Opinion ID: 349243
Heading Depth: 2
Heading Rank: 4

Heading: the options to repurchase

Text: 44 The repurchase provisions of a sale and leaseback agreement serve the same function as a mortgage loan when the repurchase price is geared to the unamortized principal advanced by the purchaser-lessor. See Frank Lyon Co., supra, 536 F.2d at 752-54. In the instant case, in addition to Sunray's right to make rejectable offers to repurchase the parcels in certain situations by, in effect, paying off the unpaid principal balance of the Trust's advance plus the applicable schedule C premium payment, Sunray has the absolute right to purchase leased parcels under section 9 of the leases during the first year of each of the thirteen extended terms. This right is subject to the same conditions stipulated in connection with the rejectable offers (1) that Sunray must discontinue the use of the premises for its then business use and (2) that the repurchase price be equal to the fair appraised value of the leased premises to Lessor as fixed by three appraisers. These provisions give Sunray considerable flexibility despite the requirement that it must discontinue its then business use of the property. Since most of the sites were unimproved non-income properties at the time of the lease arrangements, Sunray could improve the properties and resell them to investors whenever it deemed conditions appropriate in the future, as it previously had done on other occasions with similar properties, and such a sale would work a change in the then business use. Furthermore, nothing prevented Sunray from diversifying its operations and using the land for other income producing purposes. 45 The Commissioner contends that the appraisal procedure prescribed for these non-rejectable options gives Sunray another avenue by which to enjoy appreciation and the equity built up through its rental payments. The contract provides that upon exercise of the option, the lessor and lessee will each appoint an appraiser and the two appraisers thus chosen will select a third. The appraisers are required by majority decision to fix the fair appraisal value of the leased premises to the Lessor and the appraisal fees and expenses are to be paid solely by the lessee. The Tax Court disagreed with the Commissioner's analysis of this provision, reasoning: 46 Respondent (Commissioner) maintains that the price established by this formula would be the appraised value of the property as encumbered by the Sunray leases an amount equated by respondent with the present value of future rentals. Thus understood, the provision establishing the option price would preclude the Trust from enjoying appreciation in the value of the property subsequent to the conveyance by Sunray. In our opinion, however, the formula, based as it is upon an appraisal of the property, would secure to the Trust the benefit of such appreciation. 47 We believe the Tax Court misconstrued the provisions when it read them as requiring the lessee to pay the fair market value for the property upon the exercise of the options. In the absence of a provision to the contrary, the appraisers had to consider all legal obligations encumbering the property in appraising its value and had to recognize the present value of any reversion in the land at the termination of the encumbrance. Plaza Hotel Ass'n v. Wellington Ass'n, 55 Misc.2d 483, 285 N.Y.S.2d 941 (Sup.Ct.), aff'd, 28 A.D.2d 1209, 285 N.Y.S.2d 267 (1967), aff'd, 22 N.Y.2d 846, 293 N.Y.S.2d 108, 239 N.E.2d 736 (1968). Counsel for Sunray recognized that the leases encumbered the properties and adversely affected their appraisal after the primary term. 12 Thus, in assessing the fair appraised value . . . to Lessor, the appraisers would have to consider the encumbrances of the properties with leases of very low rentals, thereby seriously reducing the present value of future rentals. 48 The Commissioner also contends that since the option price was equal to the present value of future rents payable under the lease the appraisers must recognize that the reversionary value of the property in the year 2055 is de minimis because of the high discount factor applicable to a sum due sixty-five years in the future. If the fair market value had doubled or quadrupled, Sunray would be able to acquire the property for a fraction of its original cost. 13 Sunray argues, on the other hand, that the lease agreements are not totally clear, and that the Commissioner's interpretation conflicts with the language of the lease, with the interpretation of his own expert, and with that of the trustees of the Trust. Sunray asserts that the Tax Court appropriately found that the option price was not merely equivalent to the present value of future rents but that it would secure to the Trust, upon appraisal, the benefit of any appreciation in value of the properties. 49 Our review of this holding by the Tax Court is not limited to the clearly erroneous rule, as Sunray argues, since the interpretation of the option provisions is a question of law. We disagree with the Tax Court's view of these provisions of the leases for the reasons previously expressed and hold that the then appraised value to the lessor is essentially equivalent to the present value of the future rents under the lease. Thus, the options to repurchase provide Sunray with a built in latch-string by which it could spring legal title to the properties whenever it served its convenience without obligating Sunray to pay the fair market value. Sunray could thereby acquire the benefits of appreciation in the property by merely paying the present value of future rents payable under the lease. 50 Finally, Sunray contends that the Trust may, without notice to or consent of Sunray, assign or transfer to any party, for any purpose, at any time its rights under the lease, even for purposes of refinancing. It argues that the Trust's ability to refinance its investment is a significant attribute of real estate ownership. This may be true as a general principle. In the instant case, however, the right to assign or refinance may be hollow since it is subject to the extraordinary low rentals during the lengthy extended terms of the leases. Furthermore, any significance attached to the right to refinance is eroded in the instant case by other significant attributes of ownership retained by the lessee.