Daily Development for
Friday, August 28, 1998

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

LANDLORD/TENANT; VALIDITY OF LEASE; ESTOPPEL: Where lease was invalid when written because Landlord did not own leased premises, but later Landlord does acquire premises, Tenant may lose right to raise objection that original lease was invalid through estoppel based upon the tenant's taking possession and the landlord's taking property off the market or by ratification through entry into a sublease of the same space.

Merrill v. DeMott, 951 P.2d 1040 (Nev. 1997).

Landlord and tenant reached an understanding that landlord would acquire certain property and lease it to tenant for an addition to tenant's existing adult entertainment facility. They entered into the lease for the property prior to the landlord's acquisition of it in order for the landlord to qualify for an acquisition loan. The lease contained a contingency that a license be obtained for the operation of the business, but the contingency could be invoked only during a set period. Landlord acquired the property. The tenant subleased to a related business entity, commenced remodelling it for the new purposes and applied for the necessary permits. There were delays occasioned by the lack of adequate parking, and landlord and tenant reached further agreements pertaining to the provision of additional ground on a separate lease for this purpose.

Later, after the contingency period had expired, it became clear that the tenant would not be able to operate the business. The tenant attempted to withdraw from the lease on the grounds that it was invalid from the outset because it related to property that the landlord did not own at the time.

The trial court permitted the tenant to withdraw, but the appeals court reversed.

The appeals court was careful to point out that it assumed for purposes of analysis that the original lease indeed was invalid under these circumstances. There is some suggestion in the opinion that the court would not have so concluded had it addressed that issue. At worst, it would appear to have been a contract to make a lease.

The court then identified two entirely separate bases for its conclusion that the tenant was bound to the lease notwithstanding the original invalidity.

First, the court held that the tenant was estopped from raising the invalidity because of its own conduct suggesting that it accepted the lease and the landlord's conduct in reliance upon that. Notwithstanding its knowledge of that the landlord lacked title initially, the tenant commenced remodelling the property for the new purposes. It did not pay rent initially because the lease provided for no rent in the early months before the license was obtained and remodelling completed. But eventually it did commence rent payments. This conduct, the court argues, led the landlord to rely by "keeping the property off the market," and by leasing adjacent space for a parking lot for the tenant in an unsuccessful attempt to satisfy objections of the local planning authorities.

The second basis for the tenant's being bound under the lease is the fact that the tenant ratified the lease. The original tenant subleased to a related corporation and in connection with that sublease personally guaranteed that the subtenant would perform the master lease. This occurred after the Landlord had obtained title to the premises. The court concludes that this conduct ratified the lease.

Comment 1: On both points, there are a number of bases for the court's conclusion, and taken all together the result is certainly correct. It is worth noting, however, that some of the narrower issues that the court resolves are a little closer to the line. For instance, the notion that "taking the property off the market" is the basis for an estoppel precluding a tenant from objecting to the validity of the lease is at odds with the many Statute of Frauds cases that hold that there is no estoppel under these circumstances. The landlord is compensated for taking the property off the market by the payment of rent. Here, although the tenants did not pay rent originally, they ultimately did, and when they weren't paying rent they were remodelling landlord's premises. Further, the tenants were willing to treat the lease as a month to month tenancy. The fact that the landlord forbore offerring the property to others during this time would not appear, in and of itself, to be the kind of detrimental reliance warranting an estoppel. The leasing of the parking lot property is another matter, of course. But for some reason the court does not focus directly on that matter perhaps because it might be more subject to a frustration of purpose defense.

Comment 2: As to the ratification issue, again there is room to quibble. The guarantee of the subleasee's performance of the master lease was a meaningless act. The guarantors were already liable on the master lease covenants, and the sublease did nothing to release them from that obligation. The sublease, as well, was nothing more than an internal rearrangement of business affairs. It created no new interest in third parties one of the tenants owned all the stock and it is difficult to see why it should have been viewed by the landlord as an act of independent legal significance in terms of the landlord's rights.

Comment 3: Note again that the editor does not quarrel with the result, but is concerned that the loose language in the case might lead for the case to be used as precedent to lead to results that might not be as appropriate as the result here. It wasn't a hard case, and there was no reason for bad law.

LANDLORD/TENANT; DEFAULT; PAYMENT; MAILING: As a matter of law, where a lease provides that tenant shall mail rental payments, if the tenant has other financial obligations and timely performs them by mailling a check to the landlord, the Landlord bears the risk of nondelivery of the tenant's check and cannot terminate the lease for failure to pay such charges in a timely manner, notwithstanding the fact that the tenant's check was not timely received by the landlord.

Shadid v. Northern Automotive Corp., 951 P.2d 1094 (Okla. Civ. App. Div. 1 1997).

A landlord billed its tenant for the tenant's proportionate share of taxes, insurance and maintenance due under the tenant's lease. When the tenant (which claimed that it never received the bills) failed to pay those charges, the landlord served the tenant with a notice to quit. After its receipt of the notice to quit and prior to the expiration of the time provided for the tenant to cure its failure to pay the charges, the tenant (as evidenced by the testimony of three of its employees) mailed a check to the landlord in payment of the amounts due. The landlord never received the check, and after it informed the tenant of that fact, the tenant issued a replacement check. Although the lease did not specify how the charges (as opposed to the rent) under the lease were to be paid, the provision of the lease stating that payment of rent was effective upon mailing, implied that payment of other charges due under the lease was also effective upon mailing.

Comment: Note that the tenant avoided forfeiture of the lease, but did not avoid the duty to pay the required monies, by resort to the evidence of mailing. This made it a little easier to accept the testimony of the tenant's employees, since the only thing at stake was whether the tenant had acted promptly, not whether the tenant had fulfilled its money obligations.

The county permit office, however, denied the tenant a permit for the operation of its store due to insufficient parking. The tenant then attempted to cancel the lease based on the permit contingency (which had expired). The Nevada Supreme Court held that the landlord, by leasing the adjacent parking space and taking the property off the rental market during the time of the tenant's possession, reasonably relied on the tenant's performance of the lease and that the tenant was therefore estopped from denying the validity of the lease.

Moreover, the landlord's acquisition of title to the property, coupled with the tenant's occupation of the property, payment of rent, and entry into the sublease, ratified the lease agreement notwithstanding the landlord's failure to own the property at the time of lease signature. Finally, the Nevada Supreme Court held that an agreement for a specified period of free rent did not constitute a waiver of any of landlord's rights under the lease, as the lease contained a "no waiver" clause providing that waiver of one clause did not constitute waiver of the remainder of the lease and the landlord evidenced no intention to relinquish all of its rights under the lease.

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