Honorable Calvin K.Y. Say

Speaker, House of Representatives

Twenty-First State Legislature

Regular Session of 2002

State of Hawaii

Sir:

Your Committee on Consumer Protection and Commerce, to which was referred H.B. No. 2245 entitled:

begs leave to report as follows:

The purpose of this bill is to:

Testimony in support of this bill was provided by the Hawaii Independent Condominium and Cooperative Owners, Hawaii Council of Associations of Apartment Owners, Moiliili Plaza, Windward Town and Country Plaza, Windward Business Center, L.L.C., University Plaza, and several concerned individuals.

Testimony in opposition was submitted by the Housing and Community Development Corporation of Hawaii, Hawaii Bankers Association, Land Use Research Foundation of Hawaii, Estate of James Campbell, A&B Properties, Inc., Hawaii Association of Realtors, Institute of Real Estate Management, Castle & Cooke Properties, Inc., Hawaii Reserves, Inc., and several concerned individuals.

Your Committee finds that this bill attempts to address the difficulties experienced by leaseholders whose leases were negotiated before the bursting of the Japanese real estate bubble in the late 1980s. Once the bubble burst, the economy slowed, land prices, and rents declined, except for leaseholders whose long-term leases contained a lease rent "floor," a clause prohibiting the lowering of rent upon renegotiation of the lease. These leaseholders' rents did not adjust with the market.

Commercial property leaseholders, in particular, may suffer because of this type of lease. These leaseholders have invested a good part of their lives in establishing their businesses at the leased location. Some have made substantial improvements to the leased property. In this difficult economy, some may be forced to breach their lease and forfeit improvements to the landowner. During rent renegotiations they have the unhappy choice of either agreeing to inflated or exorbitant rents, or vacating the site of their business. Those who remain on the property may be forced to cut their workforce, are unable to make property improvements and other long-term investments in their business, and may eventually be faced with foreclosure and bankruptcy.

Your Committee finds that the plight of leaseholders under these leases is in part the result of an abnormal land market. Leaseholders had little bargaining power in a market that featured oligopolistic land ownership, the concentration of population and business properties in a small area, and the unparalleled rise in land prices during the Japanese bubble. All of these factors, which were far beyond the control of leaseholders, resulted in the one-sided lease contracts that afflict leaseholders today.

Your Committee acknowledges that the remedy proposed by this bill raises constitutional issues concerning a landowner's property and contractual interests. Your Committee also acknowledges that the bill may not sufficiently address the issues that it seeks to resolve. However, contractual and property rights in this country have never been absolute and should accommodate other individual rights, interests, and needs. Your Committee finds that the plight of these lessees and the effect of their contracts on the State's economy are substantial interests that merit further legislative consideration.

For these reasons, your Committee recommends further discussion of the issues raised by this bill. To encourage further discussion, your Committee has amended the effective date from upon approval, to July 1, 2099.

As affirmed by the record of votes of the members of your Committee on Consumer Protection and Commerce that is attached to this report, your Committee is in accord with the intent and purpose of H.B. No. 2245, as amended herein, and recommends that it pass Second Reading in the form attached hereto as H.B. No. 2245, H.D. 1, and be referred to the Committee on Finance.