U.S. appeals court validates gold clause in rental contract

By Lisa Cornwell
Associated Press
via Yahoo News
Thursday, August 28, 2008

http://biz.yahoo.com/ap/080828/oh_gold_clause_ruling.html?.v=1

CINCINNATI, Ohio -- A landlord can enforce a clause in 1912 lease requiring that rent be paid in gold coin for a landmark building in Cleveland, a federal appeals court ruled Wednesday.

A three-judge panel of the 6th U.S. Circuit Court of Appeals in Cincinnati sent the case back to a U.S. District Court in Cleveland to determine the equivalent rent that S&R Playhouse Realty Co. would owe for the Halle building with the "gold clause" enforced. The lower court also must address any remaining defenses by S&R.

The building is owned by 216 Jamaica Avenue LLC, which filed a breach-of-contract lawsuit in 2006 against S&R demanding rent equivalent to the value of 35,000 1912 gold coins. S&R has paid $35,000 annually in U.S. currency since assuming the lease in 1982 and balked at paying what would be a much higher amount. The lower court, finding for S&R, refused to enforce the gold clause.

"We are delighted that the windfall that the tenants have been enjoying is going to be eliminated and this will get back to a market-based rent," said David Thompson, an attorney with the Washington, D.C-based law firm Cooper & Kirk representing 216 Jamaica Avenue. "S&R has been paying 17 cents a square foot, which is way below prevailing market rates."

Thompson said that the ruling means S&R would probably have to pay about $8 a square foot in rent.

"The amount of gold that is due and owing is 1,693 ounces," said Thompson. "If the price was about $900 an ounce, that would be approximately $1.5 million annually."

Gary Walters, an attorney with Cleveland law firm Thomas Hine representing S&R, declined comment Wednesday.

The office building in downtown Cleveland was leased originally by Salmon and Samuel Halle in 1912 from Realty Investment Corp. It required $35,000 in rent to be paid in "gold coin of the United States." In 1933 Congress withdrew gold from circulation and banned nearly all private ownership of it. It also passed a resolution declaring gold clauses against public policy and allowing obligations in contracts with existing gold clauses to be paid with paper currency.

Congress repealed the ban on private ownership of gold in 1975, later amending the 1933 law to provide that parties could include gold clauses in contracts formed after 1977.

The appeals court said the gold clause in the 1912 lease never attracted anyone's attention during its first 90 years. But 216 Jamaica Avenue, a New York company, tried to enforce the gold clause when it bought the property in 2006 for $845,000. It argued that the value of its property has increased greatly over the decades and that S&R had every reason to know the risk. It also argued that the 1977 legislation permitted gold clauses to be enforced and that S&R assumed the obligations of the 1912 agreement when it assumed the lease in 1982.

S&R argued that the 1982 agreement in which it assumed the lease could not revive the gold clause because it had lain "dormant" since 1933. S&R also argued that even if the 1933 law did not remove the gold clause from the 1912 lease, the ban on enforcing the clause for several decades meant the parties to the 1982 agreement never thought about the clause.

The appeals court ruling that the gold clause is enforceable said S&R took on all obligations specified in the 1912 lease and that those obligations were clear in the 1982 lease agreement. The court also said the 1933 law did not delete the gold clause permanently from the lease agreement.

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