Additional Rent Is No Rent At All

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We are aware that in New Jersey, if a lease doesn’t denominate a particular tenant’s financial obligation as some version of “rent,” then the landlord can’t get the tenant evicted for non-payment of that item. The reason we are aware of this is because we’ve seen case law that denies a landlord such relief. While the landlord can sue to collect such charges, for example, common area charges, it can’t evict the tenant if the lease doesn’t say that such charges are “rent” or “additional rent.” It doesn’t matter that Ruminations thinks that’s just plain silly. That’s the way it works even if everyone other than the court knows that such items are part of a tenant’s rent.

Nonetheless, since courts, not Ruminations, get to issue eviction documents, almost all New Jersey leases recite something like: “All monies required by this Lease to be paid by Tenant to Landlord constitute ‘Additional Rent’ and the failure to pay Additional Rent will have the same consequences as failure to pay Basic Rent.” Still, some New Jersey leases don’t say anything like that but, fortunately, almost all tenants actually pay their rent (and additional rent). So, you don’t see a lot of court decisions about the issue.

We never thought much about this because the leases we have dealt with, regardless of where a property is located, cover this very point. So, from the transactional side of the business, the question of “what if” a non-New Jersey lease doesn’t make these kind of monetary obligations into additional rent really never crossed our mind. That is, until now.

Why now? Well, we came across a May 19, 2017 unpublished decision from the Court of Appeals of Kansas. [You can come across it as well by clicking: HERE.] It doesn’t deal directly with the issue, but the term “additional rent” plays a big part in the dispute.

A restaurant lease required the tenant to pay two rent components. Neither is surprising. The first element was “Minimum Rent.” The other was a proportionate share of the shopping center’s taxes, utility costs, and common area maintenance costs. The lease called those charges: “Additional Rent.”

The parties later amended the restaurant lease to add other space at the shopping center. It was for one year and the additional space was to be used as a banquet facility. Basically, the amendment called the new space the “Expansion Premises” and described the tenant’s financial obligation for the Expansion Premises as follows:

MINIMUM RENT FOR THE EXPANSION SPACE. In addition to all other amounts due and payable by Tenant pursuant to the Lease, Tenant covenants and agrees to pay Minimum Rent for the Expansion Premises during the Lease Term for the Expansion Premises (2,000 square feet) in accordance with the provisions of Section 2.1 and Section 2.10 of the Lease and as set forth below:

Now, take note that the amendment did not expressly require the tenant to pay “Additional Rent,” a defined term in the lease being amended. It did, however, set forth a specific “Minimum Rent” for the “Expansion Premises,” separate and apart from the Minimum Rent described in the lease for the original leased space.

About three months after the tenant “expanded” into the additional space, its landlord sent a bill for taxes and common area maintenance costs for the added space. That bill went unpaid. So, the landlord began eviction proceedings, BUT only with respect to the “Expansion Premises.” The tenant responded that the lease amendment only required payment of Minimum Rent for the added space, not “Additional Rent.”

Regular Ruminations readers will (and should) get pretty bored with reading about how courts review agreements, such as leases. But, the issue keeps coming up, and the case we’re using today is no exception. As is (too) often the case, a court needed to interpret what the parties intended when they used their chosen words and what they might have meant when omitting other words in their agreement. As to this lease dispute, here is what the Kansas appellate court had to say:

Interpretation of any written instrument, including a contract, is a question of law subject to unlimited appellate review.

The fundamental rule of contract interpretation is to ascertain the parties’ intent. Generally, this intent is ascertained from the language in the agreement executed by the parties.

Provisions of a contract are not interpreted in isolation but in the context of the entire document.

Where the language of the executed document or documents of the agreement is unambiguous, the court does not need to resort to other evidence of the parties’ intent.

With that as guidance, and with one curious fact in hand, the court ruled that there was no obligation for the tenant to any share of taxes, insurance premises, and common area maintenance costs for the expansion space. We’ll explain that not very far below, but here is the curious fact: the landlord sought to evict the tenant ONLY from the expansion space, not from all of the space covered by the amended lease.

Here is how the appellate court came to its conclusion:

The second amendment is wholly silent as to any obligation or undertaking to pay “Additional Rent” for the expansion premises. Since the terms “Minimum Rent” and “Additional Rent” are capitalized, specifically defined terms under the original lease agreement, the failure to specify the applicability of “Additional Rent” to the expansion premises would be a strong indication on the face of the document that the parties intended no such obligation. This perception is amplified by the language of paragraph 10.a of the second amendment which provides that the terms and conditions of the amendment would control any conflict with the original lease.

