Leases Don’t Last Forever

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Did you know that leases which may have been intended to be renewable in perpetuity, if at all uncertain in that regard, will be construed as importing but one renewal?

In a case called Ginsberg v. Gamson, Ginsberg entered into a five year lease.  It included an “Option to Extend Term” that gave Ginsberg the option to extend the term of the lease for “additional five year periods upon the same terms and conditions contained in the lease . . . . The rent payable during each option term shall be increased in direct proportion to changes in the Consumer Price Index . . . . In no event shall the rent adjustment for the next extended term exceed 10% of the rent during the expiring term of the Lease.”  It permitted the landlord to demand Ginsberg contribute to property taxes if the premises were sold “during the term of the Lease or any extended term thereof.” It gave Ginsberg a right of first refusal to buy the premises “during the term of the Lease or any extended term thereof.”

In litigation over the duration of the lease, the trial court found that the lease provided for “a series” of renewals under the lease, limited by statute to 99 years.  (Civil Code section 718 provides that no lease which provides for a leasing in excess of 99 years is valid.)  The appellate court reversed.

It began by noting that in general, lease provisions giving the tenant the right to perpetual renewals are disfavored.  Despite this, courts will enforce a lease provision that grants a tenant the right to unlimited renewals, so long as the parties’ intent to create that right is explicit and clear.  There must be some “peculiar and plain language” before it will be assumed that the parties intended to create it.

Language that will not create the right to perpetual renewals include renewal provisions stating the lease may be renewed from “year to year” or for “successive” periods or terms (such as “for additional periods of five years each”).

So what language will provide for successive renewals?  Ginsberg approved terms such as “forever,” “in perpetuity,” or “for all time.”  The court also approved of language granting rights to the lessee and its heirs and assigns for ten years, with the right of renewal for ten years at the end of the term, “or at the end of any subsequent term for which it may be renewed.”  The court said that the emphasized words suggested the possibility of a long-term arrangement that would outlast the original lessee.

What was it about the Ginsberg lease that failed to make the grade?

First, it did not state the tenant would have the option to extend the term for additional five-year periods “in perpetuity,” “forever,” or “for all time,” except as limited by statute.

Second, although the option contained a rent escalation clause, it was not clear that the formula would apply to periods beyond one extension.

Third, the lease contained numerous provisions more consistent with a short-term lease such as: (a) The tenant was restricted to using the premises for one specific purpose unless the landlord consented.  (b) The lease required the landlord to make repairs and to pay utilities. (c)  The lease forbid the tenant from making significant alterations without the landlord’s consent and required that the property be returned in good condition.   (d)  Although the main body of the lease stated the lease would be binding on the parties’ heirs, successors, and assigns, the extension option did not repeat this language. (e) The lease prohibited the tenant from assigning or subletting without consent.

The court opined that if the parties had intended the lease to potentially continue for multiple decades, they would have minimized the landlord’s responsibility for the premises, allowed the tenant greater flexibility in modifying the property or transferring the lease, or ensured that the landlord had the ability to negotiate to cover an increase in costs over time.

Ginsberg contended that if the lease was ambiguous, the court should remand the case to the trial court to determine the parties’ intent as to the number of extensions.  The court decided, however, that California law would now “comport with the longstanding rule in numerous other jurisdictions” that if it is uncertain whether a lease is to be perpetually renewed, it “will be construed as importing but one renewal.”

Bottom line: leases which may have been intended to be renewable in perpetuity, if at all uncertain in that regard, will be construed as importing but one renewal.

If you have any questions, please contact Lori Lutzker at: (650) 342-9600 or llutzker@carr-mcclellan.com.

Topics:  Contract Renewal, Contract Term, Leases, Maintenance, Rent, Tenants

Published In: General Business Updates, Commercial Real Estate Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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