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BP Business Economic Loss Claim Appeal 2016-1202: SP Denies Claims as Related Party Transaction Due to Landlord Rent Waivers and Forgiveness


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.

Claimant appeals the denial of its BEL claim. The Settlement Program (“the SP”) excluded from its calculation of revenue lease payments, Claimant as landlord, received from its tenant,  a motorcycle sales and repair business is owned by a husband and wife and the husband is the 100% owner of ***.
Claimant forthrightly states in its Initial Proposal, “It is agreed without question that the Claimant and its sole tenant are related parties. It is also agreed that the Claimant would not be eligible for any award without the receipt of related party revenues due in part that 100% of the Claimant’s revenues was derived from the tenant.”
Under Policy 328 v.2, “related party transactions that are not arm’s length transactions” typically are not treated as revenue. The SP stated in its final denial, in the form of its Post-Reconsideration Eligibility Notice, that “[g]iven that the Claimant was unable to provide written contracts or agreements for the Rental Revenue, Accounting Review could not determine the arms-length nature of the related party revenue transaction.” In response to that Notice, counsel for submitted a list of facts he deemed pertinent (Doc. ID), including the following:
2. The Claimant placed the building in service on August 1, 20014 and the building has been rented to from that date until present day.
3.The Claimant has leased the building to the tenant on a month to month basis and there has never been a written lease agreement between the parties.
4.The Claimant charged a base rent of $ 8,000 per month from inception until April, 2010, which is the date of the Oil Spill.
5.The tenant was unable to make the May 2010 rent payment due to the fact that the tenant’s gross income was down over a $100,000 or 33% as compared to May 2009 gross income. Therefore, the tenant was allowed by mutual consent to skip the May 2010 rent.
6.The tenant was able to make the June 2010 rent payment of $ 8,000 as sales revenues did a slight uptick due to a deeply discounted sales event in order to stimulate business.
7. By mutual consent the rent was lowered to $ 5,000 a month for July December 2010 due to the significant decrease in sales revenues of the tenant.
8. Deepwater has paid the tenant over $ 200,000 in BEL damages as a result of the Oil Spill. Therefore, it would be logical to conclude that the Claimant wouldn’t have reduced the monthly rent am ount to its sole tenant if this sole tenant didn’t have any BEL damages. The sole tenant didn’t have marginal damages but instead had severe damages. The reduction in rent from the Claimant to its sole tenant is fully justified and has been fully documented with tax documentation and support.
9.Deepwater asserts that it can’t determine if the revenue transactions were arms length. The tenant uploaded several rent comparisons so to provide evidence that the market rent was reasonable. The Claimant had set the monthly rent amount in 2004 and had not increased the monthly amount for roughly six years. If anything, the Claimant should be entitled to additional damages as the monthly rent rate has not been adjusted for even CPI.
10. Rents from the Claimant’s tenant remained at $ 5,000 per month through December 2011 at which time the monthly rent was adjusted to $ 6,000 per month effective January, 2012. The monthly rent rate of $ 6,000 is in effect as of today due to the fact that the Oil Spill caused irreversible damages to the Claimant and the Claimant’s tenant which may never be resolved.
Counsel also included in that document the statement, “The Claimant and the sole tenant did not have a written lease agreement in effect as it is completely illogical to take a creditable position that the Claimant would evict itself from its commercial building . . . .” Finally, Claimant acknowledged that its unwritten lease terms required to pay an additional lump sum rental payment of $36,000 in
December of each year, but that it had “agreed to forego” that payment due to“financial perils” resulting from the Spill. In its Initial Proposal, Claimant elaborates to say that the $36,000 annual payment due each December“was forgiven” because it was “totally unreasonable to take a position that there was any expectation for the tenant to make payment of this annual payment” considering the drop in revenue had experienced after the Spill. As proof of that loss of revenue by states in its Initial Proposal that the SP compensated “the tenant over $212,000 in June, 2015,” for its own BEL claim.
The panelist finds that the SP acted well within its discretion in concluding that the monthly rental reductions/waivers, and the annual lump sum payment forgiveness, were not consistent with an arm’s length transaction, given (1) the lack of any documentation for the lease terms; (2) the “forgiveness” of rents due without any provision for later payback, despite recoupment of damages via its BEL claim; (3) the lack of any increase in the monthly rent during the six-year life of the lease prior to the Spill; and (4)offered justification for the absence of a written lease, that“it is completely illogical to take a creditable position that the Claimant would evict itself from its commercial building.” That last detail is telling because in an arm’s length transaction, the landlord would certainly want to have the right to evict a tenant who was defaulting in its rental payments.
Claim denial upheld, appeal denied.

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