Daily Development for Wednesday, September 6, 2000

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

Normally I would not post a "nondecision" like this as a DD, but I wanted to engender some discussion and see if anyone was aware of authority already existing on the issue whether remedies are available if a legislature body deliberately unfunds a lease like this in order to terminate it.

LANDLORD/TENANT;  CHARACTERIZATION AS LEASE; OBLIGATIONS CONTINGENT UPON PUBLIC FUNDING: Second Circuit examines a long term lease with several state agencies containing a provision making future performance executory to the extent of money available to the State, but ducks (for now) question of whether state legislature can bail out.

TM Park Avenue Associates v. Pataki, 214 F.3D 344 (2dCir. 2000)

A long term lease of approximately 70% of a building in New York City contained the following provision regarding the New York State agencies constituting the tenant:

     This contract shall be deemed executory only to the extent   of money available to the State for the performance of the   terms hereof and liability on account thereof shall be   incurred by the State of New York beyond moneys   available for the purpose thereof.

Several years after the parties entered into the lease, the real estate market in New York City collapsed. As a result, the State was paying abovemarket rent for this space. In looking for ways to cut costs, the State located alternate space. During the 1995 legislative session, Chapters 312 and 313 of the Laws of 1995 became law. One of these provisions stated that no appropriation would be available on and after July 1, 1996, or as soon thereafter as the State agencies (an educational program) occupying the property relocated to different facilities and that such relocation would reflect the elimination of state funding and the unavailability of funds. The landlord brought this suit prior to the relocation, so that the effective date of the legislation had not been triggered. The case revolved around the Contract Clause of the United States Constitution which provides, in pertinent part, that "No State shall ... pass any ... Law impairing the Obligation of Contracts." [citation omitted]  The Court's analysis determined that the passage of the law permitting the State to breach of contract would not of itself violate the Contract Clause. The availability of a remedy in damages meant that the passage of this law merely offered the State the opportunity to choose to perform under the contract or to pay damages. The Contract Clause would come into play if the availability of remedies test was not met and damages for the breach of contract would not be available.

The Court noted the landlord had, simultaneously with its action in federal court, brought a claim for damages in the New York Court of Claims. The Second Circuit determined that the resolution of the Court of Claims action would likely render any federal court action moot. In the Court of Claims action the landlord might recover damages because the new statute would not trigger the executory clause or prevent the payment of damages, meaning the tenant would have broken the lease without any justification. Alternatively, if the executory clause were triggered, the Court of Claims might find that the tenant had violated some other provision of the lease, such as the "due diligence" clause of the lease which required the tenant to diligently seek and obtain appropriations to pay the rent under the lease. As long as the landlord could recover damages, there would only be a breach of the lease and not an impairment of the Contract Clause.

Only in the remote event that the Court of Claims found that the executory clause was not triggered but a damage remedy was still prevented would a federal court action be needed and appropriate, according to the Second Circuit. In light of the above, the Court held that the decisions made by the District Court were to be vacated and that the District Court was to refrain from ruling on the Contract Clause or the other causes of action until the Court of Claims action was resolved. The other relief granted by the District Court was also vacated pending the Court of Claims decision.

Comment 1: This is a case that should be watched carefully by landlords for government agencies nationwide. The Court of Claims decision may well clarify whether a clause in a lease making future performance conditional upon legislative funding makes the contract completely conditional, so that the legislature can back the government out of the contract whenever it wants or whether, as the court suggests here, there may be some remedy for breach of contract if the legislative action is not based upon supervening public policy considerations.

The problem with finding that the contract is not conditional is that then one has to determine which legislative policies justify withdrawal from the contract and which do not. This may be an impossible task.

Comment 2: At the state and local level, leases such as typically are used to circumvent vote requirements when the agency desires to make some significant capital acquisition and to finance it over time. A separate "facilitator," not subject to the vote requirement, is set up, and the facilitator issues revenue bonds secured by revenues a lease with the government entity wanting use of the facility, and then the facilitatory acquires or builds the facility. Some state courts have ruled that leases are not "debts" within the meaning of the vote requirement, and the leases therefore can validly support the revenue bonds. In other states, however, the court decisions are not so favorable, and it is necessary also to have the "legislative contingency" clause in the lease. The recourse of the landlord's bondholders, of course, is downgrade the bond rating of the legislative body in the future if it acts in bad faith in withdrawing support for the lease. Do they also have a contract damages remedy? A "takings" argument? Hmmmm.

 

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