Basically, the appellate court treated the lease amendment as if it were a stand-alone lease based, in part, on the landlord only seeking to repossess the “Expansion Premises.” That reinforced the court’s conclusion that there were two rent obligations imposed on the tenant: Minimum Rent plus Additional Rent for the original leased space, but only Minimum Rent for the expansion space.

Interestingly (to Ruminations), the court used what most people consider to be “boilerplate” as support for its ruling. As is common in amendments, there was the following recitation (its paragraph 10.a):

The Lease as modified herein remains in full force and effect and is hereby ratified by Landlord and Tenant. In the event of any conflict between the Lease and this Amendment, the terms and conditions of this Amendment shall control.

So, given that the lease amendment used only “Minimum Rent” and not “Additional Rent,” and facing an eviction request for only the Expansion Premises, the court appeared comfortable in reading the lease amendment to “control” over the base lease in that it overrode the tenant’s general obligation to pay Additional Rent for the Expansion Premises.

Ruminations is not comfortable with this outcome, but for that curious fact that the landlord only sued to recover the expansion space, thus treating the amendment as a separate lease, one that incorporated the terms of the initial lease by reference. So, if that’s what the thinking was, it would be understandable that an important lease provision, the one that tells the parties what needs to be paid in the way of rent, should have expressly called for “Additional Rent.”

One reason for our discomfort is that the lease amendment did say: “In addition to all other amounts due and payable by Tenant pursuant to the Lease… .” To us, those words should mean that there were charges beyond “Minimum Rent.” The court disagrees with us and we know when to yield to a court. Readers, we invite you to comment on whether you think the court dealt honestly with this issue when it wrote:

The notation that the Minimum Rent for the expansion premises is “[i]n addition to all other amounts due and payable by Tenant pursuant to the Lease” does not create any new obligation; it is clearly a reference to the Minimum Rent and Additional Rent already contracted for [original leased space] under the original lease. This terminology cannot reasonably be interpreted as somehow establishing a new obligation for Additional Rent for the expansion premises. If it had been the intention of the parties to have included the specifically defined term “Additional Rent,” such intent could and should have been specifically set forth.

Now, we understand that the outcome of this landlord-tenant dispute didn’t rest on whether any charges were denominated as “Additional Rent.” So, we are still curious about whether “your” jurisdiction would evict a tenant for failure to pay a charge under its lease if the lease didn’t specifically style that obligation as some form of “rent.” If you know, please let us and our readers know (by adding a comment at the end of this blog posting).

What we have learned from this dust up, however, is the following: Write what you mean and mean what you write. Though we aren’t fully aligned with the Kansas appellate court, we are sure that the lease amendment should have expressly attached the Additional Rent obligation to the expansion space if that’s what the “deal” called for. And, if the amendment was intended to “add” the new space to the existing space (whether or not the two spaces were contiguous), then the landlord should have treated the combined spaces as one leased space and should have sought eviction from the entire premises. After all, the lease amendment actually redefined the premises to mean both the original leased space and the expansion space. Basically, the landlord treated the expansion space as if it were separately leased. That being the case, why shouldn’t the court have done so as well?

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  1. The court’s ruling is bull puckey!

    In what other universe does the phrase “In addition to all other amounts due and payable by Tenant pursuant to the Lease,…” mean something other than what it says? If the lease was “amended” to reflect inclusion of the Expansion Premises without specifically stating that the Tenant had no obligation for payment of net charges for the Expansion Space, how could that be so? If every other provision in the lease applied to the Expansion Premises, as is presumed, how on earth could the court reasonably argue that this one (“Additional Rent”) provision did NOT apply. Do we know whether or not the amendment included any phraseology such as “Upon execution of this Amendment the Premises shall include the Expansion Premises for all purposes of this Lease.” And if such language HAD appeared in the Amendment, might that have made a difference? As to attempting to devine the intent of the parties, on the one hand, few landlords want to take money out of their own pockets to pay net charges for a tenant. So that might not have been a likely scenario. On the other hand, perhaps the Landlord enticed the Tenant to lease the Expansion Premises partly by agreeing that the Tenant not be obligated to pay those net charges. Clearly, the Landlord’s bifurcation of the spaces for eviction purposes raised a red flag to the court. But it’s beyond my non-legal mind as to how the court could possibly have rules as it did.

