What Is The Lifespan Of A Lease After The Stated Term Ends?

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What are the rules between a tenant and its landlord after a lease expires? In today’s blog posting, we aren’t exactly thinking about a “holdover” tenancy. In the context of this question, we’ll leave that for another day. [For those who haven’t yet read what we wrote in our November 2012 posting: “Why So Much Confusion About Holdover Tenants?,” it can be seen by clicking here: HERE. For other Ruminations about holdover tenancies, you can click: HERE or HERE.]

It is common to see a lease recite something like the following: “If the Tenant remains in possession after this lease ends, the continuing tenancy will be from month to month.” At least, that’s how the lease we learned about in a California appellate decision (of January 10, 2019) just read by us. [It, Smyth v. Berman, can be seen by clicking: HERE.]  On its face, it would seem that those quoted words are equivalent to a lease extension just as would be the case if the tenant had an extension (or, poorly named, renewal) option. Well, is it the same?

Answer: “It depends.” On what does it depend? Here’s the simple answer to that question: “It depends on where you are standing when inside the leased space.” That translates to: “It depends on state law.” [Where did we recently see that theme? Try the posting that can be read by clicking: HERE or HERE.] More about this after an intervening paragraph, one included mostly to demonstrate that adults write the strangest things. [The root of that “strangest things” thought comes from a feature on Art Linkletter’s radio show House Party (first aired in 1945): “Kids Say the Darndest Things.”]

A 2011 lease with a one year term had a three-year extension option, one that was exercised. The landlord prepared the lease and the tenant hand-wrote the following on the document: “Right of 1st refusal to purchase.” Both parties initialed the insertion. And as Ernest Tubb sang: “That’s All She Wrote.” The deficiencies of phrasing a purchase right in such a way are so obvious that we won’t waste any more electrons on that topic.

We return to today’s programming. In general, when a lease ends, but the tenant remains in place, there is a change in the relationship between the landlord and the tenant. Many readers already know that the modern landlord-tenant relationship coming out of a lease is two-pronged. The key word  describing each prong is “privity.” Simply speaking, it means “relationship.” One relationship is called the “privity of estate,” and the other is “privity of contract.” A tenant’s right to possession of the premises and the landlord’s right to receive the agreed-upon rent are the hallmarks of a real property relationship: “privity of estate.” Almost all of the other obligations, such as to repair things or to carry insurance, arise out of the contractual relationship – the “privity of contract.”

Courts (imprecisely in our view) characterize all staying-over by a tenant as a “holdover” tenancy, even where the lease specifically permits the staying-over. Ruminations will try to avoid doing so. Therefore, we’ll call the tenant in our story a “post-expiration month-to-month” tenant, or a “Pomm.” We’ve just made up that name because we want to make a point. That point is that a tenant that stays after a lease ends (taking into account all exercised extension rights) can be either a holdover tenant or a “Pomm.” The difference is that a holdover tenant is, to Ruminations, not much better than a trespasser, whereas a Pomm has a genuine month-to-month lease. The question for today is whether a Pomm or a holdover tenant has any obligations beyond paying rent or, in the case of a holdover tenant, the equivalent of rent (holdover damages). For example, who is responsible for maintaining the heating system if the lease is “over”?

There is pretty universal agreement among the states that the essential terms of an expired lease carry-over in each case. However, there isn’t much agreement as to what lease terms are “essential.” One of the lease terms that highlights the different approaches taken by the various states concerns the “right of first refusal” as handwritten into the lease we criticized above. The “majority” rule is that a right of first refusal presumptively does not carry forward – i.e., it is not essential to the landlord-tenant relationship. That approach is followed by California (as the cited case just decided), Montana, Illinois, New Hampshire, Nebraska, and others. The “minority” view, one that presumes “that a right of first refusal or other option to purchase carries forward into a holdover tenancy unless a contrary intent appears,” is found in Hawaii, Wisconsin, Michigan, New York, Maryland, and other states.

