Report Title:

Real Property Leases; Renegotiation

 

Description:

Requires, in leasehold renegotiations, that a rent based on fair market value shall apply even if that value is lower than existing rent and the lease contract bars the lowering of rent upon renegotiation. Allows a one-time rent adjustment to reflect fair market value for any existing lease renegotiated after 1/1/90.

THE SENATE

S.B. NO.

905

TWENTY-SECOND LEGISLATURE, 2003

 

STATE OF HAWAII

 


 

A BILL FOR AN ACT

 

RELATING TO LEASEHOLD.

 

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

SECTION 1. The tragic and vicious events of September 11, 2001, suddenly thrust the United States and Hawaii into an economic whirlpool. The resulting effects of the devastation in New York and Washington, D.C., on our nation's economy were felt immediately thereafter and have escalated in their effects on key aspects of our economy.

Businesses large and small in Hawaii are especially vulnerable during this time of crisis. The effects of Hawaii's economic downturn resulting from the Persian Gulf War and Hurricane Iniki are not as substantial in comparison with what happened on September 11th. It is very clear that unless our state government acts quickly and decisively, our economic downward spiral will continue.

Many long-term ground leases have been set at an artificially high "floor" due to the Japanese "Bubble" valuations in the mid 1980s. Many of these leases do not allow any new rent to be set lower than the previous rent - the "floor" - and the effect of these now above-market valuations has been devastating to business and residential lessees. These lessees have struggled to get by during the recession Hawaii experienced in the 1990s, and are doing their best to survive in the unexpected economic downturn following the September 11 tragedy. Being required to pay rent based on a highly-inflated and no longer applicable market jeopardizes their continuance.

The legislature finds that leasehold ownership in Hawaii is, has been, and probably will continue to be a common form of land ownership. Historically, the land ownership system in Hawaii has been characterized by the concentration of the fee title to lands in the hands of a few estates, trusts, and other private landowners. This pattern of land ownership on Oahu has led to the practice of landowners leasing, rather than selling, their land. The ownership of land beneath developments is consistent with this pattern of land ownership. Owners of property have refused to sell the fee-simple title to lessees and instead established long-term leases. These long-term ground leases have terms and conditions weighted in favor of the lessors or fee owners against the lessee developers. The pervasiveness of this practice has resulted in a serious shortage of fee-simple property and increased costs. It has also contributed to a malfunctioning real estate market that has helped to create undesirable socioeconomic impacts in Hawaii and has resulted in windfall profits to lessors due to the fact that they have been able to collect above-market rentals under those leases from and after 1985 due to a totally unforeseen phenomenon known as the "Japanese Bubble" period.

From 1985 through the early 1990s, there was a significant appreciation of the apparent and artificial values of real estate on Oahu. Land prices were driven up in the 1980s by wealthy international buyers who were subsequently forced to sell their properties. Nevertheless, the artificially high property values have been used by lessors as a basis to calculate long-term lease ground rents. Those with long-term commitments have had to pay the unsupportable and artificially higher ground rents and suffered reduced or even negative cash flows. Others, who have not been able to pay the increased ground rents or pass them on to sublessees, have had to move out. Some have had to simply walk away from their properties, forfeiting the valuable improvements they have made to the landowners, and those individuals who were personally responsible for their lease or mortgage obligations, or both, have been faced with mortgage foreclosures and bankruptcy.

Practices and policies that result in the use of artificially inflated land values have serious economic consequences, as evidenced by the plight of commercial and condominium lessees in Hawaii who face tremendous increases in renegotiated lease rents, based upon exaggerated land valuations. The resulting uncertainty has a paralyzing effect on transactions regarding these properties.

Hawaii businesses and their employees are suffering. Because of unrealistically high rental rates levied by landowners, businesses have been forced to take cost-cutting measures such as downsizing, converting full-time employees to part-time, reducing employee benefits, putting off tenant improvements, reducing capital investment in their businesses and other measure debilitating to businesses.

There have been many authoritative reports over the past several years that attest to the magnitude and seriousness of the problem for Hawaii's economy and its people.

