Daily Development for Tuesday, February 3, 2004 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; EXTENSIONS AND RENEWALS; ACCEPTANCE BY IMPLICATION: A holding over by a lessee and the waiver of notice by a lessor combine to exercise an option to extend a lease upon the original lease terms, despite different lease extension terms, if no extension is exercised. Grand Investment Corporation v. Connaughton, Boyd & Kenter, 119 S. W. 3d 101 (Mo. App. W.D. 2003). CBK leased space from a predecessor of Grand Investment Corporation for a three-year term. The lease contained two successive one-year options to extend the lease under the same terms and conditions. To exercise these options, the lease required that CBK send written notice to the landlord three months before the expiration of the lease (or the expiration of the first extended term). The lease further stated that if CBK held over without the written consent of the landlord after the lease expired, it would be considered a tenant at sufferance and liable for double rent. In addition, the landlord reserved the right to escalate the rent to reflect increases in the landlord's operating expenses. Grand Investment bought the landlord's rights two years into the initial term. CBK sent timely written notice of its intention to exercise its first one-year option. After the expiration of this first one-year extension, however, CBK remained in possession of the premises and continued to pay the usual rent, which Grand Investment accepted. CBK did not send Grand Investment written notice of its intention to exercise its second one-year option. After the end of what would have been the second extended term, the parties began discussing a new lease, and, by agreement, CBK paid a slightly increased rent each month. CBK moved out of the space eight months after the end of what would have been the second one-year extension. Grand Investment sued CBK and the guarantors seeking escalation rent and holdover rent. The parties disputed whether CBK exercised it second one-year option. The court held that "the general rule is that a holding over by the lessee and waiver of notice by the lessor combine to exercise an option to extend a lease.'' When this occurs, "the law implies a continuation of the original tenancy upon the same terms, conditions, and covenants as in the original lease." Although CBK did not give written notice of its intent to exercise its second one-year term, Grand Investment accepted its monthly rental payments, and in so doing, waived the writing requirement, therefore implying a continuation of the original tenancy. The tenant argued that the holding over and payment of rent established only the consent of the parties to a continuing month to month tenancy. The court noted that this might be true had there been no extension option, but that Missouri precedents made clear that whenever the lease does contain an applicable extension option, the holding over, even without appropriate notice, and acceptance of rent by the landlord, established a prima facie case that the option was exercised. The presumption, however, is not unavoidable. Extrinsic evidence may demonstrate that the holding over in fact was pursuant to other understandings of the parties. The court was of the view that there really was no dispute as to whether the second extension option had been exercised, but that there was some dispute as to the significance of the holding over after the end of the second extended term. Although the lease would have provided for double rent for such holding over, there was some evidence that the landlord and tenant had waived the double rent provision and had agreed to a rent only mildly increased because they were in the process of negotiating a new lease. As this evidence required factual analysis by the court, summary judgment for the landlord was inappropriate. Remember that escalation provision? The court held that it probably was effective for the extended term of the lease, but that there was a triable dispute as to what happened where the landlord did not provide final notice of the amount of escalation promptly after the expiration of the preceding year. Thus, summary judgment again was inappropriate as to the extended term. As to the last eight months, again, the uncertainty as to how the parties were treating that period also infected the conclusion as to whether the escalation clause applied, and remand was necessary to resolve these uncertainties. Comment 1: Although this court suggests (rather offhandedly) that without the existence of the renewal option or other lease language pertaining to holdovers, there would have been a periodic month-to- month tenancy of tenant held over and landlord accepted the rent. Although this issue is resolved by statute in many states, the majority common law rule, as discussed in Friedman on Leases at Section 18.4, is that the holding over and acceptance of rent after a lease for a term of a year or more creates a new lease for at least a year (the period permitted for unwritten lease agreements). Whether this is a one year term or periodic tenancy is in dispute. Comment 2: What if the extension option had been for substantially longer than one year? Will a holding over and acceptance of rent result in an implicit extension of the lease beyond the period permitted by the Statute of Frauds? The Missouri court suggests that this would be the result, since all that has happened is that the tenant has indicated (implicitly) a desire to extension and landlord (implicitly) has waived the requirement for written notice. Since the parties had already agreed in a signed document to create an option for extension this would appear to satisfy the Statute of Frauds requirements. Note that the result might be different in those courts that are punctilious in differentiating between options to extend and options to renew, as an option to renew theoretically requires a new lease, and can't be based on the old one. See the discussion of this issue in Qureshi v. Fiske Capital Management, 796 N.E. 2d 459 (Mass. App. 2003), the DIRT DD for 1/30/04. Note also that the Missouri court stresses that the implied exercise of the option and waiver of the formal notice are only presumed, and other facts may be adduced to demonstrate a different interpretation of these issues. 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