The difference appears to solely be related to whether a state holds the option or right to be “essential.” This would be true as to other rights that are not squarely within what a court thinks “must” or “really should” be in a lease.

Interestingly, in this case of first impression for California, the appellate court felt the need to give a second reason as to why this particular tenant’s “right of first refusal” terminated when the lease term (as extended) expired even though the lease expressly said that the “tenancy became month-to-month.” [This might be splitting hairs, but the court didn’t say that the “tenant became a month-to-month tenant.” This allowed the court to characterize the continuing tenancy as being something different than arising out of the lease – one that now arose solely out of the “privity of estate.” If this is confusing, just ignore this entire paragraph and press on regardless.] To us, when a court gives multiple reasons for its decision, it usually means that none of those reasons is strong enough to stand on its own. That’s just an opinion based on our observations.

Here’s what the California court gave as additional support for its ruling (but keep in mind that this court refers to this tenant as a “holdover” tenant):

Second, a rule presuming that rights of first refusal do not carry forward into holdover tenancies furthers the public policy favoring the stability of commercial tenancies. Holdover tenancies exist to ensure stability because they are a mechanism by which tenants may remain in possession without disruption, albeit typically only on a month to month basis. … If a right of first refusal presumptively carried forward into a holdover tenancy, a landlord wishing to nullify that right could easily do so by evicting the holdover tenant and selling the property one day later, both of which would be within its rights as the landlord of a holdover tenant. This “creates an incentive for landlords to evict holdover tenants as soon as possible” …, a result at odds with the stability of commercial tenancies. The contrary rule that carries such purchase options forward only if the parties so specify avoids this result, thereby making holdover tenancies more stable.

Readers, now that you are nearing the end of today’s blog posting, keep a few things in mind. First, California’s position on the vitality of a purchase right or right of first refusal in similar cases might change if a later dispute gets in front of the California Supreme Court. Second, if there are any “unusual, non-mainstream” provisions in your lease, ones that might not be seen as essential by a judge experienced in medical malpractice cases, then show your intention for such provisions to survive into a holdover or Pomm tenancy. Basically, override the “presumption” that a “majority” state might impose. Third, if you want to learn more about the “rules” that continue after a lease’s intended term ends, read the actual decision for which a link has been provided above. Be forewarned, however, there are a lot of procedural and side issues covered by this particular appellate court, and most of them will be of little lasting interest.

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  1. Presumptively speaking, it would seem that a statement of express intent such as “. . . Tenant will become a Periodic Tenant from month to month . . . and all of the terms and conditions of the Lease or any subsequent lawful tenancy agreement existing at that time, will remain unchanged without interruption during said Post-Term Occupancy . . .” would have avoided the lack of clarity. (Assuming, of course, that a cogent ROFR was in the lease.)

    For example, would it seem reasonable that replacing the typical misnamed “Holding Over” section of a lease agreement with the following would sufficiently establish the intent that all of the duties and obligations of the “Lease” (including any subsequent amendments thereto) would be preserved in such a “Post-Term Occupancy”?

    “Post-Term Occupancy: Notwithstanding any other term or provision of the Lease, if Tenant fails to vacate the Premises by the end of the Term or any subsequent lawful tenancy period (“Post-Term Occupancy”), Tenant will become a Periodic Tenant from month to month at one hundred fifty percent (150%) of the then current monthly Base Rent and one hundred percent (100%) of the Additional Rent applicable in the final month of the Term or any subsequent lawful tenancy period, and all of the terms and conditions of the Lease or any subsequent lawful tenancy agreement existing at that time, will remain unchanged without interruption during said Post-Term Occupancy. Unless expressly agreed otherwise and notwithstanding anything to the contrary in the Lease, either Landlord or Tenant may terminate this Post-Term Occupancy by serving notice, one to the other, not less than one (1) calendar month in advance of such termination.”

    (Notwithstanding a judicial interpretation in which “all” doesn’t really mean “all” as discussed in previous posts.)

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