In 2000, former attorney general Margery Bronster, representing leasehold reform efforts, wrote the governor stating the following:

"The imbalance of bargaining power between current lessors and lessees indeed exists with respect to existing leases. The typical current lessee affected by this legislation is a long-term lessee who has made significant investments in the infrastructure and improvements on the land. Whereas, as newcomers can enter the market and take advantage of the 'buyer's market', bargain for a fair market rent and avoid the onerous provisions that would require him to pay lease rent based on the market value of a decade ago. The current long-term lessee simply cannot. The current lessee's choice is to pay an artificially inflated or exorbitant rent or to not pay the rent and vacate the premises, which would place the lessee in breach of the lease. The lessor's damages will be based on the inflated rent that would have been payable under the lease. The lessees can neither avoid nor remedy their predicaments.

"It is rare for the economic and land conditions to have as great an impact on the local businesses and commercial enterprises as in the State of Hawaii. There is probably no other community in the United States that experienced such a dramatic rise in real estate prices, coupled with a pervasive leasehold land tenure followed by such a sustained and enervating weakened economy. The impact on local business and individual lessees has been devastating. Many examples are available for consideration."

Other studies and reports similarly address these problems with respect to residential, condominium, cooperative, and commercial lessees. For example, in 1979, Dr. Laitila of the University of Hawaii observed that "there is a non-competitive market" in Hawaii's industrial real estate and that the valuation process in use then "assumes a competitive real estate market." He predicted dire consequences for lessees whose approaching renegotiation deadline hung over a company's viability "like a short fused time bomb" -- a "little nightmare".

In 1987, a report prepared for the housing finance and development corporation stated:

"A significant number of condominium and cooperative housing projects are scheduled for their first lease rental negotiations starting in 1990, and the ability to obtain long term fixed rate financing for leasehold condominium purchases will diminish as lease terms progress. Therefore, it is anticipated that motivations of lessees and lessors may change significantly as these negotiations draw closer, and that support for leased fee conversion relief will increase."

In a 1991 report entitled "A Summary of the Research Findings from the Office of the Lieutenant Governor" it is stated that regarding condominium and cooperative units, "the majority of units are in leasehold projects."

In 1994, the business leasehold task force created by H.C.R. No. 312, H.D. 2, S.D. 1, chaired by Representative Calvin Say and made up of lessees, lessors, and concerned citizens, found that the rising cost of lease payments plays a major role in the viability of Hawaii's retail commercial and industrial businesses.

The task force report goes on to say: "Commercial lease rents have increased in recent years. Contracts negotiated some twenty or thirty years ago are coming up for renegotiation and some of the lessees have found themselves facing increases in excess of 200 per cent. Some are mom and pop operations and neighborhood shops. Increasingly, however, larger businesses, retail chains and other local commercial operations have been forced to shut their doors as their business becomes nonviable. Sadly, many jobs are lost, the goods and services they provided in our neighborhoods and communities are lost, their businesses and entrepreneurs are lost."

The task force also found fault with the practice of settling disputes over value by use of arbitration and recommended change.

In 1995, the United States Department of Housing and Urban Development financed a study by the Hawaii real estate research and education center of the University of Hawaii. The report resulting from the study states: "A mounting leasehold crisis exists in Hawaii's leasehold system and is the motivation for this study." The study also cites international monetary policies that resulted in a stronger Japanese yen and major investment in Hawaii causing residential land prices to increase 367.8 per cent by the early 1990s.

The 1985 to 1990 period has been referred to as the "Japanese Bubble Period" or the "Japanese Bubble Economy Years". The Japanese Ministry of Finance defines the bubble: "In view of its underlying connotations in the contemporary Japanese vernacular, we have opted in this report to use bubble as a term referring to a deviation between actual and theoretical asset prices, but of such magnitude that it has an impact on the livelihoods of many people and interferes with a nations normal economic management." Robert Hastings, an appraiser in Hawaii, describes the impact of the bubble on Hawaii's real estate markets as follows:

Between 1985 and 1990, exogenous and artificial forces created the explosive spiral in real estate prices in certain locations in Hawaii that were of interest to foreign investors. These increases were created by forces that result from the interaction of five banking and governmental policies in Japan during a period now characterized as the "Japanese Bubble Economy Years". During the period of years, the Japanese invested $80,000,000,000 in U.S. commercial and development real estate of which, around $l5,000,000,000 was invested in Hawaii properties. "The impact on Hawaii, with only one half of one per cent of the population of the United States, was much more significant than it was in other U.S. jurisdictions because, during 1988 and 1989, Hawaii received approximately 25 per cent of the total Japanese investment in U.S. real estate... The impact on commercial and residential economics are enormous and the resulting dislocations and economic crises to residents, industry and banks are already occurring."