    • The lower court thought the lease, as amended, was unambiguous (as did the appellate court), but reached a different conclusion than did the appellate court. In fact, its conclusion was exactly the opposite. We don’t know the reasoning used by the lower court, but it probably included consideration of the following. The blog posting reportedthat the amendment redefined the premises to mean both the original space and the expansion space. Here is how it did that:

      The Lease is hereby amended as follows: the Premises, 7301, consisting of 3,026 square feet (the `Current Leased Premises’) shall be adjusted to reflect the addition of 7311, consisting of approximately 2,000 square feet (the `Expansion Premises’) effective as of the Commencement Date (defined below), for a total of 5,026 square feet. Hereafter, the aforementioned portion of Suite 7301 and Suite 7311 shall be collectively referred to as Suite 7301.

      The take-away is that if you mean the lease to say something, especially something as important as the “rent,” then you show be clear in saying so. The appellate court had a decent basis to understand that, “in addition to all other charges,” implied “if any,” and then to see that the landlord itself treated the lease as capable of being bifurcated into two leases, one for the premises it wanted the tenant to (continue to) occupy, and one that it, the landlord, wanted back. It seemed as if the landlord didn’t treat the premises as the combined space and that allowed the court to treat the amendment as a separate lease (albeit one that seemingly incorporated the non-rent provisions of the existing lease. The (unwritten) theory would be that since the amendment specifically spelled out the rent and being Minimum Rent, that overrode the existing lease’s rent provisions. Where the amendment was silent about something, it meant that it was using the existing lease to describe the “deal” for the expansion space. Basically, the landlord could have avoided the issue by being clear in the amendment and probably by seeking eviction from the entire, combined premises. Perhaps, its desire to keep an otherwise fine tenant (greed) blinded it to what a court thought the landlord was thinking – two leases if I like it; one if I don’t.

  2. Mahlon L. Fast, J.S.C., Ret says:

    Two thoughts: 1) I believe that the result was similar to a “scrivener’s error” by omitting the “additional rent” provision for the additional space, and that this concept is supported by point 2, which is that: 2) since the issue relates to “… a proportionate share of the shopping center’s taxes, utility costs, and common area maintenance costs[.]” and now that this tenant does not have to share in those costs for the proportionate space added to the lease, and if (as I assume) all other tenants are obligated to pay those costs, the other tenants will now be paying a greater percentage of those taxes and costs. (This may be affected by whether or not the prior tenant in that additional space was also charged with the CAM charges – another assumption by me.) I do not believe that the parties to this amendment for the additional space intended to affect the obligations of all other tenants. BUT, perhaps the landlord will now have to absorb that share, rather than the other tenants.

  3. Tim Scott says:

    Presumably the redefinition of Premises flowed through to increase Additional Rent. It is common sense that the landlord thought Additional Rent was covered for the expansion space by that redefinition (part of the amendment and therefore seemingly clear). It is also common sense that a landlord doesn’t get to partially evict someone for failure to pay some portion of Additional Rent (which here would be 1 undifferentiated sum). So it seems that the outcome rests on the landlord’s strategic error in treating the amendment like a stand-alone lease – which it wasn’t. That leaves a judge that may never have practiced transactional law and may not really understand business deals in an interpretive quandary. Instead of just ruling the eviction action defective (what probably should have been done), he stuck landlord with landlord’s approach. Here bad facts make bad law – and the bad facts aren’t even deal facts but litigation strategy. I can’t imagine why landlord’s lawyer would have promoted the separate space approach.

  4. Margaret Petersen says:

    This is indeed a head scratcher. Referring to your above comment, that the definition of “Premises” was amended in the Lease to include the expansion portion, meaning that now the pro rata share “numerator” would be 5,026 SF, if the Lease itself required TT to pay pro rata share of the NNN charges, then I can see why this wasn’t addressed in the amendment since the Lease terms would automatically update the PRS calculation as of the effective date the expansion premises was incorporated into the “Premises” and TT commenced paying [all] rent on the space. So that’s a little scary since I don’t know if I would always think to catch to spell this out in a lease amendment to expand the “Premises.” BUT… I can also see how the waters were then muddied by the LL seeking only a “partial eviction” – which is an odd approach. BUT… on the other-other hand, if the lease amendment in effect had to stand as a whole new lease, which is how the opinion reads and is the implication of the LL only seeking a “partial eviction,” then think of all the other non-rent provisions that are in the [original] Lease that aren’t in the lease amendment, meaning that clearly the lease amendment wasn’t a stand alone lease and really did need to be interpreted in light of the entire terms of the Lease. Which then leads back to TT paying a PRS of the NNN charges, which are considered Additional Rent, and if what I would consider normal PRS language was used, i.e., a formula (numerator/denominator PRS fraction) to calculate the NNN charges. I don’t know if my state would decide the case this way; regardless, to me this is yet another case that supports trying like hell to NEVER take a lease matter to court. You never know what you’ll get.

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