A Sneaky Attempt At Amending A Lease Fails – Lessons To Be Learned

A little more than eight years ago, we wrote: “[I]t seems like a fair number of lenders think the “A” in “SNDA” stands for “Amendment,” i.e., an amendment of the lease.” [Click HERE for more about that.] Today, we look at an Estoppel Letter and see whether the initial “E” stands for “Emendation.” [We found a website explaining the following: “Amend is to change something, usually a document or personal behavior, to make it better. Emend is to correct something, usually in a text, to fix an error.”] Either way, SNDA or Estoppel Letter, let’s stop trying to use those documents to amend or emend a lease.

In an April 15, 2020 published decision, a United States Court of Appeals court looked at the history of a lease and other lease-related documents for a single-tenant office complex. The validity of the lease and five subsequent amendments was not at issue even if there was some dispute over their meaning. All were signed by both the landlord and tenant. On the other hand, the court was presented with two other documents – one was a letter from the landlord to its tenant (signed only by the landlord), and the other an estoppel letter (seemingly) signed only by the tenant and given to the property’s buyer. The estoppel letter, in its recitals, referred to the landlord’s letter as one of the lease’s amending documents.

First, we will address the landlord’s letter. Apparently, there was a dispute over whether the tenant was required to pay for a new fire protection system. [We won’t address this substantive issue today. Leave it unsaid that, once again, one party or the other tried to
“cherry-pick” certain lease provisions and ignore others.] The tenant’s position was it wasn’t obligated to pay for the new system. In response, the landlord wrote to “point out”:

[O]ur lease makes it clear that all costs for repairs, maintenance, and capital improvements will be borne by [the tenant] as they had been in the past when I owned both the company and the building.

There is no evidence that the tenant responded to this letter.

Standing alone, and in the face of a (standard) lease provision that all amendments had to be in a writing signed by both parties, the court rejected the landlord’s argument that the letter, standing alone, constituted a lease amendment. Basically, there was no “meeting of the minds,” a necessary requirement for a binding agreement. Under the relevant state’s law (Maryland’s):

… to modify a contract, “there must be mutual assent.” … Manifestation of mutual assent includes two issues: “(1) intent to be bound, and (2) definiteness of terms.” … There are many factors that may be relevant to determining mutual assent, “but the most important factor is the language of the agreement.” … Turning to the language of the agreement, Maryland uses the “law of the objective interpretation of contracts.” … Thus, “[the] search to determine the meaning of a contract is focused on the four corners of the agreement.”

Having established that the letter, standing alone, was a non-starter for the landlord, the court had to look at whether the letter had been “elevated” to the status of a lease amendment when the estoppel letter, in its recitals, described it as such. Basically, could the letter’s addressee, a prospective (and then, actual) buyer, rely on such a description? As a refresher, here is Black’s Law Dictionary’s (10th ed. 2014) definition of an estoppel certificate, as the court cited in a footnote:

A signed statement by a party (such as a tenant or a mortgagee) certifying for another’s benefit that certain facts are correct, such as that a lease exists, that there are no defaults, and that rent is paid to a certain date. A party’s delivery of this statement estops that party from later claiming a different set of facts.

The court rejected the landlord’s argument that because the tenant signed the estoppel letter, the landlord’s letter “became” a lease amendment even if it hadn’t been one when written. Its reasoning was the same as for the landlord’s letter itself – it had only been signed by one party (i.e., the tenant). Though Ruminations accepts that courts, not Ruminations, get to make binding determinations, we aren’t exactly comfortable with that reasoning. After all, we have always thought (and still think) that a tenant is equitably estopped from denying the truth of what it says in an estoppel letter even if that something wasn’t “true” in the first place. [See some earlier Ruminating on this by clicking: HERE.] We think the better reason to reject the estoppel letter as elevating the landlord’s letter to the status of a lease amendment would have been that the buyer could not have reasonably relied on how the tenant described the landlord’s letter. In effect, the buyer should have known that for the landlord’s letter be a lease amendment, it needed to be signed by the tenant as well. Either way, the estoppel letter’s description of the landlord’s letter as a lease amendment did not make it so.

[For those with patience to read a 63-page court decision, this one (accessible by clicking: HERE) from the Supreme Court of Guam discusses “state-by-state variation[s] in the enforcement of estoppel certificates.”

There was one more wrinkle. The estoppel letter had been delivered after the fourth lease amendment but before the fifth one. Consequently, the fifth lease amendment, in its recitals, listed both the landlord’s letter and the estoppel letter as “lease amendments.” Perhaps this final document, signed by both parties, incorporated (by reference) the landlord’s letter and the estoppel letter into the amended lease. The lower court had rejected that argument posed by the landlord, and the landlord did not raise it on appeal. Nonetheless, it warrants some comment.

Relying on an earlier Maryland court decision, the district court held that the recitals in the fifth lease amendment were not an operative part of that agreement. Though one might argue the point, Maryland law is not unique. So, why take the “chance”? Our practice, where appropriate, is to label two sections in documents – Recitals and Terms. Very often, the first “Term” in those agreements reads: “The Recitals are part of, and incorporated into, the Terms of this [document].” One could say the opposite as well.

There is one other “point” raised by the court. The fourth lease amendment, one that added additional space to the leased complex, specified that it “would be rented on a ‘Triple Net’ basis.” This term did not appear in the lease, the other amendments, the landlord’s letter or the estoppel letter. Nonetheless, the landlord argued that these “magic” two words amended the lease and overrode every place where the lease said that the landlord, not the tenant, would cover a cost or expense. We wish the court had examined the meaning of “Triple Net” instead of telling us this:

[The landlord] suggest[ed] that if the district court had examined the definition of “net lease,” it would have found the Lease ambiguous. There is no obligation for a district court to cite a dictionary when ruling on a motion for summary judgment—especially where a purportedly disputed term, “net lease,” does not appear in the original Lease.

We’ve expressed our own thoughts HERE and HERE, and recommend that stay-at-home readers take a look.

Also, readers desirous of reading the Court of Appeals decision can do so by clicking: HERE.

[After preparing this posting, we saw that the court’s decision was discussed on a GREAT Listserv – “DIRT.” We recommend readers unfamiliar with this resource take a look. Subscriptions can be entered by clicking HERE.]