Wednesday, November 27, 2019

THE IMPORTANCE OF TENANT ESTOPPELS


 
 
             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?
 
                                                                                                               Stuart A. Lautin, Esq.*

* 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
 
AV Preeminent                   

 

1 comment: