Articles in This Edition:

• Don't let your tenants "off the hook" when implementing a new lease.

• Case study: The risks behind form leases, guarantees and assignments.

• Fair housing vs. the holidays - things to consider before decorating.

• Case study: The importance of wording in lease-based options to buy.

Don't let your tenants "off the hook" when implementing a new lease.

When you sign a lease with a new resident who will be moving in for the first time, you are creating a whole new legal relationship between the owner and the resident.  Did you know that the same thing happens when you sign a new lease with an existing resident?  That’s right.  You are creating a “new” legal relationship with that resident.  Even if that seems obvious, the subtleties of what that means are really critical in your operations.

Let’s look at the new resident first, which will help us understand the existing resident situation better.  A new resident applies for an apartment and provides you an assortment of information to evaluate their eligibility to rent from you.  The applicant’s past helps you make an appropriate decision on offering them a lease.  Once you offer them a lease and they accept, their past is no longer important to you.  Who they owe money to, what kind of tenant they were elsewhere, whether they violated rules at their previous apartment, all becomes useless information to you.   In fact, there may be things you don’t even know about the applicant from their past.  But, it does not matter.  Whatever is past is past.  Their slate is “wiped clean” as your new lease takes effect.  Their prior transgressions are forgiven by you when you sign the new lease.

Now, let’s look at the existing resident.  The situation is only slightly different.  Once you offer them a new lease and they accept, their past is of limited importance to you.  I am even talking about their past on YOUR property.  As I said at the outset, a new lease is a “new” legal relationship with your resident.  Their slate is “wiped clean” as their new lease takes effect.  Well, almost.  It is certainly wiped clean from the perspective of using the “new” lease to address concerns you had before.  If they owe you money from before, you may not use the new lease to address that concern.  If they damaged the unit before, you may not use the new lease to address that concern.  Signing the new lease resets the relationship back to zero going forward.

The primary difference between new residents and existing residents signing new leases is that existing residents have a previous legal relationship with you that does not disappear.  Existing residents have a new slate with you, but they also have an “old” one as well.  While you cannot use your new relationship to address past issues, depending upon the circumstances, you may still have remedies available to you to address those past concerns.

One way you can address past issues is to carry them forward into your new relationship.  Include the remedy to the past situation as a provision of the resident’s NEW lease.  In that way, you can use your new relationship to resolve old concerns.  If the concern continues after that, you can rely on your new lease to further address the problem.  Make sure when you renew or sign a new lease with an existing resident, it covers everything you want included.  Otherwise, you risk giving them a clean slate and limiting your ability to address past concerns.

Case study: The risks behind form leases, guarantees and assignments.

As its name implies, a guarantee is usually the closest thing to a “guarantee” that a landlord will have to get a tenant’s compliance with the lease.  To ensure the benefit of such a guarantee, commercial landlords with property in Connecticut should use a lease and related contracts (including guarantees) consistent with Connecticut law – in other words, the contracts must use language that Connecticut law will recognize, often referred to as a “Connecticut lease.” 

If the landlord is transferring the property from one ownership structure to another (or acquiring it from a seller), the landlord must confirm that the assignment of all underlying contracts includes the leases and any applicable guarantees.  The landlord must also ensure a consistent, detailed accounting of payments made by the tenant, including any charges that the landlord has forgiven to the tenant.   

1. the personal guarantee’s language limited its duration to the period that the corporate tenant was occupying the premises under a “lease extension” or as a “statutory tenant;”

2. the landlord’s transfer of ownership from a partnership to a LLC did not include an assignment of the guarantee to the LLC; and

3. the LLC failed to deliver a complete, detailed ledger card at trial.

The landlord lost its case in the trial court against the personal guarantor of the corporate tenant for the unpaid rent, use and occupancy, and related charges under the lease and personal guarantee.  In September, the Connecticut Appellate Court affirmed the trial court’s judgment and addressed each of these three problems.

First, the guarantee stated in relevant part: “[T]his guarant[ee] shall remain in continue in full force and effect as to any renewal, modification or extension of this Lease and during any period in which Tenant is occupying the premises as a ‘statutory tenant.’”  Connecticut law applied to the lease, the last extension had ended (the corporate tenant was in “holdover status,” a concept which the court did not define), and the phrase “statutory tenant” has no legal meaning in Connecticut (nor was it defined in the lease or guarantee. 

Accordingly, the trial court held – and the Appellate Court affirmed – that the landlord had not met its burden of proving that the guarantee was still in force for the period in question, and the landlord lost its $55,000 claim for unpaid rent and related charges – not counting its other claims, which the court mentioned but did not specify.

