Keep Writing Your Agreements That Way – The Litigators Love You

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Has Ruminations ever suggested that those who negotiate and prepare agreements take to heart the following message: “Words matter – say what you mean and mean what you say”? Yes, and more than once or twice. In fact, more than novence.

Will that stop us from doing so again? No.

Today we look at a lease that said: “All disputes under this Lease, OTHER THAN THOSE RELATING TO THE PAYMENT OF RENT OR OTHER CHARGES BY TENANT, must be submitted to arbitration.” The tenant under this lease vacated the leased premises, failed to pay rent and other charges, didn’t remove its fixtures, and didn’t restore the leased premises to the contractually required condition. With that in mind, we are going to find out what monetary claims were subject to arbitration and what claims were not. Had the parties said what they meant, Ruminations wouldn’t be able to tell you their story.

To see where this story comes from, click HERE.

[WARNING: Today’s posting is a long one. We’ll try to keep your interest high, but you may want to settle down with a cup of coffee or another stimulant permitted by your state’s laws.]

A lease ran until mid-2011. As can be expected, the tenant was to pay rent and “additional rent,” that being its proportionate share of taxes, insurance premiums, maintenance costs, and some other specified charges. At the end of the lease’s term, even if it came early, the tenant was obligated to restore the premises to its original condition. [That whole subject is for another day.]

Under the lease’s holdover provision, the tenant was to pay double the base rent each month. To terminate the lease during its “holdover,” the tenant was required to give 60 days’ notice. [We think the word, “holdover,” might have been used a little too loosely. If you’re curious why, click HERE.

The landlord had alternative remedies available if the tenant defaulted. It could have terminated the lease and continued to seek monetary damages. Or, it could have let the tenant stay, push for the tenant’s compliance, and seek monetary damages. You’ve already seen the lease’s way of saying what disputes needed to be arbitrated

Just before the end of the lease’s term, the tenant, knowing that it wasn’t going to be able to vacate the space, asked its landlord for a term extension. The response was, “No, you’ll be a holdover tenant paying double rent.” The tenant yielded, and paid that rate for the next four months. However, it left in the middle of the fourth month and stopped that month’s rent check. It did not surrender the leased premises in the required condition

This was the landlord’s tally as to its purported damages (all figures being approximate):

$28,000 – rent for the balance of the partial month

$ 1,400 – late fee for that month

$65,000 – rent for the next two months (by reason of the 60 day notice provision)

$ 3,000 – late fee for those two months

$77,000 – repairs and removal of unauthorized work and tenant’s property

$ 8,000 – overhead fee on the $77,000

$84,000 – loss of rent while the repairs were being made

Before crediting a $32,000 security deposit, that added up to $224,000.

Let’s begin with why it was likely that the arbitration provision was written as not to apply to the payment of rent and other charges. Actually, let’s speculate why the parties agreed to that formulation. Our guess is that the landlord wanted to make sure that it could still seek judicial eviction by use of a summary procedure in whatever qualified as landlord-tenant court. If any reader has a different guess, feel free to send your guess to us and to all readers by using the comment feature at the bottom of this posting.

If that’s what the landlord wanted to preserve, it could have expressly said so by writing something like the following: “Notwithstanding this requirement to arbitrate disputes, nothing in this lease will preclude Landlord from seeking judicial eviction of Tenant and seeking a judicial order for possession of the Leased Premises even if the amount owed to Landlord is in dispute.” Then, they could have left out the entire carve-out. But, that’s not how the parties in the case did it.

We think that’s what they meant and that’s what they should have said. And that’s true even though the landlord, in its collection action, argued that the exclusion was to leave monetary disputes for litigation. It spent a lot of money to go to court with its collection complaint (after all, the tenant had already vacated and there was no need to seek eviction) and then spent more money to prosecute an appeal. Once the tenant vacated, why didn’t it just use the arbitrator? While it prevailed in getting the court to agree that a small part of its claim was excluded from arbitration, the end result was the court ordering that the landlord’s entire claim had to be arbitrated. As to why its entire claim was shuttled to arbitration, you’ll have to await the end where we tell you “the butler did it.”

If all of our analysis is correct, then we’re pretty sure the landlord isn’t real happy. And, even though the tenant was successful in moving the disputed charges out of the courts (where the landlord wanted them), it can’t be that happy to have paid for a trial and an appeal and, as a result of the appeal, finally to get to arbitration. Like some say, “you can pay a little now (for good document drafting) or a lot more later; it’s your choice.”

Why do we think they didn’t “say what they meant and mean what they said?” That’s because they had to go to court to be told what they said. It cost those contracting parties money for a fight they didn’t have to have. Here’s what the outcome turned out to be.

To begin with, the tenant got the lower court to agree that all of the charges above were to be the subject of arbitration. Then, the appellate court parsed the list of disputed items and, using a much different analysis, reached the same conclusion. Here’s how.

What did “rent or other charges” mean? Well, regular readers of Ruminations have seen these rules of contract construction before:

Such matters of contract interpretation are subject to plenary (read that, “unlimited”) review on appeal because of the general rule that contract construction is a question of law.

The court’s role is not to resolve factual disputes, such as the intention of the parties when they enter into a lease or other form of contract (that’s for a jury or other fact-finder), but only to review and interpret the language of that lease or other contract within the context of the undisputed facts.

Where the terms of a contract are clear and unambiguous there is no room for interpretation or construction and the courts must enforce those terms as written.

However, whether those terms of a contract are clear as written or are ambiguous is a question of law subject to independent review and conclusions.

An ambiguity in a contract exists if the terms of the contract are susceptible to at least two different alternative interpretations.

To determine the meaning of the terms of an agreement by the objective manifestations of the parties’ intent, the terms of the contract must be given their “plain and ordinary meaning.”

A contract must be viewed and interpreted as a whole and not by examining individual phrases independent of one another. A basic principle of contract interpretation is to read the document as a whole in a fair and common sense manner.

[There are a lot more of those principles and a lot of different ways to say them. Today, we’ve only quoted from, and paraphrased from, this particular court’s formulations.]

As to which of the disputed items was clearly “rent,” only the amount owed for the partial month qualified. The lease listed the rental amount for months that fell within the lease’s term. It also said that the base rent after the end of the lease’s term would be equal to twice that stated for the last month in the lease term. Since the tenant occupied the leased space for the partial month, and base rent was due at the beginning of each month, the amount owed for the month in which the tenant vacated at mid-point was due before the tenant vacated.

What about the following two months? Wasn’t that also “rent”? As already noted, the lease also said that it would take 60 days’ notice to terminate the holdover “term” and that the rent would be double the old rent for that entire period. Yet, the court held that the amounts owed by the tenant for those two months was not rent, but were “damages” for failing to give the required 60 days’ notice. [That’s $65,000]

Why wasn’t that really rent? Well, do we all really know what the word “rent” means? – Probably not. There is case law that tells us something beyond what our intuition tells us, specifically, “[t]he normal meaning” of the term “rent” is “consideration paid by a tenant for the use or occupancy of property.” [Underlining by Ruminations] So, because the tenant didn’t “use or occupy” the leased premises for those two months, the money it would owe would not be “rent.”

If that’s not a satisfying explanation, try this one. Under the law of the state where this particular property was located, landlords have a duty to “mitigate,” meaning, among other things, to find a new tenant. Rent received from such a new tenant, if on account of those last two calendar months, would reduce what the prematurely vacating tenant would owe. The remaining difference would be “fair compensation” for the landlord’s losses, hence not “rent.”

[Piling it on, the court in this case also added that the lease’s holdover provision didn’t expressly call the holdover payments “rent.” We’re not sure if, in the end, calling those payments “rent” would have mattered, but it has a pretty good shot at doing the trick, especially if the parties knew what they were doing when they wrote the arbitration carve-out text.]

The term “additional rent” was used in a lot of places in the lease, but not in all places. Notably, it wasn’t used in the arbitration carve-out. That omission gave rise to the question, among others, as to whether the phrase “other charges” used in the arbitration carve-out was inclusive of items identified as “additional rent.” [Of course, in keeping with this week’s theme, the parties could have “said what they meant.” But, again, they didn’t. So, they paid for two courts to tell them what they meant, even if they really didn’t mean what the courts decided they meant.]

As to whether “additional rent” was defined and if it was, what its definition might have been, we’ll leave it to our erstwhile readers to decide. You have your choice of two definitions, within the lease. Here they are:

“[P]ayment of ‘rent’ or ‘basic rent’ is ‘in addition to the other amounts, payments and other monetary obligations as elsewhere provided herein (‘Additional Rent’).”

          or the next sentence describing:

“’Additional Rent’ as ‘consisting of utilities, taxes and other payments provided in this Lease.”

