New York Overnight Partners, L.P., Respondent,
v. Joan Gordon, et al., Appellants.
88 N.Y.2d 716, 673 N.E.2d 123, 649 N.Y.S.2d 928 (1996).
October 15, 1996
1 No. 183 [1996 NY Int. 185]
Decided October 15, 1996
This opinion is uncorrected and subject to revision before publication
in the New York Reports.
Jay Goldberg, for appellants.
John G. Hutchinson, for respondent.
CIPARICK, J.:
Respondent,
owner of the Ritz-Carlton Hotel at 112 Central Park South, New York City,
leases the land underlying the hotel from appellants, owners of the land.
When the parties
deadlocked on the meaning of the lease term "appraised value of the
land" during negotiations for the lease renewal, they agreed to seek a
judicial interpretation of that term to settle their dispute. Appellants
now challenge so much of the Appellate Division order which held that the
appraiser must determine the value of the land as though vacant, without
improvements, and subject to current zoning regulations. They argue
that the court improperly directed the appraiser to disregard the effect
of the hotel on the value of the land. Because the lease expressly
provides that the appraiser value the land as unimproved, without regard
to the existence of the hotel, we affirm the order of the Appellate Division.
A.
The
impasse over the meaning of "appraised value of the land," a term critical
for establishing the rental amount for the first 15-year renewal term,
resulted from respondent s
interpretation that the lease required an appraiser to value the parcel
of land as though vacant and unimproved, whereas appellants believed that
the appraiser should consider the
"benefit" any improvement "imparts" to the land, even if that improvement
constitutes a legally non-conforming use1. The parties stipulated
to resolve their dispute in court. Respondent thus proceeded with
this action for declaratory and injunctive relief seeking a judgment declaring
the meaning of the term "appraised value of the land," and appellants counterclaimed
seeking a declaration of the meaning of the word "land" as used in that
phrase2. Thereafter, respondent moved for summary judgment on the
complaint and appellants cross moved for summary judgment on their counterclaim.
Supreme Court denied respondent's motion, granted appellants cross
motion and dismissed the complaint.
Respondent appealed,
and the Appellate Division reversed, on the law, granted respondent's motion
for summary judgment and denied appellants cross motion (see, New
York
Overnight Partners, L.P. v Gordon, 217 AD2d 20). The Appellate
Division ruled that the "clear and unambiguous terms of the Lease [provide]
that the 'appraised value of the land' may be determined only by reference
to the raw land designated as 112 Central Park South, exclusive of the
building and all 'Improvements'" (id. at 29). While recognizing that
land should
be appraised for the best, most advantageous use, the court opined
that in this case the land's fair market value must be determined by the
terms of the lease, taking into account any
restrictions or encumbrances affecting the land. The court then
directed the appraiser to determine the value of the land as if vacant
and unimproved, subject to current zoning restrictions and contractual
limitations, and to consider the effect of the lease on the value of the
land (see id., at 30). The court further granted appellants
motion for leave to appeal to this Court and certified the question "Was
the order of this Court, which reversed the order of the Supreme Court,
properly made?" Because the order of the Appellate Division is final,
we need not answer the certified question.
B.
In an effort to
avoid the consequences of the legal determination that the land must be
valued as if vacant and unimproved, appellants argue that the Appellate
Division exceeded
the scope of the limited review governing arbitration and appraisal
proceedings by directing the appraiser to consider the land as "vacant,
without improvements, and subject to current
zoning restrictions" when the ground lease does not so dictate. While
appellants do not challenge the Appellate Division's determination that
the term "land" as employed in the phrase
"appraised value of the land" does not include improvements on the
land, appellants nevertheless maintain that "it is a more advantageous
use of the land for it to be valued as a parcel of property permitting
usage of a building containing 152,000 square feet of floor space thereon,
rather than as a theoretically vacant and unimproved parcel" (Appellants'
Brief, at 24 [emphasis in original]). Otherwise, appellants contend,
the appraisal will reflect a parcel of land that is "much less valuable
than economic reality dictates." They further assert that current
zoning regulations, which limit the size of new construction, are inapplicable
because the owners of the land are legally entitled to continue the non-conforming
use that is alleged to be the best and most advantageous use. Because
the Appellate Division decision bars the appraiser from valuing the land
at its highest and best use given its directive that the appraiser disregard
the hotel, appellants claim that the decision should be reversed.
We disagree.
C.
When the language
of the lease so dictates, appraisals must take into consideration all restrictions
-- including current zoning regulations -- and encumbrances on the land,
as
well as the lease term (see, United Equities, Inc. v Mardordic Realty
Co., 8 AD2d 398, aff'd, 7 NY2d 911; Plaza Hotel Assocs. v Wellington Assocs.,
Inc., 55 Misc 2d 483, aff'd on opn below 28 AD2d 1209, aff'd on opn at
Special Term, 22 NY2d 846, reargument denied 22 NY2d 972). Distilled
to its essence, the argument pressed on this appeal amounts to nothing
more than an attempt to enjoin appraisal of the "land" as raw and unimproved
-- the very term submitted for legal interpretation -- on the theory that
the Appellate Division decision precludes appraisal of land at its highest
and best use.