In 1996, the Hawaii Financial Services Associations, a trade association with twenty-five members operating under chapter 412 of the Hawaii Revised Statutes, testified as follows:

"The HFSA supports passage of House Concurrent Resolution 130. We believe it's (sic) only reasonable and appropriate that all appraisals should be prepared using the Uniform Standards of Professional Appraisal Practice (USPAP). In our view, there is no legitimate reason for deviating from USPAP in evaluating the value of the property.

"As financial institutions, we are required by the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) to use only appraisals which are prepared for us and meet USPAP. Under FIRREA, we cannot use appraisals prepared for our customers even if they meet USPAP requirements. Customers who have obtained and paid for appraisals which do not meet USPAP, have not only wasted their money, but are further confused and upset by the different values between their non-USPAP and USPAP appraisals. Typically, the non-USPAP appraisal has a higher value and the customer cannot understand why the financial institution's appraisal is lower. While it may be a good sales tool for some appraisers to give the customer the highest value, it is really a disservice to them.

"Appraisals should not be bargaining devices between parties negotiating new leases or purchase contracts. Appraisals should be based on a common yardstick that is the USPAP. Within these standards, some deviation of valuation may occur, but the differences should be small and the cause for the difference should be clearly identifiable."

Legislation introduced in l996 noted "that small business operations in Hawaii -- operations with 100 employees or less --make up approximately ninety-eight per cent of the estimated 30,000 businesses operating in the State today. Small business operations generate two out of every three new jobs in Hawaii and disburse fifty-five per cent of the private workforce payroll and further that the high cost of renegotiating lease rents in Hawaii represents one of the major hurdles to the continued growth of small business operations in the State. The current formula for renegotiating lease rents which is based on 'highest and best use' of the property -- threatens to displace those businesses that cannot afford to pay high increases in lease rents."

After the "bubble" period created a problem, Anthony Downs, Ph.D., senior fellow at the Brookings Institute, stated as follows:

"There are two basic causes of these unexpectedly high values. One is just the shortage of available and desirable land in Hawaii - especially of fee simple land - in comparison with the demand for it. This results in part from the general prosperity of the Hawaiian economy, plus the widespread ownership of land by a few big estates that have leased it to lessees who subsequently built improvements on it.

"The second cause is the extraordinary influx of the Japanese investment funds in the period from 1985-1989 that drove land prices to levels unsustainable from economic uses built on the land. Several circumstances affecting Japanese investors were unprecedented and unique. As a result, Japanese investors could and did pay huge prices for land that cannot be supported by any conceivable uses put on that land. I will refer to this period from 1985-1990 as the "Japanese bubble period"."

The result was a series of land sales, or sales of both land and improvements at extremely high prices. An example is the sale of a downtown office site for $1,200 per square foot --when no previous site had ever sold for more than $400 per square foot.

Appraisers in Hawaii have used these sales as comparables in lease renegotiations and arbitrations. The result is a setting of land values so high that the rents based on those values surpass the earning power of the improvements on the land. They not only cannot be supported by the existing improvements, but they also cannot be supported by any improvements including the theoretically highest and best uses.

In Hawaii, when dealing specifically with real estate values and real estate rental rates, the process of arbitration has been a substantial contributor in creating the problems that Hawaii's leasehold real estate is currently in. It has substantially contributed to abuses in the Hawaii leasehold real estate marketplace. To put a stop to these abuses, and remedy this problem in Hawaii, when determining leasehold real estate valuations and leasehold rental rates, the process of arbitration needs to be replaced with the process of appraisal.

