Requires, in a leasehold renegotiation, that a rent based on fair market value shall apply even if the value is lower than the existing rent and the contract bars the lowering of rent upon renegotiation. (HB1131 HD1)

A BILL FOR AN ACT

SECTION 1. 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 master 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.

In recent years, there has been 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 master lease ground rents. Those with long-term commitments have had to pay the higher ground rents and suffer 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 falsely 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 are forced to take cost cutting measures such as downsizing and part-timing.

To accomplish the public purpose of using and managing the property wisely in the community interest requires changing the present practices involved in leasing property. The leasing of property at fair and reasonable prices will alleviate the negative conditions discussed above and promote the economy of Oahu and the public interest, welfare, and security of its citizens. Changing the practice will help to satisfy the pressing public necessity for a secure, strong, and stable economy in Hawaii. Therefore, making the leasing of property viable for the lessees is for a public purpose.

It is therefore the purpose of this Act to alleviate the negative results of past economic conditions, by providing for lessees under a long-term master lease of property 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 -- 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.

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.

Leases commonly prohibit a reduction in rent at renegotiation even though a resale property appraisal determines that the lease rent based on the land’s fair market value is less than the current lease rent.

The purpose of this Act is to provide:

SECTION 2. Section 519-1, Hawaii Revised Statutes, is amended to read as follows:

"[[]§519-1[]] 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[.]; provided that a lease rent:

(b) At the option of either party, any disagreement over fair market value per square foot that cannot be resolved by negotiation may be settled by an appraisal process selected by the lessee that is in conformance with the Uniform Standards of Professional Appraisal Practice, and shall not be subject to arbitration under chapter 656.

[(b)] (c) The term "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."

SECTION 3. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 4. This Act shall take effect on January 1, 2050.