Second, real estate closing attorneys sometimes forget that a landlord-tenant relationship can have more documentation than just a lease.  For example, in this case there was also at least one personal guarantee.  This oversight meant that the assignment of leases did not incorporate or even mention the personal guarantee involved in this case.  This created a significant legal issue for the landlord, because the ability to enforce a contract (such as a guarantee) requires that the landlord be a party to the contract (either explicitly or by assignment).  Under Connecticut law, the trial court and appellate courts must each resolve this legal issue before they can address the whole point of the lawsuit, which was whether the guarantor owed the landlord at least $55,000 in unpaid rent and related charges.

In this case, the guarantee’s language saved the landlord’s case, because it made the guarantee applicable to the partnership-landlord’s “successors and assigns” (i.e. the LLC-landlord).  However, while it won this battle, the landlord had to spend precious time and money to defend its right to be in court in the first place, which would have been self-evident (and, likely, beyond challenge by the guarantor) if the landlord had simply included the guarantee in the assignment of leases when property ownership transferred to the LLC.

Third, the landlord had not kept a complete, detailed accounting of all payments (and forgiven charges) to the tenant’s account.  In this case, the LLC’s principal apparently could not explain how tenant payments were applied to the tenant’s account, or confirm what specific charges the LLC had forgiven.  In the absence of this information, both the trial and appellate courts ruled against the landlord for failing to carry its burden of proof that the guarantee covered the claimed amounts.

There are simple lessons for landlords to learn from this case:

• Use leases and related contracts (including guarantees) drafted by a Connecticut lawyer, and throw away all those “form” documents;

• Include a landlord attorney in any real estate closing transaction (whether transfer of ownership or acquisition) involving residential or commercial units to ensure that the closing attorney does not overlook basic items like other contracts beyond the lease(s); and

• Pay attention to the basics like the ledger card, which should be a complete and self-explanatory description of the financial transactions between the landlord and tenant.

Landlords who address these items will likely avoid the fate of the landlord in D’Amato Investments.  [TOP]

Fair housing vs. the holidays - things to consider before decorating.

With the holidays fast approaching, some people are way out in front with the festive decorations.  Well, at least the retailers are.  I have actually seen Christmas decorations for sale as we quickly work to store away signs of Halloween.  Next year we’ll see holiday decorations on the store shelves along side the American Flags and stars and stripes bunting for the Fourth of July.

But, I am not writing a commentary on retail America’s attempts to get consumers to spend their holiday cash earlier and earlier.  This is about your property and your decorating plans and habits.  As you read this, hopefully you are preparing for a wonderful family gathering around a juicy turkey with all the trimmings.   Thanksgiving, a truly American holiday, is followed promptly by Christmas, Hanukkah, and a variety of not-so-neutrally religious or just American holidays.  I want to share a few thoughts your properties’ holiday garb as the holidays approach.

While I won’t pretend to know all of the various religious holidays celebrated at the end of the calendar year, there are a few.  And, while you won’t have any idea what religious holidays your residents observe and celebrate, as you know, you aren’t allowed to ask.  So, as you task maintenance with the responsibility to embellish the management office, or as you do it yourself because it is your favorite part of the holidays, remember, you must be cautious about what you display.  Biased housing (the opposite of Fair Housing) is not what you intend to reflect in your effort to creative a festive mood.  But, careless decorating could create just such a message.

Fair Housing laws make it illegal to discriminate on the basis of religion.  While you may find if frustrating, holiday decorations reflecting your own personal beliefs or even your company’s preference may directly offend residents, applicants, or even prospects visiting your property.  I know your purpose in decorating is not to offend, but fair housing laws don’t focus on your intent, just your actions.  If your decorations offend a protected class, or simply make them feel unwelcome, you may find yourself receiving coal in your stocking along with a fair housing complaint.

As with all Fair Housing issues, there is a light at the end of the tunnel that you can see, if you focus really hard.  In this instance you can decorate to your heart’s desire.  Religiously neutral decorations are your best alternative.   Things like lights, wreaths, Santa Claus images, candy canes, and decorated trees are generally considered acceptable.  Keep your decorations secular and eliminate the directly religious elements of the holidays from your displays.  Ironically, if you eliminate all religious elements of any year-end holiday, while you may offend everyone, you will do so equally, which is okay.

If you want to honor your residents and their differences by intentionally displaying religious decorations for the holidays, ensure you have equal billing for each holiday observed and that your display is proper and accurate.  Do your research in advance and involve your staff in the planning and execution of the decoration plan.  It will help them answer questions about the decorations from people who come in your office.  Perhaps forming a decorating committee of members of your community who can advise you on elements for your display will not only show your commitment to respecting their beliefs, it will surely show your dedication to treating everyone equally.

Whatever path you decide to take, one thing is for sure, as fast as the holidays are upon us, they will also be behind us.  Whatever your holiday, religious or not, take the time to slow down just a little to enjoy the things that mean the most in your life.  Most of us forget to do that throughout the rest of the year.  Here’s a little reminder... [TOP]
 

Case study: The importance of wording in
lease-based options to buy.

