New Jersey Court Clarifies Valuation of Option Agreements: Lease Encumbrances Must Be Included

Introduction: When "Fair Market Value" Depends on the Lease

Option agreements for the purchase of commercial real estate often hinge on key valuation terms. But what happens when the property is subject to a long-term lease with below-market rent? The recent decision in Blinds To Go (U.S.), Inc. v. Lakewood Development Co. (OCN-L-3541-25, Dec. 15, 2025) provides a definitive answer for New Jersey: unless the contract clearly states otherwise, the impact of the lease must be included in the valuation. This opinion is a crucial touchstone for businesses negotiating, enforcing, or litigating purchase options tied to leased property.

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Factual Background and Procedural History

The dispute centered on a commercial property at 1800 Cedar Bridge Avenue in Lakewood, NJ. In 1997, Blinds To Go (U.S.), Inc. (“Blinds To Go”) entered into a ground lease with the Industrial Commission of the Township of Lakewood (“ICL”) for an initial 20-year term, with options for three 10-year renewals. The lease included an automatic renewal clause and, critically, an Option Agreement allowing Blinds To Go to purchase the property at a set price, which—if exercised during a renewal term—would be determined by the “then-current fair market value of the land, exclusive of all improvements,” as determined by appraisal.

Lakewood Development Co. (“LDC”) acquired the property in 1999 and became bound by these agreements. In June 2024, Blinds To Go exercised its purchase option, triggering an appraisal process. The parties’ appraisers disagreed: Blinds To Go’s appraiser valued the leased fee interest (accounting for the existing lease) at $1.2 million, while LDC’s appraiser valued the unencumbered fee simple interest at $10.2 million.

Blinds To Go sued for breach of contract and sought specific performance. In December 2024, the court ruled that the valuation must include the lease as an encumbrance and ordered a new appraisal. A subsequent appraisal valued the leased fee interest at $1.3 million, which Blinds To Go accepted. After failed negotiations, Blinds To Go moved to enforce its rights and compel the sale; LDC cross-moved for reconsideration, arguing the court’s interpretation was incorrect.

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Key Legal Issues

The court addressed three core legal questions:

1. Should the fair market value for the purchase option include the impact of the existing ground lease (leased fee interest) or reflect the unencumbered fee simple interest?
2. Did the court’s prior summary judgment order misapply principles of contract interpretation?
3. Is Blinds To Go entitled to specific performance of the Option Agreement at the appraised price?

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Legal Standards Applied

1. Motion for Reconsideration (Rule 4:49-2)

Reconsideration is an “extraordinary remedy,” appropriate only if the court’s decision was “palpably incorrect or irrational,” or if it failed to consider significant competent evidence. It is not a vehicle for re-argument or raising new issues. (See State v. Fitzsimmons, 286 N.J. Super. 141, 147 (App. Div. 1995); D’Atria v. D’Atria, 242 N.J. Super. 392, 401 (Ch. Div. 1990)).

2. Contract Interpretation

New Jersey courts enforce contracts according to the intent of the parties as reflected in the express terms, surrounding circumstances, and underlying purpose. Unambiguous terms are enforced as written. (Manahawkin Convalescent v. O’Neill, 217 N.J. 99, 118 (2014); Cypress Point Condo. Ass’n v. Adria Towers, L.L.C., 226 N.J. 403, 415 (2016)).

3. Fair Market Value Determination

“Fair market value” is the price a willing buyer and seller would agree upon in an arm’s-length transaction, considering all relevant encumbrances unless expressly excluded by contract. (See Humble Oil & Refining Co. v. Englewood Cliffs, 135 N.J. Super. 26, 33 (App. Div. 1975), aff’d, 71 N.J. 401 (1976); Multi Mgmt. Realty, LLC v. Union, N.J. Tax Unpub. LEXIS 59).

4. Specific Performance in Real Estate Contracts

Specific performance is the presumptive remedy for breach of a contract to convey real estate. (Friendship Manor, Inc. v. Greiman, 244 N.J. Super. 104, 113 (App. Div. 1990); Pruitt v. Graziano, 215 N.J. Super. 330 (App. Div. 1987)).

