Hawaii-2017-HB1407-Introduced

SECTION 1. The legislature finds that leasehold ownership of land is, has been, and will be for the foreseeable future a common form of ownership of land in the State. Lease agreements generally contain a lease rent renegotiation provision that utilizes real property appraisals to determine the fair market value of the land, a critical component in the renegotiation process. Residential and commercial leases commonly are structured whereby the fee simple owner leases the land to the lessee, who as a sublessor may then sublease the land or a portion of the land to a sublessee.

The legislature finds that it is in the public interest that lease rent and sublease rent should be based on the fair market value of land. Existing leases commonly prohibit a reduction in rent at renegotiation even if a property appraisal determines that the lease rent based on the land's fair market value should be less than the current lease rent.

The legislature also finds that it is against public policy to enforce any provision of a long-term ground lease that prevents fair market rent to result from any rental rate renegotiation, provided that a renegotiation should not cause renegotiated rent to be less than the original negotiated rental amount.

The United States was built on the free market. This free market operates efficiently when the balance of supply and demand exists. When this dynamic is out of balance, financial abuses run rampant, and these abuses typically continue until either the marketplace equalizes (supply and demand reach a reasonable range of equilibrium), or rules along the lines of antitrust provisions are established. While monopolies and oligopolies can and do exist regarding many commodities and services, when the commodity or service is deemed to be a basic need for the general welfare and health of the people of a state, antitrust law or public utilities commissions are established, especially to regulate products or services that are deemed necessities.

In this State, the commodity of fee simple land has, in modern times, been a point of contention between large landowners and everyone else who seeks to either have a place of business in the State or who chooses to reside in the State. This tension between large landowners and those who are not closely related to these large landowners has been ongoing and consistent. The intensity of this tension increased dramatically after the mid-1980s, as a result of substantial foreign investments in the State's fee simple real estate, primarily by Japanese investors. While the tremendous amount of Japanese investments in the United States were spread out over a number of states, the negative impact of these particular foreign investments in this State were felt far greater than in other states. This resulted from the relatively large proportion of the foreign investments into this State in relation to the total overall real estate investments in the State, and the fact that available fee simple real estate is relatively rare.

Other parts of the United States have seen tremendous increases in prices, followed by substantial decreases shortly after, and do not have a similar lack of available fee simple land that has plagued this State. Furthermore, and more importantly, most other parts of the United States do not and did not have a substantial amount of their useable land area tied to ground leases -- especially ground leases that included provisions that would not allow subsequent ground lease rental rates to be adjusted to fair market value rental rates.

The bargaining power of the large landowners has dictated the form of ground leases, which have often included phrases similar to the infamous "not less than" clause, and became substantially abusive upon the "bursting of the bubble" of foreign investment into a sizable portion of the fee simple real estate in the State. Businesses large and small are especially vulnerable as a result of the limited availability of urban fee simple commercial and industrial properties, and financial abuses of these businesses result from this. In spite of the few new laws that have been enacted in an effort to eliminate these abuses, the financial abuses continue to be present, and typically occur upon renegotiation of long-term ground leases.

Accordingly, the purpose of this Act is to provide that lease rent based on fair market value, as determined by a real property appraisal, that is less than the rental amount currently being paid, shall prevail over an existing lease contract provision that bars the lowering of lease rents upon renegotiation.

SECTION 2. Section 519-1, Hawaii Revised Statutes, is amended by amending subsection (a) to read as follows:

"(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 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 a renegotiation of the rental amount, based on fair market value as determined by a real property appraisal, may result in decreased rental recompense, notwithstanding any contract provision to the contrary."

SECTION 3. This Act does not affect rights and duties that matured, penalties that were incurred, and proceedings that were begun before its effective date.

SECTION 4. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 5. This Act shall take effect upon its approval.

INTRODUCED BY:	_____________________________

HOUSE OF REPRESENTATIVES	H.B. NO.	1407
TWENTY-NINTH LEGISLATURE, 2017
STATE OF HAWAII