What happened to direct statements like: “‘Additional Rent’ means all monies, other than Basic Rent, payable by Tenant to Landlord pursuant to this Lease, whether for use and occupancy of the Leased Premises or not. Landlord’s rights and remedies for Tenant’s failure to pay Additional Rent when due are the same as those for the non-payment of Basic Rent”?

[Take note that we suggest saying “by Tenant to Landlord” to exclude an unbargained-for default by reason of a tenant’s failure to pay someone else. Readers can argue among themselves about that.]

Now, here is a universal problem that we’ve often been unable to explain to many who prepare leases and other contracts. Whichever formulation (of the three above) you’ve become fondest of, each says that payments (of all kinds) from the tenant to its landlord fall within the definition of “Additional Rent.” Yet, our industry’s practice is to go ahead and tag some, but not all, specific obligations with a lease with the label: “Additional Rent.” We might even use a Section heading of “Additional Rent” and then use subsections for specific charges such as taxes, insurance premiums, and operating expenses. Some lease provisions might read like: “As Additional Rent, Tenant will pay Landlord for all costs incurred by Landlord to change lights bulbs within the Leased Premises.”

So, what’s wrong with that? Well, Ruminations and the court will tell you. Few have ever listened to us (and that’s forced us to follow the crowd). Perhaps we and our readers will listen to this court. Here goes.

In the lease in question (the one with the “arbitrate some issues, not others” provision), a lot of monies payable by the tenant were labeled as “Additional Rent” despite the seeming lack of a need to do so (because either of its two different definitions would have made those payments into “Additional Rent”). Some provisions, notably, the ones captioned as “FIXTURES” and “ALTERATIONS,” did not use the term “Additional Rent.” So, the court ruled that, despite the broad definitions (yes, the two of them), not all charges and required payments were actually “Additional Rent,” just those specifically labeled as such.

Now, this ruling by the court led it further down the path of contract interpretation. The arbitration carve-out language didn’t include “Additional Rent.” It “carved-out” for “rent or other charges.” So, did “other charges” mean ALL “other charges”? According to the court – “No.” Why? The phrase “other charges” immediately followed the word, “rent.” The court already had construed “rent” to include “Additional Rent.” There is an “ancient” maxim of statutory construction as follows: “the meaning of words may be indicated and controlled by those with which they are associated.” Accordingly, the phrase, “other charges,” was to be interpreted “within the same context as ‘rent’ and ‘additional rent,’ that is, those charges that were in exchange for” the right to use and occupy the premises.

As if that weren’t enough (or isn’t convincing), how about this thought expressed by the court? “Furthermore, if ‘other charges’ were to include broadly any claim for money damages, the mandatory arbitration clause would effectively be written out of the lease. The landlord’s disputes with the tenant are bound to involve the recovery of money.” “A contract ‘should not be interpreted to render one of its terms meaningless.’”

Moreover, here’s something we’ve hidden from you until now because it would have seemed like a non-sequitor (as a literary device, not as a form of logical argument) had we mentioned it earlier. The lease gave the arbitrator the power to establish “a value incident to the resolution of a valuation dispute.” From that, we learn that the arbitration carve-out couldn’t have been meant to apply to ALL monetary disputes.

Where did that leave the court in figuring out what monetary items were subject to arbitration and what ones were not? Easy – since arbitration is a favored form of relief, and since the court could conclude that the carve-out for “other charges” was, at a minimum, “ambiguous,” the issue, itself, would need to be arbitrated.

Applying that analysis to the $84,000 loss of rent while the repairs were being made, the court said such a claim was not for a “rent-like” item because it wasn’t for the vacating tenant’s use or occupancy of the leased premises. Not being “rent-like” meant it wasn’t an “other charge” in the restricted sense the court gave to the phrase “other charge.” Similarly, while the expenses of removing fixtures and repairing the premises (and the claim for overhead) arose from the words in the lease, they, too, were not “other charges,” more closely resembling a claim for loss of use by the landlord. In effect, they arose from the tenant’s alleged breach of the lease, not from the lease itself. Likewise, the late charges.

