Daily Development for
Wednesday, November 20, 1996

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

LANDLORD/TENANT; RENT: "Gold clause" in 99 year lease entered into in 1917 is valid and binding upon tenant's assuming assignee notwithstanding 1933 federal law invalidating such clauses if assignee's duties arose under a novation agreement subsequent to effective date of 1975 federal law. Trostel v. American Life & Casualty Co., 92 F.3d 736 (8th Cir. 1996)

The clause, a common "inflation adjuster" in contracts of the era, provided that "at the option of the lessor, all payments under this lease shall be made in gold coin of the United States or America, of or equal to the present standard of weight and fineness." The term "present standard" in the original lease, of course, referred to the value of gold in 1917.

Landlord sent ninety notice of its intent to invoke the clause. Tenant responded by attempting to prepay the twenty five year balance of the lease term in cash prior to the running of the ninety day notice period. Landlord rejected the tender and demanded gold on a monthly basis. The district court held that the gold clause had been rendered invalid by 1933 federal legislation. The federal appeals court here reversed and held the clause enforceable (subject to further interpretation of the critical issue of the benchline value by which the gold performance was to be measured.)

In 1933, Congress, in response to monetary problems of the Great Depression, declared such clauses illegal and prohibited the private ownership of gold. This situation changed again in 1975, when Congress again permitted private ownership and trading in gold. The 1975 legislation further provided that the provisions of the 1933 statute would not apply to obligations issued after October 17, 1977.

Prior tenants under this lease had transferred their interest a number of times during the lease term. The lease contained a clause that indicated that a tenant would be released from further obligations if an assignee tenant expressly assumed the covenants of the lease. Thus, the lease provided by contract for a "novation" to occur automatically each time a new tenant assumed the lease. The instant tenant had entered into an assignment and assumption agreement denominated a "warranty agreement" in 1990. The 1990 agreement incorporated the 1917 lease by reference. The court does not make clear whether the landlord under the lease had the right to reject proposed assignees, but it does indicate that the landlord had conducted face to face discussions with the tenant in this case at the time that the tenant assumed the lease.

Tenant argued that the gold clause had been nullfied by the 1933 legislation, and that novation arrangements occuring between 1933 and 1977 had amended the lease so that the gold clause was no longer part of it. The court rejected that argument, pointing out that the Congressional intent, reading the 1933 and 1975 legislation together, was to suspend operation of such clauses, but to permit them if they were revived by new agreements subsequent to 1977. It viewed the novation agreement, which specifically incorporated the terms of the 1917 lease, as an express new agreement meeting the test of the 1977 legislation.

Tenant then argued that there had been no "meeting of the minds" because there was evidence that it had no intent to abide by the gold clause and that the landlord also was unaware of the fact that the clause might be enforceable until after the 1990 agreement. The court held that the 1990 agreement was unambiguous in its incorporation of the language of the 1917 agreement, and therefore no extrinsic evidence of bargaining intent was relevant.

The court further held that the normal lease rule of "perfect payment in time" - prohibiting prepayment of rental absent the landlord's agreement - applied here, notwithstanding a rental agency agreement entered into between landlord and a prior tenant.

One critical issue of value was remanded to the court below: whether the "the present value" established a benchmark of the 1917 value of gold or the 1990 value, since the agreement upon which the landlords rested their claim was the agreement as "revived" in the 1990 novation, or the 1917 value, since the 1990 agreement incorporated the language of the 1917 agreement using that term. The court held that this term was "ambiguous," and that the trial court should interpret it.

Note: Even using the 1990 benchmark is likely to be uncomfortable for the tenant, as inflation over the next 25 year likely will make the lease a much more expensive proposition than planned. The 1917 benchmark, of course, would be ruinous. In 1917, gold was worth about $16.50 an ounce. The current twelve month high is about $415 an ounce.

Comment 1: If, of course, the parties intended that the "gold clause" term be an inflation adjuster, then the landlord should be entitled to its benefit. If they assumed that the clause was legally unenforceable, then there seems to be equity on the side of the tenant. If there is no clear evidence of what they assumed, then the basic rule is that the tenant is stuck with what it signed. Only through rigid enforcement of clear contract language can we insure the confidence in the marketplace that deals will be carried out.

Comment 2: Interestingly, if the landlord knew that the tenant was not anticipating that the clause was enforceable, and the landlord intended to enforce it, then there is some authority that the landlord would have had a good faith and fair dealing duty to disclose to the tenant the fact that the agreement was enforceable. See Market Street Assoc. v. Frey, 21 F.3d 782 (7th Cir. 1994)(one party to contract has good faith and fair dealing duty to warn other party about significance of certain features in contract if it is aware that other party is unaware of their impact). Here, however, the landlord apparently did not know of the significance of the gold clause at the time of the novation. This weakens its argument that it is entitled to demand enforcement, but strenghthens its defense to a good faith and fair dealing claim.

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 five years, these Reports annually have been collated, updated, indexed and bound into the 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 Stacy Walter at the ABA. (312) 988 5260 or stacywalter@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. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.