How a Simple Leasing Issue Becomes Complicated
Fairfield County Business Journal
May 2, 2016
Your medical practice has four months left on its lease, and must relocate. You find a great space in another building, but it needs extensive reconfiguration, which will take the landlord two months. The term of the new lease will begin when this "fit-up" is complete.
Three months later, the fit-up is not complete, for reasons beyond the landlord's control - maybe a transport strike, or a shortage of special equipment or uncooperative building inspectors. Your situation has become urgent. You and your patients need to know where your office will be, so you find an alternative space. It’s inferior, but it will be ready in a week. You tell the landlord of the first space, "deal's off." The landlord says, "Nonsense, your lease doesn't allow you to walk away." Now, what?
If the lease didn't specify whether or when the parties - both parties - were permitted to walk away if the space wasn't ready on time, then the drafters committed a surprisingly common error - a contingency with no deadline, and no prescribed consequence for failure of the contingency. The beginning of a lease term might depend on fulfillment of many, possible contingencies. Perhaps, the landlord has yet to acquire the property, or perhaps the tenant needs licensure to use the space.
How do leases get written without the vital deadline? Perhaps the landlord's attorney had inserted a deadline in the first draft, allowing the tenant to walk away if the space wasn't ready within four months (a penalty for late delivery, often requested by tenants and just as often resisted by landlords, is no substitute for the deadline). Then, the landlord told its attorney that the four-month deadline should be extendable for reasons beyond the landlord's control, a reasonable qualification. When the attorney conscientiously insisted on a deadline, even if effective after the "force majeure" extension, the landlord said, "I don't want to give the tenant an out, forget the deadline".
This happens frequently. I don't suggest that the deadline be unrealistic, but the deadline adds clarity and aids enforceability.
If only the tenant (not the landlord) could walk away if the space wasn't ready by the deadline, the lease might be considered to suffer from a "lack of mutuality." Don't expect to argue this traditional technicality too successfully, but reasonable mutuality is another commonsense support for enforceability.
Alternatively, we might hear about the "rule against perpetuities", an even more ancient principle that was designed to invalidate grants that might vest (if ever) too far into the future. Attorneys have been scratching their respective heads over this rule for centuries, and Hollywood script writers use it for plot twists. Remember "Body Heat", 1981? Now, after centuries of judicial resistance and some statutory refinements, it is applied infrequently.
In a 2003 Connecticut case, a landlord and its tenant disagreed, seven years after signing the lease, over whether the lease term had begun, or could ever begin. The court mentioned the rule against perpetuities, but dismissed its application out of hand, preferring simply to determine the commencement date.
Although courts nationwide resist applying the rule against perpetuities, they also frown upon any lease that looks "perpetual." In a 2015 Connecticut case, the lease provided for a one-year term, but also for automatic, one-year renewals until either party gave notice of termination at least 60 days before the end of the then-current term. When, six years later, the tenant attempted to terminate in mid-term, the landlord sued for the balance of the current year's rent. Noting that "courts do not favor perpetual leases," the court ruled for the tenant, citing a 1975 case that invalidated a self-renewing lease under which only the tenant had the right to terminate.
In my view, the 2015 case was wrongly decided. The landlord in the 1975 case was potentially "stuck" forever, but in the 2015 case neither party was "stuck" perpetually. Once it gave a timely non-renewal notice, either party could get out of the lease at the end of the then-current, one-year term.
My point is not that non-attorney landlords and tenants should delve into these technical principles. Rather, they should regard them as commonsense reminders to avoid loose ends. We should avoid any lease arrangement that "seems perpetual". More generally, though, each party should attend carefully to the practical impact of lease contingencies, not only on itself but also on the other party. Leaving loose ends to resolution in court is too unpredictable and expensive.
Andrew A Glickson is a member of the Real Estate Department at Pullman & Comley, LLC, who frequently represents landlords and tenants in connection with many types of lease. His principal office is in Stamford. He can be reached at email@example.com.