Two Lease Guarantees Gone Awry

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We wanted to a “hit and run” this week based on what we think is a peculiar and wrong court decision about language in a personal guaranty. Then, we came across a second court decision concerning a guaranty, though with no other connection to the “peculiar” one. Given that electrons are plentiful and essentially free, we’ve chosen to tell readers about the later-discovered one first.

The story begins with a 15-year lease that was assigned by the named tenant to a successor only five months after the lease terms started. In connection with that assignment, a guaranty was given to the landlord, one in which the guarantor guaranteed:

[T]he payment and performance by the [a]ssignee of all its obligations under the [l]ease and all of the obligations of the [t]enant as defined under the [l]ease effective as of the date hereof.

The awkwardness of that text is immaterial to what then happened. About 2-1/2 years later, the lease was further assigned. In connection with this second assignment, the guarantor, in a writing dated about a month later, “confirmed that its guarantee would remain in effect despite [this] assignment….” Then, about eight years after that, the shares of the then tenant were acquired by yet another “tenant,” actually the same one, but with a new shareholder. The parent company of the new shareholder guaranteed the tenant’s lease obligations, the landlord waived its right to cancel the lease by reason of the shareholder change, and, importantly, the landlord received another letter from the original, lease-signing tenant. That letter confirmed the ongoing validity of the original guaranty, using the following language: [Read more…]

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For A New Landlord/Tenant, Does History Override An Unambiguous Lease Provision?

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We think this comes up much too often, and, it is often about rent, more often about additional rent, and sometimes it is about a non-monetary issue. What is “this”? “This” is about when a lease says one thing and the parties, over a long period of time, do another. We bring this up today because we just read a June 6, 2019 decision by the District of Columbia Court of Appeals.

A long-term air rights lease called for rent to change every five years beginning on the 10th anniversary of the “Lease Commencement Date.” The lease provided that the new rent [that’s what the court wrote, but we all know what it meant to say as that the amount of the “rent increase“] would be the current rent:

multiplied by twenty-five percent of a fraction, “the numerator of which is the CPI at the date of adjustment and [ ] the denominator of which is the CPI at the immediately preceding date of adjustment[:]”

By the tenth grade we were taught to convert that text to the following formula: [Read more…]

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Who Wrote Your Lease, Loan Agreement, Or Other Document?

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“A committee is a cul-de-sac into which ideas are lured and then quietly strangled” — Sir Barnett Cocks. Much the same can be said about the documents we read and, sadly, write. Sir Cocks didn’t necessarily mean only that ideas were strangled to death. We want to think he also was thinking about damaged survivors, the ones that survived, but with a life-long injury.

Think about the process we follow to create a written agreement, whether that is a lease, an easement, a loan agreement or any of the others we, Ruminators, can list. In most cases, we start with a form written by predecessors. The words in those forms aren’t “ours.” The “voice” isn’t “ours.” In some cases, we cut and paste from a selection of related forms, each with its own voice. Then, we modify this “base” document, adapting it to the deal in front of us. In simple cases, we fill in some blanks, delete some provisions, and add a few. In others, we make significant changes, some to the very core or philosophy of what the form’s original authors had in mind. Our additions might have been written solely from our own thoughts; they are never tabula rasa (def.: an absence of preconceived ideas or predetermined goals); they never are. In fact, our additions often are snippets from something else we or others have written. [Note that we’ve written “authors,” not just author. That’s because our selected foundational document or document very likely was put together in the same way we are describing.] [Read more…]

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Go Ahead, Just Slap On Some Extra Words!

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Is it masochistic to want to read court decisions? Given that most of society frowns upon masochists, it’s probably good that very few of us who create transaction documents actually read any such decisions. [That’s sarcasm.] It seems to us that what we do is engage in some “on the job training,” but mostly we rely on the wisdom of our ancestors – those who wrote the documents we use as templates. If today’s blog posting were a sermon then, fortunately, we’d be preaching to the choir. You, our readers, by being such and, almost certainly, by your reading of more erudite materials than these postings, are, unfortunately, the exception in our chosen field. Today, Ruminations salutes you.

We’re not sure why we felt compelled to express those thoughts today. Perhaps it is because we were thinking about the mix of topics in our blog postings and why we use court decisions as to the central focus for about two-thirds of those postings. Our conclusion was that we learn more from mistakes than successes. In general, it is often difficult to find a mistake, and in our own work, very much more so. [That’s not necessarily because our own work, and we’re talking “collectively,” couldn’t be “better.” It’s just that we don’t see errors in it where others do.] Almost all court decisions point out mistakes people have made. Reading such decisions is how we learn. [Read more…]

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Who Knew Purchase Options Could Be So Complicated?