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The Court’s Reasoning and Application of Standards

A. Lease Encumbrance Must Be Included in Valuation

The heart of the dispute was whether the appraisal should reflect the property’s value subject to the below-market ground lease (leased fee interest) or as if unencumbered (fee simple interest). The court found the Option Agreement’s language unambiguous: it excluded improvements from the valuation but did not exclude the lease. As the opinion stated:

“The Option Agreement’s language is unambiguous and does not exclude the ground lease from the valuation, though it expressly excludes improvements.”

Relying on Humble Oil and established appraisal practice, the court emphasized that encumbrances such as long-term leases materially affect value and must be considered unless the contract expressly provides otherwise. The court noted:

“The fair market value of the Property requires the inclusion of the lease terms.”

Both parties’ appraisers, using the income approach, reached a valuation between $1.2 and $1.3 million—reflecting the impact of the lease, which fixed rent at a rate far below market for over two decades.

B. No Basis for Reconsideration

Applying Rule 4:49-2, the court found no “palpably incorrect or irrational basis” in its prior ruling. LDC’s arguments were rejected as attempts to re-argue the merits. The court observed that the contract’s silence on excluding the lease—while expressly excluding improvements—signaled the parties’ intent to include the lease in the valuation:

“The contract’s silence on excluding the lease, while expressly excluding improvements, indicates intent to include the lease in the valuation.”

C. The “Absurd Result” Is a Consequence of the Bargain

LDC argued that using the leased fee valuation produced an “absurd” result: a sale price far below current market value. The court acknowledged the harshness but found it flowed directly from the parties’ bargain. The reduced price was a consequence of incentivizing Blinds To Go to locate in the industrial park with below-market rent. The court declined to rescue LDC from the “absurd result” the lease itself created:

“The absurd result of the greatly reduced sales price is generated by the rental income as defined by lease itself.”

D. Specific Performance Ordered

Finding that Blinds To Go had established its right under the contract, and that the parties’ appraisers had agreed on the value, the court ordered specific performance: execution of a contract of sale for $1.3 million and transfer of title by April 3, 2026.

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Practical Implications for New Jersey Businesses

1. Contract Language Controls—Omissions Matter

This case underscores that courts will enforce unambiguous contract terms as written. If a party wants to exclude certain encumbrances (such as a lease) from a “fair market value” determination, the contract must say so explicitly.

2. Existing Leases Can Dramatically Reduce Option Prices

Long-term leases with below-market rents can significantly lower the appraised value of a property for option purposes. This is not a loophole; it is the direct result of how “fair market value” is determined in the presence of encumbrances.

3. Motions for Reconsideration Have a High Bar

Businesses should be aware that motions for reconsideration will not succeed merely because a party is dissatisfied with a result or wishes to reargue the case. Only clear error, irrational reasoning, or overlooked evidence will suffice.

4. Specific Performance Is the Default Remedy

For real estate contracts, New Jersey courts will usually order specific performance—forcing the sale—rather than awarding damages. Parties must be prepared to fulfill their contractual promises.

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Actionable Takeaways for Business Owners and Practitioners

• Draft Carefully: When negotiating option agreements, explicitly state whether existing leases or other encumbrances should be excluded from the fair market value calculation. Silence will likely mean inclusion.
• Review Lease Terms: Understand how long-term leases—especially those with below-market rent—can impact property value if an option to purchase is later exercised.
• Document Appraisal Methodologies: Both parties should ensure that their appraisers use methodologies consistent with the contract and prevailing law.
• Act Promptly on Disputes: Delays or obstruction in complying with clear contractual obligations can lead to court-ordered specific performance and adverse cost consequences.
• Seek Legal Counsel Early: Complex option agreements and lease structures demand careful legal review to avoid unintended—and potentially costly—outcomes.

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Conclusion: Consult Experienced Counsel for Complex Real Estate Options

The Blinds To Go decision is a powerful reminder that New Jersey courts will enforce the plain language of real estate contracts, and that “fair market value” includes existing encumbrances unless expressly excluded. For businesses and property owners, the stakes are high: millions can turn on a few words in an option agreement. If you are negotiating, exercising, or disputing a real estate purchase option, consult experienced legal counsel to protect your interests and avoid costly surprises.