Fair rents based upon fair value was the purpose of Act 180, Session Laws of Hawaii 1998, of which the Committee on Conference stated: "The purpose of this bill is to protect consumers who lease land by requiring that the fair market value of renegotiated rental amounts for lease be determined in conformance with the Uniform Standards of Professional Appraisal Practice." However, the legislature finds that there is a need for additional clarification, since the legislature finds that not all of the entities that are bound by that Act are currently complying with the requirements of that Act.

In addition, the impact of the foregoing on Hawaii's people also has been devastating. Thousands of jobs have been lost. Workers who deserved pay increases have not been able to get them. Jobs that should have been created have not been. Many resident families are being divided, because children, husbands, or wives are being forced to seek employment in other states. Many local families whose entire effort for a generation has been to build the equity in a business are losing the equity to lease rents that are illegal. The creativity of Hawaii's people is shackled because businesses are incapable of investing in new creative ideas. Hawaii has been unable to diversify its economy from tourism because long-term investment in leasehold businesses has been rendered imprudent. The boom of the 1990s -- the greatest economic boom in America's history -- completely passed by the State. The impact on other sectors of the Hawaii economy is also being felt. Public employee pay is falling behind mainland standards because state government revenues have stagnated, and the State is losing some of its brightest citizens to more competitive states.

It is a critical public purpose to restore health to the state economy, to encourage better businesses and jobs for our people, and to reverse trends causing windfalls to lessors and consequent losses to businesses. The leasing of property at fair value based on the use to which the property is put is more than ever critical to reversing economic trends that threaten the welfare of nearly every sector of our State's economy. The legislature finds this to be a compelling public purpose.

To achieve this goal requires enactment of remedies to allow lessees to eliminate illegal and unreasonable practices involved in past lease renegotiations. Therefore, the legislature is acting to provide an appropriate basis for Hawaii's lessee businesses and residences to assert the legal rights they have held for many years. While such a change does touch existing contracts between lessors and lessees, the constitution does not prohibit this Act. First, where the underlying contract is illegal, those provisions cannot be enforced. This Act merely clarifies existing legal rights.

In 1969, the legislature passed what is now section 519-1, Hawaii Revised Statutes. That statute provides that lease rent renegotiations under all leases should be based on the use to which property was put under the terms of the lease. The purpose of this legislation was described in House Standing Committee Report 745 in 1969:

...The desirability of this bill is apparent since uses not allowed in a lease agreement would not be relevant to setting the rental amount. The fact that the value of the property has increased or decreased due to changes in surrounding areas will not be taken into consideration in renegotiation and problems which have arisen from this consideration will be prevented....

Senate Standing Committee Report 701 in 1969 was even more explicit:

The purpose of this bill is to require that in leases of private lands for five or more years, which call for the renegotiated rental amount during the term of the lease that such renegotiated rental or other recompense be calculated upon the value of the land based upon the uses to which the lease permits of the land by the lessee and not upon some higher priced use which the zoning laws permit but which the terms of the lease do not permit.

As this legislative intent clearly indicates, the purpose of rent setting was to achieve rents based on the uses to which properties were put under terms of the lease, not based on "some higher priced use".

Notwithstanding the foregoing, appraisers and arbitrators have failed to properly follow or apply either the common law or section 519-1 with the result that lease rents have been set so high that many of Hawaii's finest businesses have staggered under the burden. Yet because rents set by arbitrators cannot be appealed, lessees have had no way to enforce their legal rights.

The impact of the foregoing on Hawaii's economy has been heavy indeed. Most business in Hawaii is conducted by businesses who occupy leasehold premises. The impact on businesses of excessive rents has robbed businesses of the equity in their leasehold assets, made borrowing against those assets impossible, rendered business leasehold assets unsaleable, and thus in the great majority of cases, rendered new investment in business in Hawaii imprudent. Businesses, including many of Hawaii's finest businesses, have been exiting Hawaii to other states. Businesses have been unable to update plant and equipment to stay competitive and businesses either scrape along at survival levels, or close. In fact, the business impacts of the foregoing are accelerating at an alarming rate, and it appears that the commercial leasehold real estate market in Hawaii has collapsed, and the residential leasehold market is near doing the same.

