Determining Correct Lease Term Length
Q I signed a lease with a tenant for office building space more than 20 years ago. The lease was to expire in 2011, but included an option for the tenant to renew for a five-year period. During the original term, the lease was assigned to a string of subsequent tenants. Under the lease, the current tenant could exercise the option to renew its term for an additional five years—if it notified me of its intention to exercise the option and stay in the space in writing within six months of the lease expiration.
The tenant tried to exercise the option in writing, but according to the date I believe the lease is set to terminate, the tenant missed the deadline by three months. When I notified the tenant that I would be renting the space to another company in three months because of its untimely notice, it claimed that it had given its notice to exercise its option early, according to the date it believed the lease was to expire—two years from now in 2013.
The dispute over whether the lease ends this year, as I think it does, or in 2013, which the tenant argues is the correct time, has gotten ugly. It turns out that I approved several assignment agreements with the past tenants, some of which stated that the original lease term ended in 2013 and some of which stated that it ended in 2011, which was reflected in the original lease. Now the tenant is refusing to vacate the space because it says that regardless of the date used in the original lease, the assignment agreement that it signed uses 2013 as the end date.
I have an offer from another tenant that will pay significantly higher rent, but only if it can move in soon. The current tenant and I have both threatened to go to court to determine the correct date, which will determine whether the tenant appropriately exercised its option. I don't want to lose the opportunity to charge higher rent to a new tenant, but I also don't want to pay for a lawsuit. How would a court determine who is right in a dispute between a tenant and owner in a case like mine over a lease's end date?
A A court's determination about conflicting lease termination dates is case specific. So whether it's worth your time to go to court, hoping that you'll be able to rent the space to a more lucrative tenant, is a gamble. Typically, a lease termination date is very clear: It's in the lease agreement. However, in your case, the space has been turned over so many times that, unfortunately, you didn't double-check to make sure that the correct length of the lease was in every one of the assignment agreements you agreed to. And even though the original lease sets the expiration date for this year, subsequent assignees—including the current tenant—relied on the representation that the lease term was longer.
So, which date will be used? The situation in a past Kentucky case, although it dealt with retail and not office space, is similar to yours. It shows that while these types of decisions are very case specific, there are certain factors that influence the court in determining which date is deemed to be correct for purposes of meeting deadlines to renew leases.
In the case, the owner developed a shopping center in the 1960s. It leased the property in 1966 to a tenant for a 25-year period beginning on Jan. 29, 1967, and ending on Jan. 28, 1992, with five successive renewal options for terms of five years each. The lease provided that an exercise of the first five-year option must be given at least six months preceding the expiration of the initial 25-year lease term.
In the meantime, starting in 1972, the lease was assigned several times. The assignment agreement for the fifth tenant stated that the lease rights were assigned to it for the remainder of the initial term of the lease ending on Jan. 28, 1994, and for the five renewal terms. Although the owner consented to the terms of the assignment, it didn't raise the issue that the ending date should have been 1992, according to the initial lease, rather than 1994.
The tenant struggled financially and wanted to assign the lease. When it was talking with prospective tenants to take over the lease, it stated that the lease would end Jan. 28, 1994. A major grocery store franchise assumed the lease. Although that assignment agreement reflected an ending date of 1994, the owner approved it.
On Oct. 17, 1991, the franchise notified the owner of its intention to exercise its option to renew the lease. The owner rejected the notification as untimely and inadequate and said that it would take the space back on Jan. 28, 1992.
The tenant sued the owner in January 1992, seeking a declaration that the initial term of the lease expired on Jan. 28, 1994, and that, even if the court declared that the initial term of the lease ended Jan. 28, 1992, as the owner claimed, the tenant's exercise of the option was valid anyway.
In turn, the owner sued the tenant, seeking a determination that 1992 was the expiration date of the lease, and therefore, the tenant failed to appropriately exercise its first option. The tenant and the owner each asked a trial court for a judgment in its favor without a trial.
The trial court ruled in favor of the tenant, finding that the correct end date was Jan. 28, 1994, that the tenant had adequately exercised its option, and that, as a result, if the tenant chose to rent the space for all five of the additional lease terms, the final term would expire on Jan. 28, 2019. The owner appealed.
The appeals court noted that the entire conflict between the tenant and owner revolved around “what appeared to be a typographical error in a subsequent recorded assignment of the lease in 1972…That instrument misstated the termination of the lease as 1994 instead of 1992 and that error cascaded throughout the history of the lease and subsequent assignments,” the appeals court pointed out.
The appeals court observed that “the tenant provides numerous examples where the 1994 date is utilized, and the owner provides examples where the 1992 initial lease termination date is used and acknowledged by the parties.” However, the appeals court agreed with the trial court's determination in favor of the tenant.
The appeals court sided with the tenant because: (1) the initial error occurred in 1974, and the franchise tenant wasn't involved with the lease until 10 years later in 1984—when it responded to an advertisement by a previous tenant representing the termination date as being in 1994 instead of the correct 1992 date; (2) the price that the tenant paid reflected the value of the lease ending in 1994 and not a lesser price for a lease ending two years earlier; and (3) the owner had approved past assignment documents, as well as the franchise tenant's assignment agreement, that used the 1994 termination date.
The appeals court observed that the tenant “was entitled to the benefit of its bargain…It is not any single factor but a balancing of the equities between the parties to determine which would suffer an unconscionable hardship,” it said [Lumax Realty Corporation, et al. v. The Kroger Company, 2011].
Sometimes, space is sublet or assigned numerous times from one tenant to the next. And if you own several properties or don't stay on top of these transactions, an incorrect number, date, or other piece of crucial information could be used and relied on by the new tenant. To avoid confusion that can lead to expensive misunderstandings and protracted litigation—this case was finally resolved in October 2011—be vigilant about checking that all of the terms for an assignment are correct before approving it. Make sure that assignment agreements expressly state the commencement date and expiration date of the lease term. And keep copies of each agreement for yourself in case there's a dispute later.