lease is conditional in any way. Moreover, Polar Star never advised the Government that it did not consider the renewal valid unless and until an agreement had been reached on the amount of rent for the renewal term.