Finally, the city and county of Honolulu's Ordinance 91-95, which provided a mechanism for converting leasehold interests in condominium and cooperative units to fee interests through the city's condemnation power, was subsequently upheld by the United States Court of Appeals for the Ninth Circuit in Richardson v. City and County of Honolulu, 124 F.3d 1150 (9th Cir. 1997), cert. denied, 119 S.Ct. 168 (1998). In particular, the Court of Appeals noted that in enacting that ordinance, the city found that landowners had refused to sell proportionate shares in their fee simple titles and that the few sales that occurred involved exorbitant prices, and that this refusal to sell fee simple titles, along with other factors, had caused a dramatic increase in the price of housing in Honolulu.

The Ninth Circuit further noted the city's finding that persons wishing to reside on Oahu were forced to sign long-term leases that provide for periodic rent renegotiation. These conditions led to "the acute recent inflation of land costs (that) has adversely affected lease rent negotiations of persons who have purchased leasehold multi-family units as their homes: in some instances renegotiations have resulted in lease rents that have increased over 1,000 percent. Under the burden of increased lease rents, many owner-occupants of residential condominium apartments..., especially those on fixed incomes, have found, and will continue to find themselves unable to afford to continue living in their homes."

Finally, the court noted the city's findings that these defects in the housing market would adversely affect the city's economy:

"There is a close relationship between the monetary values accorded land on Oahu and the stability and strength of Oahu's economy as a whole. Residential condominium ... land values, artificially inflated by concentrated or single ownership, market conditions or other factors, skew Oahu's economy toward unnecessarily high levels. The pervasive and substantial contribution made to inflation by high residential condominium ... land values creates a potential for economic instability and disruption on Oahu. Economic inflation, instability and disruptions on Oahu have real and potential damaging consequences for all members of an affected society."

The legislature similarly finds that there is a need to reduce the potential for economic instability, not only on Oahu, but with respect to the entire State. To accomplish the public purpose of using and managing the property wisely in the community's interest requires changing the present practices involved in leasing property.

The legislature finds that a one-time adjustment to the current fair market value for ground leases affected by the "Japanese Bubble" will alleviate the negative impact of that unforeseen phenomenon while promoting the economy of the State and the public interest, welfare, and security of its citizens. Such an adjustment to existing ground leases would not be a substantial impairment on contractual relationships since the rent to be determined under the one-time adjustment would not be lower than the rental amount determined in the period prior to 1985 and after the adjustment, the terms of the lease would continue to govern future rent renegotiations. Allowing the one-time adjustment would permit lessees to pay current market rent (after years of paying above-market rent) and be competitive in today's challenging economic times. This will help to satisfy the pressing public necessity for a secure, strong, and stable economy in Hawaii. Therefore, the legislature finds that making the leasing of property viable for lessees is a valid public purpose.

Residential lessees who own cooperative apartments are similarly situated. Although chapter 38 of the Revised Ordinances of Honolulu has given cooperative apartments owners the right to seek mandatory conversion, no cooperative housing corporation has been able to proceed under that law because they have not been able to meet the eligibility requirements under the ordinance and, practically speaking, cooperative apartment lessees are unable to use the ordinance to obtain their leased-fee interest.

The legislature therefore finds that there is a need to alleviate the negative results of the "Japanese Bubble" by allowing lessees under a long-term ground lease to lease at fair market value the land on which their developments are sited. Lease agreements generally contain a lease rent renegotiation provision that utilizes real property appraisals to determine a critical component in the renegotiation process, namely, the fair market value of the land. Residential and commercial leases are commonly structured whereby the fee simple owner leases the land to the lessee, who as a sublessor then subleases the land or a portion of the land to a sublessee. Leases commonly prohibit a reduction in rent at renegotiation even though a property appraisal determines that the lease rent based on the land's fair market value is less than the current lease rent. The legislature finds that it is in the public interest that the lease rent and sublease rent should be based on the fair market value of the land.

