Daily Development for Monday, March 12, 2001

LANDLORD/TENANT; EXTENSIONS AND RENEWALS; STATUTE OF FRAUDS: Where an easement provides for three year renewals at rents "agreed upon by grantors and grantee to reasonably reflect any new conditions," the Statute of Frauds does not require that the renewal be in writing.

Carlson v. Bold Petroleum, Inc., 996 P.2d 751 (Colo. App. 2000).

Carlson leased to Bold Petroleum as easement to discharge certain sewage into lagoons on Carlson's property. The easement provided that the holder had the right to renew every three years at rents "agreed upon by grantors and grantee to reasonably reflect any new conditions."

Carlson challenged the continuing validity of the renewal right, arguing that since there was no written renewal of the easement, the easement had expired. Carlson argued that, as a consequence, he had the right to demand a significant increase in payments for the easement. The trial court noted that, regardless of Carlson's claims, Carlson had in fact increased the easement fees to the various defendants and continued to receive those fees from the defendants.

The Colorado Court of Appeals held that so long as the initial easement was in writing, the Statute of Frauds was satisfied even in the absence of a written exercise of the renewal option. Further, the Court held that Carlson's claim that the renewal was not effective because the written agreement did not contain an essential term the consideration to be paid is not reason to avoid the easement since a court can determine what amount is reasonable.

Comment 1: The editor has taken the position in the past that the agreement to renew at a "reasonable" rent is an agreement to agree, and is invalid. The problem is not the Statute of Frauds we have an illusory contract. Colorado has some unfortunate authority in this area: Amoco Oil Company v. Ervin, 908 P.2d 493 (Colo. 1995, the DIRT DD for

6/6/96, where the court held that a landlord had a duty of good faith and fair dealing to set grant renewal options at reasonable rentals even when the lease provided expressly that the landlord could propose whatever new rate it wished, and the tenant was free to reject. The editor went bonkers over that decision, of course!!

This court did not cite the Amoco case, but instead relied upon a 1926 case that in fact state a market rate computation, and not a "reasonableness" computation as the basis for setting renewal rent.

But if, as Amoco suggests, the Colorado courts are comfortable takings tenants under their wings, viewing it within their judicial power to evaluate the multitude of considerations that might make for a "reasonable" rent, it is not surprising that the court found that there was a real agreement here.

Comment 2: This issue has arisen on DIRT once or twice in the past.

There has been considerable disagreement among the comments as to whether an agreement to be bound by a "reasonable" rent is an agreement at all. Some have viewed the term as the functional equivalent of a "market" rent. This certainly rescues the concept, since all, including the editor, agree that it is possible to devise an objective method of establishing "market." But is "market" the same as "reasonable?"

LANDLORD/TENANT; EXTENSIONS AND RENEWALS; STATUTE OF FRAUDS: Where an easement provides for three year renewals at rents "agreed upon by grantors and grantee to reasonably reflect any new conditions," the renewal rights are valid under the Rule Against Perpetuities, even though the easement might, as a result of multiple renewals, have perpetual duration.

Carlson v. Bold Petroleum, Inc., 996 P.2d 751 (Colo. App. 2000).

The court commented that it was aware of no prohibition against providing multiple renewals of easement rights, and that the cases cited by Carlson regarding perpetual leases were inapplicable to this case because it involved grant of an easement. Finally, the court noted that even if the easement continued in perpetuity, it would not violate the rule against perpetuities because that doctrine simply invalidates any interest which fails to vest within the prescribed period. In its view, the interest in the easement holders was already vested, since they were in possession under an existing easement.

Comment: Note that, at least under the ordinary interpretation of the Rule, an option to renew that became effective outside the term of the lease would violate the statute, even if it was held by the party who had been the lessee. But some courts have restricted the application of the Rule to family wealth transactions and do not apply it to commercial options. See, for instance Pathmark Stores, Inc. v. 3821 Associates, L.P.,

663 A.2d 1189 (Del. Chancery 1995), the DIRT DD for 4/12/96.

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