Daily Development for Wednesday, October 21, 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 AND TENANT: The exception to the Rule Against Perpetuities for options that are “appurtenant” to a lease does not apply to options that are exercisable after expiration of the lease term during the month-to-month tenancy created by a holdover provision in the lease. Bleecker Street Tenants v. Bleeker Jones, 882 N.Y.S.2d 42 (A.D. 1 Dept. 2009).
The Lease between plaintiff landlord defendant tenant provided for an initial 14-year term, with nine options to renew the Lease for consecutive 10-year periods. The Renewal Options were exercisable by Tenant by giving notice to Landlord prior to the end of the then-existing term, and Landlord was required to send Tenant a reminder notice regarding such options (the “Reminder Notice”).
If Landlord did not send the Reminder Notice and Tenant did not exercise its Renewal Options, the Lease provided that the Renewal Options would remain in effect until such time as Landlord sent the Reminder Notice, and “[i]f the term shall have expired, Lessee shall remain in possession as a month-to-month tenant.”
After expiration of the initial 14-year term, Tenant did not exercise its Renewal Options and became a month-to-month holdover tenant. The Landlord commenced an action to declare the Renewal Options void under the Rule Against Perpetuities (“RAP”) and the New York Supreme Court held that the Renewal Options were exempt from RAP since they were options “appurtenant” to the Lease.
The Supreme Court, Appellate Division (the “Court”), reversed the holding of the lower court and found that the exception for options appurtenant to a lease did not apply to the Renewal Options. In Symphony Space v. Pergola Properties (99 N.Y.2d 466 (1996)), the New York Court of Appeals, stated that the exception to RAP for options appurtenant to a lease applies where the options (i) originate in one of the lease provisions, (ii) are not exercisable after lease expiration and (iii) are incapable of separation from the lease. In this case, the Court found that the Renewal Options were exercisable after expiration of the Lease since the Lease expressly provided that such options continued to exist during Tenant’s month-to-month tenancy, after expiration of the Lease term. The month-to-month tenancy did not extend the term of the expired Lease.
Therefore, the Court applied RAP and found that the Renewal Options violated RAP’s rule against remote vesting (EPTL 9-1.1(b)) because the Renewal Options were exercisable 21 years after the date of the Lease. The Court also found that the Renewal Options did not violate the prohibition against unreasonable restraints against alienation under common law and RAP (EPTL 9-1.1(a)) because the Renewal Options did not directly restrain Landlord from transferring its property, although they may have indirectly affected the building’s sale price.
Comment: On first thought (and that‘s all you usually get in these comments) the editor is suspicious of the conclusion that the lease was no longer in effect when it was being continued on a month to month to basis following the original term. Although the usual rule is that a month to month holdover tenancy is a new lease (Friedman on Leases [Randolph Edition} at 18-46, such a rule perhaps not to apply to holdover arrangements what were agreed to in the original lease specifically to accommodate he situation where notice of renewal still had time to run.
Here, the parties apparently stipulated that the renewal option was part of the extended term. Why shouldn’t the option be able to “shelter” from the operation of the RAP under these circumstances. If, conceivably, under the original lease, there was a period of time when there would be NO lease and the option could be renewed, of course that’s a different matter.
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