Stl 300 N. 4TH v. Value St. Louis Associates

• Decision Date: 03 September 2008
• Docket Number: No. 07-1663.,07-1663.
• Citation: 540 F.3d 788
• Parties: STL 300 N. 4th, LLC, Plaintiff-Appellant, STL 400 N. 4th, LLC, Plaintiff, v. Value St. Louis Associates, L.P., Defendant-Appellee, Integrity Real Estate Corp., Defendant.
• Court: U.S. Court of Appeals — Eighth Circuit

540 F.3d 788

STL 300 N. 4th, LLC, Plaintiff-Appellant, STL 400 N. 4th, LLC, Plaintiff, v. Value St. Louis Associates, L.P., Defendant-Appellee, Integrity Real Estate Corp., Defendant.

No. 07-1663.

United States Court of Appeals, Eighth Circuit.

Submitted: January 14, 2008.

Filed: September 3, 2008.

Thomas Cummings, argued, Jeffery T. McPherson, Jonathan D. Valentino, on the brief, St. Louis, MO, for appellant.

Thomas L. Caradonna, argued, C. David Goerisch, on the brief, St. Louis, MO, for appellee.

Before COLLOTON and SHEPHERD, Circuit Judges, and ERICKSON,¹ District Judge.

SHEPHERD, Circuit Judge.

In this diversity action, plaintiff STL 300 N. 4th LLC appeals the district court's grant of summary judgment and declaratory judgment in favor of defendant Value St. Louis Associates, L.P. For the reasons explained below, we reverse and remand.

I.

On April 21, 1964, a ground lease was entered into for real estate located at 300 North 4th Street in St. Louis, Missouri; the lease was amended on September 1, 1967. STL 300 N. 4th LLC ("STL 300," "landlord," or "lessor") is the successor in interest to the original landlord and is the current owner of the real estate; Value St. Louis Associates, L.P. ("Value," "tenant," or "lessee") is the successor in interest to the original tenant and is the current owner of the apartment building and other improvements built on the real estate.

As amended, the ground lease provides for a 76-year lease term and is scheduled to terminate on April 20, 2040. The lease sets the annual rent for the first 40 years of the term and provides that the annual rent is to be recalculated in the 40th, 52nd, and 64th years, or 2004, 2016, and 2028, at a sum equal to six percent of the "then appraised value of the demised premises" with a stipulation that no increase shall exceed 25 percent of the last previous annual rent or be less than $209,034.12 or the last preceding annual rent, whichever is higher. The lease provides that "[a]ppraisals shall be made by three qualified appraisers, one of whom shall be appointed by Landlord, one by Tenant, and the third by the appointed appraisers."

At issue in this case is the definition of the term "demised premises." STL 300 argues that "demised premises" means a "hypothetical fee simple interest" in the land, that is the value of the land without consideration of the effect of the lease. Value contends that "demised premises" is defined as a leased fee interest in the land, that is the value of the land subject to the lease. The third appraiser valued the property based on the two separate definitions. Under STL 300's approach, the third appraiser valued the property at $8.33 million. Under Value's definition, the third appraiser valued the property at $2.7 million.² The impact of these vastly different appraisals is significant. If STL 300's approach is correct, the cost of the annual rent will increase by 25 percent; otherwise the rent will remain at its current level. Value's appraiser noted in his report that, under Value's leased fee theory, "[t]here would appear to be little or no probability of future increases in the base rent of $209,034."

STL 300 initiated this diversity action seeking a declaratory judgment. Both parties agree that Missouri law governs the interpretation of the lease. In granting summary judgment, the district court sided with Value and determined that the proper definition of "demised premises" under the lease is the value of the property taking into consideration the lease. The district court based its decision in part on language from the preamble of the lease which describes the metes and bounds of the property and sets forth certain easements to the property. At the conclusion of the preamble, the lease provides that "[t]he above described premises are hereinafter referred to as the `demised premises.'" The critical paragraph from the preamble, with the handwritten and initialed additions italicized, is as follows:

TOGETHER WITH all of the right, title and interest, if any, of the Landlord, of, in and to the beds of the streets, roads and avenues in front of and adjoining the above described premises; but subject, however, to all applicable building and zoning restrictions, regulations, and resolutions and ordinances, as the same may affect the demised premises; subject to easements created or to be created in favor of applicable governmental authorities or jurisdiction and the public utility companies for the installation of sewer lines, water mains, fire hydrants, gas, electric and telephone and other service over, under and through the streets named above also subject to the Lessee's fee interest in and to the buildings to be erected upon the premises above described, which they hereby retain.

