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.