Daily Development for Tuesday, June 10, 2009
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri

LANDLORD/TENANT; EXTENSIONS AMD RENEWALS;  OPTIONS:  In the absence of an express lease provision prescribing the specific time and method for exercising an extension option, if a tenant that holds over and continues to pay the agreed-upon rent and the landlord accepts such rent, this creates a presumption that the lessee has effectively exercised an option to extend the lease. 

Ellis v. Pauline S. Sprouse Residuary Trust, 280 S.W.3d 806 (Ten. 2009). 

Ellis, a farmer, leased a 103.3 acre tract from Bagwell.  After the lease terms were agreed on by Ellis and Bagwell over the telephone, Ellis reduced the agreement to writing.  The written agreement provided that the lease “will be for a period of five years with Mike Ellis having the option of five additional years.” 

Ellis farmed 60 acres of Bagwell’s property for several years, and intended to exercise the extension option.  In a conversation with Bagwell in late 2001 or early 2002, Ellis notified her of such intention, but Bagwell denied that the parties ever discussed an option.  Nevertheless, after the original term expired, Bagwell continued to accept Ellis’s timely $3,000 rent payments, and Ellis continued to farm the property.

In 2004, Sprouse, a Knoxville real estate developer, became interested in the property.  According to Ellis, in one of Sprouse’s visits to the property, he informed Sprouse that he had leased the property.  Sprouse denied that Ellis mentioned this, and in May 2004, Sprouse signed a contract to purchase the property for $440,000.  The contract contained a handwritten statement providing that the “[c]urrent lease not . . . be disturbed.”  A day after signing the contract to sell the property to Sprouse, Bagwell faxed a copy of the Ellis lease to the real estate agent handling the transaction.  Bagwell and her family members also executed affidavits stating they were in possession of the property and there were no tenants on the property.  While Sprouse did not see a copy of the lease and professed to rely on the affidavits, he admitted knowledge that Ellis had “some interest” in the property. 

Sprouse received a warranty deed on May 25, 2004, and in mid-June, entered the property without Ellis’s permission, driving across Ellis’s corn crop on his way to the river.  Sprouse also threatened to plow under the entire crop after Ellis complained about the damage to his crops.  In September 2004, Sprouse sent a demand letter to Ellis, demanding that he vacate the property by the end of December 2004.  Ellis did so but was unable to find comparable farmland to lease.  Subsequently, Ellis filed suit against Sprouse, seeking to recover compensatory damages for damage to his corn crop, lost profits for the remaining two years under his lease, and punitive damages.  A jury found in favor of Ellis, and Sprouse appealed.

On appeal, the primary issue was whether Ellis had effectively exercised his extension option in the absence of an express provision in the lease prescribing the specific time and method for exercising such option.  Sprouse argued the trial court erred by instructing the jury that (1) Ellis had a reasonable time after the expiration of the lease to exercise his extension option, and (2) by continuing to occupy the land and pay rent, there was a presumption that Ellis had effectively exercised his option.  The Tennessee Court of Appeals found that the jury’s conclusion that Ellis had effectively exercised his extension option was factually and legally unsupportable, concluding that (1) Ellis’s testimony regarding precisely when his conversation (in late 2001 or early 2002) with Bagwell expressing his intention to extend the lease was too uncertain, and (2) Ellis’s holding over by continuing to farm the property and paying rent in 2002, 2003, and 2004 could not, as a matter of law,

amount to an exercise of the extension option under Norton v. McCaskill.  Ellis appealed the holding from the court of appeals.  The Tennessee Supreme Court granted the appeal “in order to address how Norton v. McCaskill, 12 SW. 3d 789 (Tenn. 2000) applies to leases that do not contain a specific provision prescribing the time and method for exercising an option to extend a lease.”

The Tennessee Supreme Court began its analysis with a discussion of Carhart v. White Mantel & Tile Co., a 1909 case holding that a tenant that holds over and continues to pay the agreed-upon rent (and a landlord who accepts such rent) “creates a presumption that the lessee has effectively exercised an option to extend a lease that does not require the lessee to give notice of its decision to extend the lease.”  The court then addressed Norton, a 2000 case involving a ten-year lease of property on which a commercial billboard had been constructed.  The lease contained an extension option (reserving in the tenant “an option to renew [the] lease at the end of 10 years”), but the lessee did not attempt to exercise the option until it received a notice from the property owner after the expiration of the initial term that the lease was no longer in force.  The owner leased the property to another billboard company and refused to accept the tenant’s rent check.  At trial, the Tennessee S

upreme Court held that lessees must exercise the option within the original term of the lease.  However, the court explicitly limited its holding specifically to “leases that require renewal ‘at the end of’ or ‘at the termination of’ the lease or that contain similar language conveying the same requirement.” 

Because the lease in the subject case did not contain similar language, the court concluded Norton did not apply.  Moreover, the court held that even after Norton, the principles of Carhart remain viable and applied to this case, creating a presumption that Ellis extended his lease since he made timely lease payments and Bagwell accepted the same, despite the existence of a factual dispute regarding whether Ellis gave notice of his intention to extend the lease.

Comment 1: To the editor, Norton appears to have been incorrectly decided, and this case exposes the reason.  A court is unwilling to disturb a continuing relationship such as the parties created here simply because there was no formality in the exercise of an option.  If a presumption of renewal occurred simply by the holdover, as the court suggests, then it will be difficult to apply the Norton rule in the future except in circumstances in which one of the parties expressly indicates prior to the holdover that there has been no extension or renewal. 

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