Fortunately for the parties, the court wisely ruled that with only a small amount falling outside of the mandate to arbitrate (being, the rent for the partial final month of occupancy), the entire set of claims had to be arbitrated. That’s because of another public policy – to avoid the unnecessary bifurcation of disputes between judicial resolution and arbitration for intertwined issues.

If you think it took a lot of words today to write about how sloppy drafting cost a particular landlord and tenant a lot of money to wind up where they should have been in the first place, then think how many words their respective attorneys said and wrote in getting back to where they should have started.

Today’s posting WAS NOT about the wisdom or efficacy of arbitration or any other form of alternate dispute resolution. It was about failing to write what the parties actually meant. Or, possibly, it was about not knowing what they meant, but writing something anyway. There are many differing views about the choice between using arbitration or judicial process, and when (or whether) it is wise to select one and not the other. Though that’s not really the issue raised today, clear drafting of documents is, we’d like to hear your thoughts on either the use of arbitration or about document drafting. So, go right ahead and enter your comments right below so as to share them with thousands of like-minded readers.

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Comments

  1. Ira, today’s post could lead to an entire course on negotiation, best business practices and the virtues of being a Hemingway, rather than a Kafka, in drafting leases.

    Here are some principles I’ve learned to avoid clusters like the one you’ve described:

    1. Don’t make deals that can’t be written clearly and easily enforced.
    2. Lease administration experience makes for superior lease negotiations.
    3. In drafting, speak from a clear understanding of business practicalities.

    You asked a brilliant, foundational question above: “What happened to direct statements like: “‘Additional Rent’ means all monies…” Indeed. What happened to common sense, or the idea that we are writing to make a business work? I think the tortured, nonsensical language this case illuminates results from lease-makers being completely detached from business operations, including moving out of a space or collecting rent. Which isn’t their fault, really.

    The interplay of ADR and this situation is an important topic. I advise my clients to reject arbitration provisions as a policy matter, substituting mediation instead. If a mediated negotiation which deploys experienced, neutral leasing professionals can’t work things out, then go to court. Of course, in mediation the parties can elect to arbitrate. It’s better to find it through process rather than in the lease itself.

  2. Elliot Warm says:

    Ira, I find this article particularly interesting as an example of the need for clear definitions. For example, the word “Rent” could be defined consistently as including base rent and all additional charges payable by the tenant under the lease; and the definition could have in this case gone even further so as to cover all items payable by the tenant that arose from the lease. (I do understand that most of the time, the latter concept isn’t needed, because the characterization of rent and additional rent is generally required only to allow for a dispossess action for non-payment; once there is no issue of possession, who cares what you call the money owed, as long as you can collect it.)

    I took special note of the issue of a repeating the additional rent language more than necessary rather than having a general statement. In the same vein, I have had clients who insisted that non-recourse language be used in loan documents in every possible instance where there could be liability for payment. I thought it the better that there be one definitive statement of non-recourse in the main document, with the typical lawyer language that “anything to the contrary notwithstanding in any of the Loan Documents [a term of art],” the non-recourse applies. Indeed, as in the case you cited, I was fearful about using the exculpatory language in, say, 10 places, and then having a judge determine that there must be a reason why it was not used in one other particular place.

  3. While I agree with Ira’s general theme that as attorneys our job is to make sure that what we write is what we (and, more importantly, our clients) mean, I disagree that the landlord in this case probably intended to carve out only judicial eviction from the arbitration clause. I think the landlord wanted to exclude all monetary claims from arbitration (although that is not exactly what the lease said). Arbitration would then be reserved for non-monetary issues: e.g. who had a particular repair obligation or what the fair market rent should be during a renewal term. In my experience landlords disfavor arbitration, especially of monetary obligations, because they fear a neutral arbitrator would “compromise” what they see as justly owing to them.

    Also, Roger makes an excellent point. It is vitally important to have a clear understanding of your client’s business and the practicalities of lease administration. Something I finally learned after years of private practice when I became in-house counsel for a major office tenant and saw the actual effects of holdover, surrender in condition ante, renewal options, operating costs, and other provisions.

    I also agree with Roger to make mediation the first step. While I was in-house, it was a clause that we always tried to include in every lease. As a practical matter landlord’s and tenant’s lease administrators talk to each other all the time and work out minor problems. When they are not able to work out something themselves, it is almost always prudent to resort to mediation rather than “going to war” which is always the case in litigation and often the case in arbitration.

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