Its common for people to enter agreements on a handshake trusting that they’ll work out any issues later. It’s even more common for people to enter written contracts that contain covenants that leave open for resolution at a later time certain aspect of the deal. One such example is a Lease Agreement that provides for renewal terms at a rental rate to be determined at the time of the renewal at then market or prevailing rental rates. While common, this form of agreement is no agreement at all and is unenforceable.
In a recent case, a dispute arose when a Tenant exercised a right to renew the Lease term based on the “prevailing market rate for comparable properties.” The Landlord and Tenant had a dispute over whether the Lease was certain as to the rental rate.
The Tenant argued that the rent could be determined by looking at the market rental rates in the area. The Landlord argued that this, alone, was too uncertain because it left open the methodology to determine the rent based on the comparable rates in the area. The Trial Court agreed with the Landlord stating that the renewal provision, which stated that the renewal rent was to be based on the prevailing market rate for comparable properties was too indefinite and therefore, legally unenforceable.
Recently, the Third District Court of Appeal affirmed the Trial Court decision holding that, where the lease does not provide for the renewal rent amount, the procedure for determining rent has to be definite enough to determine the rent with certainty. Determination of the renewal rent should not require additional negotiation or litigation. If this cannot be done, the renewal provision is not definite enough for there to have been a meeting of the minds, and accordingly, the provision is legally unenforceable. The provision in this case created too many questions about the method for determining rent. For example, who is responsible for obtaining the comparables? Must the Landlord or the Tenant provide the comparables? May the other party object to the comparables relied upon and if they can object to the comparables relied upon, who will decide which comparable to use?
The take away from this case is that you should not enter any contract just because its common in the industry to provide for such clauses that leave open for discussion and agreement following lease or contract execution Rosenthal Law Group can help review and negotiate the terms of your contracts and leases. Contact us at 954-384-9200 for a consultation.