Daily Development for Friday, April 28, 2006
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri dirt@umkc.edu

LANDLORD/TENANT; TENANT'S DUTIES; "YIELD UP" CLAUSE:  The "yield up clause" in a ground lease contemplating tenant improvements, requiring that the premises be returned to the landlord in "good condition" does not require that tenant divide a building constructed on several separately owned leased parcels. 

Coleman v. Regions Bank, 2005 WL 2886481 (Ark. 2005). 

Bank executed two 50 year ground leases as tenant, one with Tucker's predecessors and one with Moore, to lease two neighboring parcels.  Each lease permitted the Bank to construct its banking facilities on the parcels, make alterations in and to the buildings as the Bank deemed necessary (provided that such alterations were not injurious to the leased premises), and required the Bank to deliver the building upon termination of the lease, except for bank fixtures, equipment, and bank vaults, in good condition.  Bank constructed a separate two-story structure on each parcel.  Fifteen years later, Bank expanded its banking headquarters to a single, two-story building covering all of the Tucker and Moore parcels (the East Building) and a three-story building on the western side (the West Annex) connected by an overpass. 

At the end of the lease term, Tucker and Moore demanded that Bank remove the overpass and restore the buildings as separate free standing buildings. 

Bank filed a petition for declaratory judgment, seeking a declaration that it had complied with the terms of the leases and that all three parties had mutual use to the equipment, utilities and services located in all of the buildings. 

Moore and Tucker answered and counterclaimed, alleging that the Bank breached the "good condition" and the "injurious to the leased premises" clauses of the leases and committed waste by constructing a building that effectively merged the Moore and Tucker properties and then failing to restore buildings at the expiration of the lease.  The trial court held that: (1) the ground leases did not require separate buildings; (2) the "alterations" clause of the ground leases was not violated by the expansion and modification; (3) the "good condition" clause was not breached at the termination of the lease due to the configuration of the buildings: and (4) an implied easement existed allowing all landowners to continue to use the common building features in the same manner as before. 

Tucker and Moore appealed to the Supreme Court on each finding, but due to procedural limitations, only the third issue regarding the "good condition" clause was reviewed by the Court.  In support of their argument, Tucker and Moore asserted that the Bank breached the "good condition" requirement of the leases because the interlinking configuration of the buildings and equipment made it extremely difficult for a single owner to exercise the normal incidents of ownership on or over its respective property. 

The Court, however, rejected this argument and stated that all alterations and improvements to the properties were made pursuant to the language of the "alterations" clauses in each individual lease and were done with the knowledge and implicit consent of Tucker and Moor.  In such instances, the Court cited the rule that under a "good condition" clause, a lessee is not required to remove improvements made with the consent of the lessor or under the authority of the contract.  The tenant's only responsibility is to make ordinary repairs to the facilities as they exist in order to return the premises in "good condition."  A number of precedent cases involved tenant's installation of bank vaults that the landlord didn't want.  Here,  the court held that the Bank was under no obligation to return separate buildings to Tucker and Moore or to remove the overpass, and the Bank did not violate the "good condition" clause of the leases.

Again using a procedural two step, the court dodged the issue of whether an implied easement existed. 

Comment 1: The editor is surprised that the court permitted the ruling on implied easements to stand.  It is one thing to say that a landlord is required to accept the physical improvements made to the property upon lease end.  It is quite another to conclude that, where the lease is silent, the tenant has the implicit ability to bind the landlord to an easement encumbering the landlord's fee title.  The court seemed determined to facilitate the result in favor of Bank here, but enough is enough. 

But we don't have the record, and don't know the exact extent of the easement.  If it simply amounted to easements to facilitate common heating and cooling systems, entranceways and other common areas, it makes sense that if the court is going to permit the building to pass, then those aspects of use of the building that demand common use must also remain.  One assumes that they would end when the building was demolished. 

On the other hand, if the court had in mind, for instance, that the neighboring parcel owner, joined to the building on Tucker and Moore's parcel only by an overpass, would continue to have the right to pass through the overpass and into their building, even though its own building was free standing and otherwise independent, that does seem to be a bit of a stretch. 

Comment 2: On the central question - there is an important drafting lesson here.  A ground lessee, over the long term of the lease, may well combine the leased premises with other leased parcels through common buildings or facilities.  The lawyer might not be around to warn the landlord every time this happens that failure to object may firmly bind the landlord to his neighbors at least end.  Consequently, the lawyer should layer up the original lease with language permitting the landlord to compel the removal of undesirable fixtures (such as bank vaults) and to restore the premises to a free standing building, unless the landlord expressly waives the right to demand such restoration at the time that the lessee decides to merge with other properties.

Comment 3: From the tenant's standpoint, tenants should be wary about agreeing to such restoration duties until they are sure what sort of expenses are entailed.  In a recent case with which the editor is familiar, a landlord, unhappy that the tenant was leaving, demanded under the "removal of fixtures" clause that the tenant remove all the telecommunications wiring built into the walls and floors and restore all surfaces to their original condition.  The result is that the landlord got a virtually new facility (albeit in the same layout as the tenant had designed), and the tenant undertook enormous expense, even though the next tenant (when found) most likely would rip out a lot of what was restored and might easily have removed the undesired telecommunications cabling at low additional cost when it undertook its own renovations. 


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