Daily Development for Friday, February 11, 2002

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

LANDLORD/TENANT; RENEWAL; RENEWAL RENT:

Holdover and payment of rent beyond the initial term will be assumed to be exercise of a renewal option where option terms do not require express notice of renewal..

Troutman Oil Company v. Lone, 57 S.W.3d 240 (Ark. App. 2001)

Here, in a questionably drafted lease agreement for a gas station, the owner provided for $500 in monthly rent "for the term of this lease" and further for "[t]he term of this agreement shall begin on 2nd day Jan. 1998 and shall run continuously for 1 (one) year and shall have one full ten years option to lease again." The lease provided further that the lessee could not assign or sublease the leased premises without owner's prior consent. The lessee sublet the leased premises on the same day as the lease commenced for $1500 per month. Lessee did not obtain owner's prior written consent, but did notify the lessor and obtain written consent from the Lessor's vice president within the first month.

The landlord-tenant relationship continued for seventeen months, at which time the owner terminated the lease for several breaches the Court adjudged to be non-material, including lessee obtaining the owner's consent to the sublease in an untimely manner. The trial court awarded lessee substantial damages, including lost profits.

On appeal, the owner insisted that lessee had not exercised its option to renew and the lease had therefore become a month-to-month tenancy because tenant had not given notice to renew and in any event, the option to renew was void for indefiniteness. In a 3-2 decision, the Court of Appeals affirmed the trial court decision and upheld the renewal.

The court reviewed a number of cases in which options to renew failed for lack of stated terms and found the instant case to differ from those cases, as the lease agreement stated that the rent was to be $500 per month for the term of the lease. The court ignored the owner's evidence on gas station leasing customs and the owner's insistence that the stated rent was wholly insufficient for a possible eleven year term. The dissenters argued that the option terms were unambiguous and did not create an option for a ten year renewal at $500 per month, but simply an option to at a rent to be negotiated, as the lessor argued.

Comment 1: The problem with the dissent's position is that the Arkansas case law, discussed earlier in the opinion, that an option to renew at a rent to be negotiated is unenforceable in Arkansas.

Comment 2: The option term language obviously is a model of poor drafting, and the lessor got what it deserved for entering into such a lease. It should be noted that, in addition to the rent, the lessor got a commission on the sale of petroleum products through the leased service station, and it appears that this may have been it's primary revenue source from this activity. It's "evidence" of trade practices was simply evidence of other leases it had been able to negotiate with other tenants of this space - showing skill at negotiation, but hardly a "trade practice."

Comment 3: The editor notes the case not only for the discussion of this silly renewal language but for the holding that the holdover constituted a renewal. This was good news for the tenant here, but obviously in other contexts it might be very, very bad news. It certainly sounds a cautionary note. If there is an option to renew, any tenant holding over without planning to exercise the renewal had better be very explicit about it's intent, at least in Arkansas.

An interesting twist might occur if the renewal option provides for a higher rent. If the tenant holds over but pays the original rent, not the higher rent, to the landlord, and the landlord accepts that rent without complaint, do we have a renewal, and, if so, at what rent?

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/