Although there
is no question that it is the appraiser who must determine which of the
myriad factors are relevant to a particular valuation and how such factors
impact the valuation of the parcel of land (see generally, Appraisal Institute,
The Appraisal of Real Estate, "The Valuation Process", ch 4; "Highest and
Best Use Analysis," ch 12; "Land or Site Valuation," ch 13 [10th ed, 1992]),
without interference or direction from the court, this case required a
threshold legal interpretation of the scope of the very subject of the
appraisal. Thus, the Appellate Division determined that the drafters
of the lease intended the term "land" to mean only the vacant and unimproved
land, subject to contractual limitations and current zoning regulations,
which presently would permit construction of a smaller building.
This determination properly discharged the court's legal function, rendering
the matter ripe for appraisal.
The precedents
firmly establish that in addition to construing disputed terms of a lease
in advance of an appraisal proceeding, it is also within the province of
the court to
identify those factors the lease expressly designates or excludes in
the valuation process.
For example,
in Plaza Hotel Assocs. v Wellington Assocs., Inc., supra, Supreme Court
rejected the appraisers' valuation as if the land were available for its
highest and best
use, free of the lease restrictions (see, 55 Misc 2d 483). The
court indicated that such valuation violated the express language of the
lease requiring that the appraisal account for the lease restriction that
the land be used for a hotel, a less profitable use (see, Plaza Hotel,
55 Misc 2d, at 486-487; accord, United Equities, Inc. v Mardordic Realty
Co., supra, 8 AD2d, at 400 [lease specified that fair market value of land
be determined by reference to the renewal options and their terms contained
in the lease and any restrictions affecting the land]; 185 Lexington Holding
Corp. v Holman, 19 Misc 2d 521, aff'd, 10 AD2d 569, aff'd 8 NY2d 965 [rental
for renewal term based on value of land only, without improvements, under
express terms of the lease]; see also, Madison Murray Assocs. v Perlbinder,
215 AD2d 204, 204- 205).
Similarly, in
Ruth v S.Z.B. Corp (2 Misc 2d 631, 636- 637, aff'd on opn below 2 AD2d
970), the court ruled that because the lease unambiguously provided that
the land be valued "free of lease," the drafters could not have intended
that the arbitrator "might give heed to the very lease which so declared"
otherwise and ruled that the land must be valued without considering the
lease restrictions.
Consistent with
these cases is the finding by the Appellate Division that the language
of the lease unequivocally excludes the hotel from the valuation of this
parcel of land -- a
determination not challenged on this appeal -- and that the land's
valuation is subject to current zoning restrictions, contractual limitations
and the lease itself. No less
significant is the fact that this finding does not infringe on the
appraiser's discretion and judgment nor does it foreclose a valuation of
the land for its highest and best use under
different circumstances. Pursuant to the express terms of the
lease, the parties did not intend the land to be appraised for its highest
and best use to establish the rental rate for the
renewal term.
That the unambiguous
terms of the lease -- dictating that a prime parcel of land in midtown
Manhattan be appraised as vacant and unimproved for purposes of setting
the rental rate for the next 15 years -- strike appellants, the successors-in-
interest to the original lessor and fee owner of the land, as a poor bargain
33 years after execution of the lease does not
constitute a basis for recasting the agreement under the guise of judicial
interpretation. Indeed, as fee owners of the land, the lessors will
acquire title to the hotel structure and all
"Improvements" on the land upon expiration of the last renewal option;
it is not until then that the lessors will be poised to reap the economic
advantages of the "legally non-conforming use."
Accordingly,
the order of the Appellate Division insofar as appealed from should be
affirmed, with costs, and the certified question not answered upon the
ground that the order
appealed from is final and the certified question is thus unnecessary.
F O O T N O T E S
1. Article 1, 1.03 of the lease defines the demised premises
as the land acquired by the lessor as described in Article 2, 2.01. As
pertinent, Article 2, 2.01 describes the subject land as "[a]ll that
certain plot, piece or parcel of land, without the buildings and improvements
thereon erected, situate, lying and being in the Borough of Manhattan .
. . [s]aid premises now be known as and by the Street Number 112 Central
Park South . . .. "Improvements" is defined in Article 1, 1.04 as "[a]ny
and all buildings being premises known and described as 112 Central Park
South . . . and the structures and improvements new or at any time hereafter
erected, constructed or situated upon such premises or any part thereof.
The Improvements shall include such buildings, structures and improvements
and the foundations and footings thereof . . .. EXCEPTING the land and
Demised Premises hereinafter described in Article 2, section 2.01."
2. We note that the lease contemplates arbitration when the parties
fail to agree on the appraised value of the land as a "matter of fact or
of value" (Lease Agreement, Art XXX, 30.02). Because the parties submitted
the dispute over the legal meaning of the term "land" to the court, this
case does not implicate the nature or scope of an arbitration or appraisal
proceeding (cf., Matter of Dimson v Elghanayan, 19 NY2d 316, 325).
* * * * *
* * * * * *
* * * * * *
Order, insofar as appealed from, affirmed, with costs. Certified
question not answered upon the ground that the order appealed from is final
and the certified question is thus unnecessary. Opinion by Judge Ciparick.
Chief Judge Kaye and Judges Simons, Titone, Bellacosa, Smith and Levine
concur.
Decided October 15, 1996