The legislature finds that there is a need to alleviate the negative results of past violations of lessee's rights by providing for lessees under long-term ground leases a right to reestablish lease rents at fair rental value. These leases are those in which renegotiated lease rents are based on prior renegotiated lease rents, which serve as a rent floor under which the cost of the lease can never drop. Some of these leases also use formulas that drive up the cost of the lease with every renegotiation, regardless of actual use or value.

The legislature finds that for lessors to receive a return from property based upon the use to which the property is agreed to be put is reasonable and proper, and is the basis on which properties in practice were leased in Hawaii, and the legislature further finds that rents established as set forth above constitute unforeseen windfalls to lessors.

Accordingly, the purpose of this Act is to correct the effect of the Japanese Bubble values on long-term ground leases and to require that in future leasehold rent renegotiations the rent is based on fair market value as determined by appraisal under the Uniform Standards of Professional Appraisal Practice (hereinafter "uniform standards").

Furthermore, any difference in appraised value shall be resolved by an appraisal process that is in conformance with the uniform standards and not by arbitration mandated by chapter 658, Hawaii Revised Statutes. Any appraisal or rent determination that does not follow the uniform standards will be subject to being set aside by a circuit court if a civil action is initiated.

While such a change does affect existing contracts between lessors and lessees, these contracts are not paramount to the State's power to protect its citizens. In Home Building & Loan Association v. Blaisdell, 290 U.S. 398, the United States Supreme Court upheld against a contract clause attack a mortgage moratorium law that Minnesota had enacted to provide relief for homeowners threatened with foreclosure during the Depression. In its decision upholding the Minnesota law, the Court said: "It is the settled law of this court that the interdiction of statutes impairing the obligation of contracts does not prevent the State from exercising such powers as are vested in it for the promotion of the common weal; or are necessary for the general good of the public, though contracts previously entered into between individuals may thereby be affected."

SECTION 2. The Hawaii Revised Statutes is amended by adding a new chapter to be appropriately designated and to read as follows:

"CHAPTER

REAL PROPERTY LEASE CONTRACTS

-1 Definitions. As used in this chapter, unless the context clearly requires otherwise:

"Fee owner" means the person who owns the fee simple title to the real property leased under a property development and the person's heirs, successors, legal representatives, and assigns.

"Lease" means the same as in section 519-1.

"Leased fee" and "leased fee interest" means reversionary interests of the fee owner, lessor, and all legal and equitable owners of land that are leased, other than the lessee's or a sublessee's interest.

"Legal and equitable owners" means the fee simple owners and all persons having legal or equitable ownership interests in the leased fee or in the lessor's leasehold estate, including mortgagees, developers, lienors, and sublessors, and their respective heirs, successors, legal representatives, and assigns.

"Lessee" means any person who leases or subleases land from another, and the person's heirs, successors, legal representatives, and assigns.

"Lessor" means any person who leases or subleases land to another, and the person's heirs, successors, legal representatives, and assigns.

"Lessors", "lessees", "fee owners", and "legal and equitable owners" include individuals, both masculine and feminine; corporations, firms, associations, partnerships, limited liability companies, trusts, and estates; and the State of Hawaii and any county or other political subdivision of the State. When more persons than one are the lessors, lessees, fee owners, or legal and equitable owners of a lot, the terms apply to each of them, jointly and severally.

"Uniform standards" means the current Uniform Standards of Professional Appraisal Practice approved by the director of commerce and consumer affairs pursuant to section 466K-4(a).

-2 Lease renegotiations; calculation of rent; definition. Whenever any agreement or document for the lease of private lands provides for the renegotiation of the rental amount or other recompense during the term of the lease, and the renegotiated rental amount or other recompense is based, according to the terms of the lease, in whole or in part upon the fair market value of the land, or the value of the land as determined by its highest and best use, or words of similar import, such value, for the purposes of determining the amount of rental or other recompense, shall be calculated upon the use to which the land is restricted by the lease document; provided that:

(1) Fair market value shall be determined in conformance with the uniform standards;

(2) Any disputes over value shall be settled by procedures under this chapter and not by arbitration; and

(3) Any other provision or remedy afforded any class of lessee in this chapter or in any other law relating to the lease of real property shall be equally available to all lessees; and no provision, right, benefit, or remedy afforded to any class of lessee or tenant by this chapter or in any other law or rule shall be denied to any other class, lessee, or tenant.

