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RPTE eReport

Spring 2024

Fourth Circuit Court of Appeals Decides Commercial Lease Dispute Over Renewal Rent

Ryan D Ellard


  • An internet provider ("Lessee") and a utility company ("Lessor") entered into an agreement for Lessee to lease a utility duct from Lessor.
  • If Lessor disagrees with Lessee’s appraisal, Lessor at its sole cost will obtain a second appraisal.
Fourth Circuit Court of Appeals Decides Commercial Lease Dispute Over Renewal Rent
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Zayo Group, LLC, an internet provider (“Lessee”), and Norfolk Southern Railway (“Lessor”) entered into an agreement where Lessee would lease a utility duct from Lessor.  The lease provided Lessee with two ten-year renewal options, with rent for the renewals terms to be adjusted to reflect fair market value.  When the time came to renew the lease, the parties were unable to agree on the renewal rent, so they secured three appraisers to determine the fair market value rate.  The appraisers arrived at a new annual rate of $2,340,000 by a vote of two-to-one.  Lessor issued two invoices reflecting the new rate; however, Lessee refused to pay the full amount, arguing that the appraisers’ nonunanimous decision was not binding.  Lessor filed suit and was granted judgment on the pleadings by the United States District Court of the Eastern District of Virginia.  Norfolk S. Ry. Co. v. Zayo Grp. LLC, No. 1:21-CV-1299, 2022 WL 1185884, at *2 (E.D. Va. Apr. 21, 2022).  Lessee appealed to the Fourth Circuit.  Norfolk S. Ry. Co. v. Zayo Grp., LLC, 87 F.4th 585, 587 (4th Cir. 2023).

In considering the parties’ arguments, the Fourth Circuit reverted to the lease, which read as follows:  

Lessor Initially shall propose the Adjusted Rental and shall notify Lessee thereof during the last six (6) months of the Initial Term or preceding Renewal Term. If Lessee objects to Lessor’s proposed Adjusted Rental, Lessee at its sole cost will obtain and submit to Lessor an appraisal by an MAI member with In sixty (60) days of Lessor’s notice. If Lessor disagrees with Lessee’s appraisal, Lessor at its sole cost will obtain a second appraisal by an MAI member. If Lessee’s and Lessor’s appraisers cannot reach agreement they will select, and Lessor and Lessee will jointly compensate. a third appraiser similarly qualified, and the three shell determine the Adjusted Rental within sixty (60) days of the third appraiser’s selection, which determination shall be final and binding.

Id. at 587.

Lessee argued that the language meant the parties could only be bound by a unanimous decision of the appraisers and since the appraiser it appointed dissented, the majority’s decision was unenforceable.  Lessor countered that the lease included no such unanimity requirement.  The Fourth Circuit agreed with Lessor, holding that,

Logically read, the lease introduced a third appraiser to break ties. Ordinarily, “determining” an issue means definitively resolving it, no matter the mechanism. The contract also demonstrates the parties’ desire not to drag out the rent determination. Section 4(b) of the lease provided a timeline for each step of the process. . .  The logic of the appraisal sequence, considered as a whole, suggests that the third appraiser’s role was to break a tie. The third appraiser is appointed only if the other two have deadlocked. If unanimity were required, an appraiser appointed by a single party could indefinitely hold up the process, regardless of whether the lease contemplated a third appraiser. Such a result would render the third appraiser redundant and defy the parties’ express purpose of “determining” the rent. Thus, a unanimity requirement does not follow from a reasonable reading of the lease.

Id. at 591 (4th Cir. 2023) (cleaned up).

The first sentence of the Court’s opinion – effectively dispelling any suspense that might follow – reads, “When two companies agree to a method for resolving their disputes, they are bound by their contract.”  The Court’s concise decision serves as a reminder to practitioners that where the plain language of an agreement will resolve the parties’ contentions, the court will look no further.  If parties to a lease would like a unanimity requirement, it should be clearly articulated in the contract.