In an action arising out of San Francisco, a tenant entered into a written lease with a landlord for a term of five years. The lease contained an option provision, which provided as follows:

“Providing the Lessee has faithfully performed all of the terms, covenants and conditions contained herein during the term of this lease, Lessor grants the Lessee to extend the within lease for an additional period of five (5) years under the same terms and conditions except for the rent which shall be determined by mutual agreement at that time. Should the Lessee wish to avail herself of this privilege, she must give Lessor notice in writing at least ninety (90) days prior to the termination of this lease.”

The lease, executed in 1976, provided for monthly rental of $880 per month for the first two years, with annual increases of $25 thereafter up to $955 for the fifth and last year of the lease term.

When the lessee gave timely notice of her interest in renewing the lease, the parties were unable to agree upon the rental for the extended term. To borrow a line from Claude Rains in Casablanca, “I’m shocked!”

The Lessor contended, not surprisingly, that rent should be between $2,500 and $3,000 per month, whereas the Lessee contended rent should be no more than $1,100 per month.

A complaint was filed by the Lessor seeking a declaratory judgment that the option provision on the lease is not enforceable and that, since the parties were unable to agree upon a rental, there is no lease in effect. The complaint alternatively requested the court to declare the fair rental value of the property in the event the court determined that the option provision was enforceable.

The trial court entered a judgment providing that the Lessee was entitled to continue to lease the property for the additional five years at a monthly rental of $1,276 with an annual increase based upon a San Francisco Bay area consumer index. An appeal by the Lessor thereafter followed.

In reviewing the case, the appellate court reviewed various cases around the country on this subject. It was noted that some jurisdictions provide that a renewal provision is valid “if the contract shows the parties’ mutual consent to meet in the future to negotiate further provisions for rent, even though no method for determining future rent has been set forth.” The courts adopting this rule “reason that the contract implies a mutual agreement to provide for a future ‘reasonable’ rent, which can be determined by a court under the particular circumstances of the case when parties fail to agree, and that the rule effectuates the intent of the parties.”

Most jurisdictions reject this point of view, however, and hold that provisions must specify some guidelines or method for determining future rent. The court noted examples of valid provisions as “requiring… arbitration or appraisal, or… reference to fair market rents for similar properties at the time of establishment of the future rent.”

The traditional view, and California’s position, has been that a provision to extend a lease at a rental to be fixed by mutual agreement is “invalid and unenforceable for uncertainty, at least where the provision does not specify any guidelines or method for the fixing of the rent.”

Thus, a lease that simply provides that rent shall be determined by “the agreement of the parties” is an illusory obligation since either party may simply refuse to agree to anything to which the other party might agree.

The appellate court, in reversing the trial court and holding the option unenforceable, concluded that:

“A provision for renewal of a lease at a rent to be determined in the future is enforceable… only if the lease agreement contains an ascertainable standard for the determination of such rent.”

In another situation involving a lease, a lessee was given an option to purchase the property “for the total sum of $85,000, payable as mutually agreed by both parties.” Sound familiar? The court noted that “unexpressed provisions of the contract may be inferred from the writing or external facts” but concluded that “an agreement to agree upon a material term of a contract… renders the instrument unenforceable in any form of action because it is a mere nullity.”

The court went on to observe the absence of agreement as to how the purchase price would be paid, whether in monthly, quarterly, semi-annual or annual installments – or at the end of a specified number of years. The absence of any rate of interest on such payments was also noted. The court continued: “They had simply agreed to agree upon terms in the future. In such circumstances there was no binding obligation upon the buyer to accept and pay for the land.”

The moral of the story? Before you sign a lease, or an addendum containing provisions that you have handcrafted, albeit with the best intentions, retain a knowledgeable attorney to review the document. The cost will undoubtedly be less than a trial and possible appeal to interpret your handy work.

[This column is intended to provide general information only and is not intended to provide specific legal advice; if you have a specific question regarding the law, you should contact an attorney of your choice. Suggestions for topics to be discussed in this column are welcome.]#PlanetLaundry #Article #BusinessManagement #Public #Finances #FeaturedArticle

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