-3 Rules. The housing and community development corporation of Hawaii shall adopt rules pursuant to chapter 91 as may be necessary to implement this chapter.

-4 Applicability. This chapter applies to all ground leases that were in existence prior to January 1, 1985.

-5 One-time rent adjustment. (a) Any ground lease in existence on the effective date of this chapter that has been renegotiated after January 1, 1990, shall be allowed a one-time adjustment upon application of the lessor or lessee to reflect fair market rental value as determined by a real property appraisal in conformance with the uniform standards; provided that the adjusted rent under this section shall not be lower than the rental amount negotiated pursuant to the lease prior to January 1, 1985. This adjustment shall be a one-time correction to the lease and shall prevail over any existing contract provision to the contrary. The new adjusted rent shall be prospective and shall become effective upon the determination of the fair market rental value as determined by the appraisal. To the extent that the lease rent amount is reduced pursuant to this subsection, a sublessor shall promptly adjust any sublease to a sublessee for the premises or portion thereof covered by the sublease to the extent necessary to achieve fair market rent. This subsection shall be automatically repealed on December 31, 2006 or three years after a final court decision upholding the validity of this chapter in the event the validity of this section is challenged, whichever occurs later.

(b) At the option of either party, any disagreement over fair market value that cannot be resolved by negotiation shall be settled by an appraisal process that is in conformance with the uniform standards, and shall not be subject to arbitration under chapter 658.

If a party does not agree with the value produced, that party may appoint and pay for the services of an appraiser of its choice, who shall perform an appraisal. If the two appraisers cannot resolve the differing valuations, a third appraiser shall be appointed by mutual agreement to review the work done or, failing agreement, by the senior judge of the circuit court of the circuit in which the real property is located, and the issue shall be settled by a decision of two of the three appraisers. The two appraisers shall provide in writing their findings, conclusions, methodology, and reasoning clearly showing how they arrived at their decision. The cost of the third appraiser shall be divided and paid equally by the lessee and lessor.

(c) As used in this section, "ground lease" means a lease of privately-owed land in which a lessee leases the land only or leases the land and infrastructure for a term of twenty years or more, including extensions and renewals.

-6 Priority. If this chapter conflicts with another state law, this chapter shall prevail.

-7 Severability. If any provision of this Act, or the application thereof to any person or circumstance is held invalid, the invalidity does not affect other provisions or applications of the Act, which can be given effect without the invalid provision or application, and to this end the provisions of this Act are severable."

SECTION 3. Section 519-1, Hawaii Revised Statutes, is amended to read as follows:

"[[]519-l1[]] Lease renegotiations; calculation of rent; definition. (a) Whenever any agreement or document for the lease of private lands provides for the renegotiation of the rental amount or other recompense during the term of the lease and [such] that renegotiated rental amount or other recompense is based, according to the terms of the lease, in whole or in part upon the fair market value of the land, or the value of the land as determined by its highest and best use, or words of similar import, [such] the value, for the purposes of determining the amount of rental or other recompense, shall be calculated upon the use to which the land is restricted by the lease document[.

(b) The term "lease",]; provided that provisions of this chapter are superseded by chapter .

(b) As used in this section:

"Lease", "lease agreement", or "document" [as used in this section,] means a conveyance leasing privately-owned land by a fee simple owner as lessor, or by a lessee as sublessor, to any person, for a term exceeding five years, in consideration of a return of rent or other recompense[.], and, for purposes of determining renegotiated rents, shall include any related documents including offers to lease, applications, or documents of similar import which show agreement or understanding as to the use to which property would be put under a lease."

SECTION 4. If any provision of this Act, or the application thereof to any person or circumstance is held invalid, the invalidity does not affect other provisions or applications of the Act, which can be given effect without the invalid provision or application, and to this end the provisions of this Act are severable.

SECTION 5. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 6. This Act shall take effect on July 1, 2003.

INTRODUCED BY:

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