Relying upon this language, the district court held that

the handwritten language makes it clear that the plain meaning of the language of the Lease[ ] establishes that the parties intended the demised premises to be subject to the lessee['s] fee interest in the buildings which by the very definition of a leased fee interest means that any appraisal of the demised premises must be based on the Landlord['s] ownership interest in the land with the rights of uses and occupancy conveyed by the Lease[ ] to the Tenant[ ], the rights of each being specified in the Lease[ ].

In support of this position, the district court relied on Mo. Baptist Children's Home v. State Tax Comm'n of Mo., 867 S.W.2d 510, 511-12 (Mo.1993) (en banc), wherein the Missouri Supreme Court held that in assessing commercial property for tax purposes, the "[t]rue value in money" of the property "is the price which the property would bring from a willing buyer when offered for sale by a willing seller" or "the fair market value of the property on the valuation date." Id. at 512. Such assessment required consideration of the impact of a long-term lease on the property. Id. The district court went further to state that "even assuming, arguendo, that the Lease [is] ambiguous, which [it] clearly [is] not, the court finds that the Tenant['s] position is the most rational and probable interpretation." The district court explained that as the time remaining on the lease shortens, the value of the property, and subsequently the rent amount, will increase because STL 300 will be nearing the point at which it will acquire ownership of all improvements, including the buildings erected on the land.

In a separate order, the district court concluded, based on the lease's provision for appointment of a third appraiser, that the intent of the parties was to give the third appraiser's determination of value binding effect should there be a deadlock between the parties' appraisers. The district court deemed the appraisal process to have failed when the parties decided not to follow the procedure outlined in the lease, instead instructing the third appraiser to alternately determine the value under the two different theories. Thus, the district court held the value of the demised premises to be $2.7 million, the appraised value determined by the third appraiser under Value's leased fee interest theory.

On appeal, STL 300 raises two arguments. First, it claims the district court erred in construing the plain terms of the lease to define "demised premises" as the value of the land subject to the ground lease. STL 300 contends (1) the definition of "demised premises" in the lease is clear when the lease is reviewed in its entirety, (2) the rent-adjustment provision of the lease supports a finding that the parties intended the appraisal to be made without consideration of the lease, (3) Value's approach likely would cause the absurd result of the amount of rent remaining constant during the 76-year term of the lease, and (4) the district court's reliance on Missouri Baptist is misplaced. Second, STL 300 claims that the district court erred in declaring the value of the property based solely on the third appraiser's determination without permitting STL 300 the opportunity to develop the record further.

Value responds that the language of the lease unambiguously dictates that the "demised premises" should be based on a leased fee interest in the land, and that controlling Missouri law, specifically the Missouri Baptist case, supports that position. Value also takes exception with STL 300's claim that the district court erred in declaring the value of the property based on the third-party appraisal.

II.

In this appeal of "the district court's grant of summary judgment, our review is de novo, and we apply `the same standards as the district court and view[ ] the evidence in the light most favorable to the nonmoving party.'" C.B.C. Distrib. & Mktg., Inc., v. Major League Baseball Advanced Media, 505 F.3d 818, 821 (8th Cir. 2007), cert. denied, ___ U.S. ___, 128 S.Ct. 2872, 171 L.Ed.2d 831 (2008) (quoting Travelers Prop. Cas. Co. of Am. v. Gen. Cas. Ins. Co., 465 F.3d 900, 903 (8th Cir.2006)). The grant of summary judgment is appropriate where "there is no genuine issue as to any material fact and ... the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). We review the district court's interpretation of Missouri state law de novo. C.B.C. Distribution, 505 F.3d at 821. "When state law is ambiguous, we must `predict how the highest court of that state would resolve the issue.'" Id. at 821-22 (quoting Clark v. Kellogg Co., 205 F.3d 1079, 1082 (8th Cir. 2000)).

Interpretation of a contract is a question of law in Missouri, and the general rule of construing a lease agreement is to ascertain the intentions of the parties and to give effect to those intentions. See Speedie Food Mart, Inc. v. Taylor, 809 S.W.2d 126, 129 (Mo....