Daily Development for
Friday, September 27, 1996

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

LANDLORD/TENANT; SUBLEASES; SUBLANDLORD'S REMEDIES; ATTORNEY'S FEES: Attorney's fee clause in master lease applies to dispute between tenant and subtenant where sublease "incorporates" provision of master lease.

Republic Bank v. Marine National Bank, 53 Cal. Rptr. 2d 90 (Cal. App. 1996)

The precise language of the sublease seems critical here:

"[A] copy of the Master Lease is attached hereto as Exhibit `C' and incorporated herein by this reference. Sub-Tenant agrees not to violate, cause to be violated, or cause Sub-Landlord to be in violation of the terms, covenants and conditions of the Master Lease and further agrees that the terms of the this lease shall be subject and subordinate to the Master Lease."

The sublease contained no provision regarding attorney's fees. But the master lease provided as follows:

"[I]n the event of any action at law or in equity between Landlord and Tenant to enforce any of the provisions and/or rights hereunder, the unsuccessful party to such litigation covenants and agrees to pay to the successful party all costs and expenses."

The subtenant disputed that it was liable for certain rent payments. Ultimately, the landlord brought suit to collect such payments. Prior to trial, subtenant paid all disputed rents with interest, and the sole issue at trial was whether subtenant owed attorney's fees under the provision in the Master Lease. The trial court ruled that the provision in the Master Lease did not apply in this case.

On appeal, held: Reversed, with costs and (presumably) attorney's fees.

The court scoffed at the argument by the subtenant, which had been adopted by the trial court, that the parties did not intend to make each and every provision of the Master Lease applicable to sublandlord and subtenant as if they were "landlord" and "tenant" within the meaning of the Master Lease. It even refused to entertain the argument that the "incorporation by reference" language was ambiguous, so as to justify the admission of extrinsic evidence. The court indicated that the common understanding of laypersons and lawyers alike was that when parties to a contract "incorporated" another document they were setting forth that document as part of their agreement. The court cites one modern case and three fifty year old cases and Webster's Dictionary, describing this as a "host of authority" against which the subtenant could array only logic.

Editor's Comment: Clearly this was a bad day for logic. The tenant pointed out that the Master Lease had certain provisions that were clearly inconsistent with provisions of the sublease, and that the parties therefore demonstrably could not have intended that the "incorporation" language mean that all provisions of the Master Lease applied to the parties as if they were the parties in the Master Lease. The court dismissed this argument by saying that this did not mean that the parties did not intend to incorporate those provisions of the Master Lease that the sublease did not contradict.

But wasn't there a simple alternative explanation? The parties wanted to indicate clearly that their agreement required that subtenant adhere to all of the duties of the tenant/sublandlord set forth in the Master Lease, since the subtenant was now in possession. Perhaps their use of the term "incorporate" was an unfortunate use of words, but it certainly is not an unusual use of words to accomplish such a purpose. To leap to the conclusion that the subtenant and sublandlord intended that the Master Lease apply to their own relationship in all respects that the sublease did not expressly cover is certainly a remarkable feat of mental agility.

Editor's Comment 2: Although the Editor generally concurs that parties to commercial agreements should be bound by specific language, the Editor views the incorporation language here as susceptible of a more likely interpretation than the one reached by the appeals court. At worst, the language was ambiguous and the trial court's interpretation should have been allowed.

Practice Lesson: The editor has seen many real estate practitioners routinely scratch in the language "and by this reference incorporated" or the equivalent at virtually every point that there is reference to an exhibit document. Normally, one would think that such "overkill" is harmless, because a court would understand that the parties are just indicating an intent that they are reaching their instant agreement in light of, and with respect to, the language contained in the exhibits. The parties to many real estate agreements would be mightily surprised if they were told that every duty of parties in their equivalent position in incorporated documents applied to them.

California law firms, at least, should promulgate this case to all of their drafting attornies. All attornies will have to be very circumspect in the use of the concept of incorporation.

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