Attorneys Should Beware Of Unlimited Lease Extensions
By Laine T. Wagenseller* – As a Los Angeles real estate attorney I recently had a client approach me about a billboard lease from 1975 which appeared to confer unlimited lease extensions to the lessor billboard company. The lease rate was very low and the lease had been assigned to a new company, who was offering a small increase with a new lease addendum. The client wanted my advice on whether he was really bound forever by this lease.
The Lease Language
The short form lease was between the landowner and one of the main billboard companies in Los Angeles. The lease provided that the lessor leases and grants exclusively to the lessee, the entire roof and side walls of the building…for the purpose of maintaining advertising signs, including necessary structures, devises, illumination and connections for a term of five (5) years from date.”
Paragraph 5 of the lease stated that “This lease shall continue in full force and effect for its terms and thereafter for subsequent successive like terms unless terminated at the end of such term or any successive like term upon written notice by the Lessor or Lessee served thirty (30) days before the end of such term or subsequent like term.”
The lease did not make any mention of a higher rental rate during successive terms.
California Law Regarding Unlimited Extensions In Leases
Presumably the object of the attorney analysis was to determine whether the client had the ability to lease the roof to another billboard operator or whether he had any leverage over the new billboard company in lease negotiations in order to get a higher rent. My role as a real estate attorney was not simply to recite legal precedent but to apply that precedent to a real world situation and figure out a practical solution.
The first issue was whether the original lease is currently valid and enforceable. The lease provides that it “shall continue in full force and effect for its term and thereafter for subsequent like terms unless terminated at the end of such term or any successive term….” In other words the lease appeared to continue indefinitely unless terminated.
A 2012 California Court of Appeals case called Ginsberg v. Gamson (2012) 205 Cal.App.4th 873 addresses this issue at length, holding in the end that the lease in that case did not clearly or unequivocally establish that the tenant had a right to unlimited extensions and therefore limited the tenant to one extension. Here is some of the rationale of the California Court of Appeals.
In general lease provisions giving the tenant the right to perpetual renewals are disfavored. The California Supreme Court has said that it is against the policy of the law to create a perpetuity. However, the court will enforce a lease provision that grants a tenant the right to unlimited renewals, so long as the parties’ intent to create that right is explicit and clear.
When a lease is ambiguous as to whether the tenant has a right to unlimited renewals of the lease, courts will not delve into the matter further to figure out the parties’ intent. Instead the court will not construe the provision as creating a right to a perpetual renewal and instead provide only one renewal.
The term ‘successive’ does not clearly or unambiguously indicate an intent to provide perpetual renewals. Some out-of-state courts have required that the language include terms such as ‘forever’, ‘in perpetuity’ or ‘for all times’. On the other hand some courts have pointed to language referencing ‘heirs and assigns’ as suggesting the possibility of a long term arrangement.
Overall a court will undertake an analysis of the lease to determine whether it is intended to offer renewals in perpetuity. One factor to take into account is the lack of a rent escalation clause, which would be an unreasonable omission in a perpetual lease. “Of course, parties are free to make bargains that are ill-advised and they will be bound by the contracts they negotiate and enter. But the absence of such ‘long term’ planning in the lease casts further doubt on the perpetual quality of an extension provision that, on its face, does not clearly and unequivocally provide for unlimited extensions.”
California Law Cuts Both Ways In This Situation
In my client’s case both sides could make strong arguments as to whether there is an unlimited right to renew in the form lease at issue. The strongest argument for the client is the lack of a rent escalation clause. The tenant cannot be expected to have an unlimited right to rent the space without any obligation to increase its payment over time.
The strongest argument for the billboard company is that the lease does provide the opportunity to cancel the lease every five years. The billboard company will note that the landlord has the opportunity to cancel the lease every five years and that can hardly be construed as a perpetuity.
Like many legal issues, the answer is not so clear cut as to be able to give a definitive response. My role as the client’s attorney is to advise the client of the strengths and weaknesses of each approach and help the client make a business decision as to the best outcome.
Negotiating Strategies for the Landlord
The goal of this analysis was to determine the best strategy for the client going forward. If the client’s intent was to secure the best rent, the first analysis should be what comparable rates in the neighborhood are. Is the billboard company’s proposed rental rate a fair market rate or not?
The landlord could get comparable rates by talking to other property owners in the area or perhaps from a different billboard company. A competing billboard company may also give an opinion on the value of the billboard and potentially agree to indemnify the landlord in the event of litigation if the landlord were to give them the business (depending on how competitive the market is).
Any new Addendum or Amendment to the lease to reflect a new agreement should clarify the term and any rights to renew. As it stands the landlord can make an argument under the case above that the company does not have a right to any further time on the lease and that the landlord is free to shop the billboard to competing companies.
However, billboard companies are very likely to engage in litigation to stop the landlord from doing this. The law is not clear enough to determine that the landlord would certainly win such a case. The landlord will also want to consider whether he is agreeable to entering into a new long term lease.
Los Angeles real estate litigation attorney Laine T. Wagenseller is the founder of Wagenseller Law Firm in downtown Los Angeles. Mr. Wagenseller specializes in real estate litigation and handles various cases involving leases. For more articles on real estate litigation issues, please visit www.wagensellerlaw.com or contact Mr. Wagenseller at (213) 286-0371.