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BP Business Economic Loss Claim Appeal 2015-1832: Lease must be adhered to in order to be considered “arms length”


The following is an Appeal Panel Decision issued pursuant to Section 6 of the BP Deepwater Horizon Economic & Property Damages Settlement Agreement and the Rules Governing the BP Appeals Process. Links may have been added to assist the reader. The original decision may be found here, as well as a glossary of BP Settlement terms.

This is one of five related appeals in which the Claims Administrator denied the BEL claims of this commercial lessor headquartered in Lake Charles, Louisiana (Zone D). Claimant appeals the exclusion by the program accountant of rental income paid by an entity also owned by Claimant’s principal. Claimant prosecutes this appeal, asserting that the Administrator erred in excluding the related party revenue.

Claimant leases five commercial properties in the Gulf Coast Areas to a related company, [XXXXX]. The claims are for locations in [XXXXX]. The program accountant was unable to determine that the rental revenue resulted from an arms length transaction and excluded it from the calculations. On appeal, Claimant has submitted a written commercial lease signed in 2007 between the Claimant and [XXXXX]. Claimant argues that the lease is objective documentation of the arms length nature of the rental agreement. Claimant therefore urges that the denial should be overturned and the claim remanded for recalculation with the rental revenue included.

BP argues that the Administrator correctly excluded the rental revenue because the history of the rental payment by the tenants was irregular and arbitrary. For example, the lease calls for fixed monthly payments but this provision was apparently not adhered to. In several months, no rent was paid while in others, rent payments in varying odd amounts were recorded. It is clear from the P&Ls that the actual payments rarely matched the monthly rent required in the written lease.

Claimant argues in its reply brief that this pattern is not uncommon and merely represents a lenient landlord allowing the tenant to catch up on past due rent. BP counters that the Claimant was allocating income between itself and [XXXXX] for tax purposes with no precise methodology.

On de novo review, it is the conclusion of this panelist that the irregular nature of the payments, without insistence on compliance with the lease provisions, would not likely occur on the open rental market. The inconsistent and sometimes haphazard pattern of rent payments is not the hallmark of an arms length transaction. The Claims Administrator has established Policy 328 v.2 which provides that related party revenue that is not based on an arms length transaction should typically be excluded from revenue. Here, the program accountant was correct in concluding that the rental payments from [XXXXX] were not the product of an arms length transaction. The Claimant and [XXXXX] are clearly related parties. Even with the written lease agreement, the record of inconsistent rental payments is persuasive evidence that mitigates against the existence of an arms length transaction. The Claims Administrator was correct in denying this claim and the Claimant has not demonstrated an adequate basis for overturning that decision.

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