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We don’t know if there are more ways to write a purchase option in a lease “wrong” than right,” but we do know opportunities abound. Here are a couple of examples. The first is based on a statement of California law within a court opinion from March of 2018. [See it by clicking: HERE.] Basically, that court lifted text from earlier cases, each of which is pretty stark. Here they are:

Where an option to purchase exists within a lease agreement, the exercise of the option to purchase causes the lease and its incorporated option agreement to cease to exist, and, instead, “a binding contract o[f] purchase and sale c[omes] into existence between the parties.”

[W]hen defendant exercised the option granted her to purchase the property by making the first payment of $500 thereunder, the lease and option agreement no longer existed and a binding contract of purchase and sale came into existence between the parties.

Further, a consequence of the termination of the lease agreement is that the former lessee’s obligation to pay rent under the lease also terminates, unless there is an express stipulation that requires continued rent payments after the exercise of the purchase option.

Where the relation of landlord and tenant exists under the terms of a written lease, containing an option to purchase which the lessee exercises, [and it is exercised,] he is no longer in possession as a tenant, but his possession is that of a vendee.

[Read more…]

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Consent Expressly Given – A New Look

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Sometimes a party has the right to withhold its consent when the other party requires that party’s consent. And, sometimes the right to deny consent is desired to be absolute and unconditional. In such cases, and for a very long time, Ruminations has been using a formulation saying that such consent “may be withheld for any reason or no reason at all.” We just read a June 28, 2019 Supreme Court of Texas decision possibly chastising us for wasting those words. After analyzing a contract provision stating simply that a party could not assign its rights “without the express written consent” of the other, that court wrote that the added words, “for any reason or no reason,” were surplusage. As that court wrote, consent-required provisions with or without the extra words have identical meaning. Accordingly, “the same can be said” as to a provision reading that consent “can be granted or withheld at [a party’s] sole discretion.”

Before every reader starts searching for an eraser to take to their form agreements, there is a caveat. This decision came out of the state of Texas. That’s not going to be the law in every jurisdiction. Also, it was based on the premise that a provision, in an oil and gas “farm-out” agreement saying that one a party could not assign its interest without the other’s consent, is “unambiguous.” [Viewing Wikipedia would tell you that “a farmout agreement is an agreement entered into by the owner of one or more mineral leases, called the ‘farmor,’ and another company who wishes to obtain a percentage of ownership of that lease or leases in exchange for providing services, called the ‘farmee.’”] When a court decides that an agreement’s provision is not ambiguous, it refuses to look outside of the agreement itself to aid in interpreting that provision. It accepts the “plain meaning” of the words. At most, it will refer to a dictionary of its own choice, sometimes, as Ruminations, has noted, one with a definition that supports an already decided conclusion. What a court won’t do is to look at prior discussions or negotiations to aid interpretation. [Read more…]

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What Is A “Reasonable Time”?

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What is a “reasonable time” for something to happen or to get done? Do we ask this question of ourselves when we use that phraseology in our leases and other agreements? We can’t avoid using concepts such as “reasonable,” “material,” “promptly,” and the like, but are we being as careful as we should be when sprinkling them around?

There are good reasons to use what Ruminations has called “weasel words” or “deliberate ambiguity.” [For earlier thoughts on this subject, click: HERE.] Basically, we don’t always know how long something should or will take, even when diligence is observed and proper efforts (whatever those are) are employed. After all, we may know that the time for something to happen may be affected by adverse weather, but we don’t know whether there will be any such weather. We might know that a particular repair, say a roof replacement, might take 30 days from beginning to end in the summer, but not how long it might take in a winter season five years hence. So, we use “reasonable” when setting a time limit for such work to take place. [Read more…]

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Are Waivers Enforceable?

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Are waivers enforceable? It depends. How unsatisfying is that answer? Generally speaking, absent duress or coercion, parties can waive what would otherwise be their right. How does one know if there is (was) coercion? Well, some situations, such as an actual gun to the head, are easy to identify. Others are not so simple. When it comes to agreements between commercial parties, there is a presumption that they are grown-ups, able to protect their own interests. The “bigger” they are, the less likely a cry of “coercion” will rule the day. Representation by an attorney will dull a party’s claim that it was improperly forced to agree to a waiver (or other contract terms). When courts reject a party’s plea that it was coerced, you’ll often see the “deal” as having been between “sophisticated parties that negotiated at arm’s length with apparent care and specificity, and represented by competent counsel.” All of those factors concern themselves with the character of the parties and how they arrived at their agreement. [Read more…]

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