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In February 2012, Johnson Thermal
Systems, a producer of industrial refrigeration equipment, entered into a Lease
with Gilbert Family Trust for a one-year lease term. The Lease granted JTS an
option to renew for two more one-year terms, but required JTS to give Gilbert
at least 60 days prior written notice.
In March 2013 JTS and Gilbert
amended the Lease to provide that JTS was exercising its option to extend the
Lease for the first of its additional one-year terms. That amendment extended
the Lease until April 15, 2014.
JTS began constructing a new
facility in 2014. In the interim, agents for both JTS and Gilbert discussed
plans for exercising the second (last) one-year term. During lease term
extension negotiations, Gilbert presented to JTS possibilities of
month-to-month, six-month, and one-year lease terms at different rates.
On April 10, 2014, JTS told Gilbert
via email that it “would like to do a 6 month lease with the option to go
month-to-month for an additional 3-6 months.” So JTS and Gilbert signed an
amendment extending the Lease until October 15, 2014. JTS was allowed further
extensions in that document, which required appropriate advance notice.
During the six-month extension term
agents for JTS and Gilbert discussed extending the Lease past October 15.
However, JTS never definitively answered whether it would extend or not.
Instead, JTS consistently gave Gilbert possible vacation dates, each within the
six-month extension term.
October 15, 2014 passed without a
written or oral agreement extending the Lease. JTS continued to occupy the
building and pay rent. In November 2014 Gilbert entered into an agreement to
sell the property to Caldwell Land and Cattle.
Gilbert
sent JTS a written “Notice of Termination” which required JTS to surrender
possession by January 31, 2015. In opposition to the Notice, JTS asserted that
it had exercised the final six-month extension term, and was entitled to remain
in occupancy through April 15, 2015.
Gilbert and Caldwell closed the deal
in December 2014. JTS refused to vacate, so Caldwell started eviction
proceedings in January 2015.
Although JTS ultimately vacated, it
made no repairs to the property and left in place a leased electrical
transformer which JTS had installed one year earlier.
Since JTS had vacated, Caldwell
amended its complaint by dropping the eviction claim and instead asserting
damages and related matters.
In August 2017 the district court
held a trial, and ruled that JTS and Gilbert had created a month-to-month
tenancy after October 15, 2014. The court concluded that JTS had breached the
lease by removing the transformer without Caldwell’s permission, and failing to
repair the leased premises.
The district court held that
Caldwell was entitled to recover $85,389 from JTS, plus $150,000 attorney’s
fees. JTS appealed.
Sparing you the analysis undertaken
by the Supreme Court, the conclusion is that JTS did not exercise the six month
extension. As a consequence, JTS was treated like a month-to-month or “at-will”
tenant, subject to the holdover provisions of the Lease.
This is not the reason why I
selected this case for your reading enjoyment. There is another reason
altogether.
Caldwell knew the property was occupied
before Caldwell closed the deal. And although unstated in the Appellate
Opinion, it does not appear that Caldwell or Caldwell’s lender sought to confirm
the position of JTS prior to closing in a Tenant Estoppel Certificate or
equivalent.
A Tenant Estoppel Certificate would
have stated the position of JTS and provided that Caldwell (and perhaps, its
lender) has been inducted by the Estoppel to close the purchase, and is
detrimentally relying upon the factual accuracy of the statements contained within
it. Typically Estoppel Certificates state the lease term, amount of rental
owing, security deposit, finish-out allowances remaining unpaid, remaining
renewal and extension options, that Landlord is or is not in default, and
similar.
Instead, it seems that Caldwell
purchased the property subject to the superior possessory rights of JTS,
without completely understanding (or at least knowing) the extent of those
rights.
Caldwell wins; JTS loses. See Caldwell
Land And Cattle, LLC v. Johnson Thermal Systems, Inc.; Supreme Court of
Idaho; Docket Number 46056; November 15, 2019: https://law.justia.com/cases/idaho/supreme-court-civil/2019/46056.html.
Lessons
Learned / Questions Asked:
1. Lesson:
One might only wonder if this lawsuit could have been entirely avoided if
Caldwell had insisted upon a Tenant Estoppel Certificate from JTS as a
condition to closing. Such a Certificate presumably could have disclosed the
leasing term issues. Caldwell could then have forced Gilbert to address the
problem prior to closing, at Gilbert’s expense.
2. Lesson:
In fairness to Caldwell, perhaps such a Certificate was received – but the
Opinion does not describe it. Or maybe Caldwell knowingly completed this
purchase without such a Certificate based on an indemnity from Gilbert or
closing escrow, funded by Gilbert. Maybe.
3. Lesson:
Yes Caldwell ultimately prevailed in the lawsuit, but how difficult will it be
for Caldwell to collect this Judgment?
* Board Certified,
Commercial (1989) and Residential (1988) Real Estate Law,
Texas
Board of Legal Specialization
Licensed
in the States of Texas and New York
Higier
Allen & Lautin, PC
2711
N. Haskell Avenue, Suite 2400
Dallas
Texas 75204
P:
972.716.1888
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