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.
Readers are urged to respond, comment, and argue with the daily
development or the editor's comments about it.
Items in the Daily Development section generally are extracted from the
Quarterly Report on Developments in Real Estate Law, published by the ABA
Section on Real Property, Probate & Trust Law. Subscriptions to the
Quarterly Report are available to Section members only. The cost is nominal.
For the last six years, these Reports have been collated, updated, indexed and
bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6,
published by the ABA Press. The Annual Survey volumes are available for sale to
the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312)
988 5590 or mtabor@staff.abanet.org
Items reported here and in the ABA publications are for general information
purposes only and should not be relied upon in the course of representation or
in the forming of decisions in legal matters. The same is true of all
commentary provided by contributors to the DIRT list. Accuracy of data and
opinions expressed are the sole responsibility of the DIRT editor and are in no
sense the publication of the ABA.
Parties posting messages to DIRT are posting to a source that is readily
accessible by members of the general public, and should take that fact into
account in evaluating confidentiality issues.
ABOUT DIRT:
DIRT is an Internet discussion group for serious real estate professionals.
Message volume varies, but commonly runs 5 ‑ 10 messages per workday.
Daily Developments are posted every workday.
To subscribe to Dirt, send an e-mail to:
To: |
ListServ@listserv.umkc.edu |
Subject: |
[Does not matter] |
Text in body of message |
Subscribe Dirt [your name] |
To cancel your subscription to Dirt, send an e-mail to:
To: |
ListServ@listserv.umkc.edu |
Subject: |
[Does not matter] |
Text in body of message |
Signoff Dirt |
For information on other commands, send the message Help to the listserv
address.
DIRT has an alternate, more extensive coverage that includes not only
commercial and general real estate matters but also focuses specifically upon
residential real estate matters. Because real estate brokers generally find
this service more valuable, it is named “Brokerdirt.” But residential
specialist attorneys, title insurers, lenders and others interested in the
residential market will want to subscribe to this alternative list. If you
subscribe to Brokerdirt, it is not necessary also to subscribe to DIRT, as
Brokerdirt carries all DIRT traffic in addition to the residential discussions.
To subscribe to Brokerdirt, send an e-mail to:
To: |
ListServ@listserv.umkc.edu |
Subject: |
[Does not matter] |
Text in body of message |
Subscribe Brokerdirt [your name] |
To cancel your subscription to Brokerdirt, send an e-mail to:
To: |
ListServ@listserv.umkc.edu |
Subject: |
[Does not matter] |
Text in body of message |
Signoff Brokerdirt |
DIRT is a service of the American Bar Association Section on Real Property,
Probate & Trust Law and the University of Missouri, Kansas City, School of
Law. Daily Developments are copyrighted by Patrick A. Randolph, Jr., Professor
of Law, UMKC School of Law, but Professor Randolph grants permission for
copying or distribution of Daily Developments for educational purposes,
including professional continuing education, provided that no charge is imposed
for such distribution and that appropriate credit is given to Professor
Randolph, DIRT, and its sponsors.
DIRT has a WebPage at: http://www.umkc.edu/dirt/