Ask yourself this question:  A commercial landlord is entitled to rent and/or use and occupancy payments from a tenant who has exercised a lease-based right of first refusal (or option) to purchase the property until the date of closing, right?  Wrong.

The Connecticut Supreme Court recently rejected a landlord’s final effort challenging its ruling in Bayer v. Showmotion, Inc. that a tenant’s exercise of its lease-based right of first refusal to purchase the premises terminated the lease and eliminated the tenant’s responsibility to pay rent.  Thus, even though the closing had not yet occurred more than three years after the tenant exercised the option (the parties are still litigating that issue in a separate breach of contract action), the “landlord” lost its nonpayment of rent summary process case and had to pursue what was left of its rights in the breach of contract action.

Remember, as discussed in last month’s article, a right of first refusal is essentially identical to an option to purchase with one major difference.  A right of first refusal only becomes available to the tenant if the landlord chooses to sell the property, while the tenant can generally exercise an option at the tenant’s discretion until the expiration of the time fixed by the parties.

In Bayer, the landlord received a $4.5 million offer from a third party to purchase the premises, which the landlord extended to the tenant under the lease-based right of first refusal clause.  The tenant exercised the option and paid the lease-required down payment of $100,000 - but did not close - because the parties could not agree on a purchase and sale agreement.  Shortly after reaching an impasse in the purchase and sale agreement negotiations, the landlord gave the tenant notice of its intent to withdraw the property from the market, and – two months later – served the tenant with a nonpayment notice to quit (the tenant had stopped paying rent), followed by a complaint seeking immediate possession when the tenant failed to vacate.  Over three years later, despite the closing having still not occurred, the Supreme Court overturned the trial court’s judgment granting immediate possession to the landlord.

Why?  The Supreme Court held that a contract for the sale of real estate exists if the controlling document(s) identify the parties, a description of the real estate, and the terms of payment, including a way to determine the total purchase price and the mortgage amount (if any).  Notably, this list does not include the closing date or other standard terms in a real estate purchase and sale agreement.  Thus, the absence of these items in Bayer did not preclude the creation of the new contract between the landlord and tenant on the tenant’s exercise of the option.

• A landlord is not required to treat a third party’s offer as an acceptable offer. 

• The Supreme Court seemed to indicate that the landlord could have created clarity on the issues of a closing deadline and/or a purchase and sale agreement by including such language in its communication of the third party offer to the tenant.  Interestingly, the third party used this same approach to prevent the landlord from treating its $4.5 million “offer” as an invitation to enter a binding contract.  Instead, the third party required a completed, executed, and delivered purchase and sale agreement acceptable to both parties before a contract could exist, which begs the question why the landlord in this case conveyed the “offer” to the tenant without that same condition. 

• The Supreme Court recognized that a tenant could waive the termination of the lease and related elimination of the requirement to pay rent in the new contract.

There are also some negative implications for landlords in this case, as the Supreme Court again turned to other states’ laws to find the answer to the legal issues involved in a Connecticut landlord-tenant case.  In our last Case Studies Edition, we addressed the Supreme Court’s surprising and unnecessary use of New York law to hold that a landlord’s withdrawal of a Connecticut summary process action terminates the underlying notice to quit under Connecticut’s summary process statute [click here to access full article].  This case is another example of the Supreme Court’s apparent willingness to use other states’ laws to determine the future course of Connecticut’s laws affecting landlords.

In this case, the Supreme Court does not cite a single Connecticut case or statute for the crucial holding that “[i]t is widely accepted that, upon exercise of the option, the lease is extinguished, and the relationship of landlord and tenant becomes that of vendor and vendee.”  Having made the tenant a “vendee,” the Supreme Court was able to return to Connecticut law to hold that “the tenant’s new status as vendee carries with it equitable title to the property,” which terminates the tenant/vendee’s responsibility to pay rent. 

This is a remarkable ruling that reinforces the need for care in the drafting and use of lease-based options to purchase, as we addressed in last month’s article on lease-based options to purchase (or rights of first refusal). Moreover, it is a reminder that landlords can now expect to face challenges to long-standing approaches in Connecticut summary process litigation with tenant-advocates arguing other states’ laws.  The issue is not whether the tenants will win these arguments, but the cost to Connecticut landlords to address these arguments and get definitive resolution.   [TOP]

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The reading of this newsletter does not form an attorney-client relationship. The contents of this newsletter are for informational purposes only and do not constitute legal advice. Nothing in this newsletter is intended to imply or predict the outcome of any legal matter that you may be considering or be involved in. The Landlord Law Firm makes no warranties of any kind regarding the information contained in this newsletter.