The storage industry, particularly in densely populated areas, often uses hybrid rental agreements that give rise to legal issues and can be very costly to an owner.
Ambiguous lease clauses can provide a predicate for a tenants overcharge claims, or defenses against an owners efforts to collect additional rent, or even base rent. The problem is exacerbated when a drafting ambiguity is repeated in numerous leases for the same property, and multiple tenants challenge the enforceability of the rental clause.
Such a situation arose in Citibank. N.A. v. 666 Fifth Avenue Limited Partnership, a New York case decided a few years ago. The main issue in Citibank was whether the escalation provisions allowed for a reduction in Citibanks (the tenants) fixed rent when the real property taxes were reduced below the base-year amount.
Citibank entered into two leases for office space in New York City. The leases contained similar terms and included a paragraph stating the fixed rent would be adjusted to reflect fluctuations between annual real estate taxes and comparable taxes for the base year. The lease provided:
If the taxes payable for any tax year . . . shall represent an increase above or decrease below the base taxes, then the fixed rent for such tax year and continuing thereafter until a new tax statement is rendered to tenant shall be increased or decreased, as the case may be, by tenants share of such increase or decrease.
The tax-escalation adjustment formula was further addressed in the following paragraph:
[If ] as a result thereof a refund of taxes is actually received by or on behalf of landlord, then promptly after receipt of such refund, landlord shall send tenant a tax statement adjusting the taxes for such tax year and setting forth tenants share of such refund and tenant shall be entitled to receive such share by way of a credit against the fixed rent next becoming due after the sending of such tax statement; provided, however, that tenants share of such refund shall be limited to the amount, if any, which tenant had theretofore paid to landlord as increased fixed rent for such tax year.
Citibank cited the first paragraph, arguing that the parties specifically contemplated and intended an actual reduction in fixed rent when taxes fall below the base-year amount. The landlord countered that the first paragraph could not be read alone. When considered in context with the limiting clause in the second paragraph, Citibank could only be entitled to a credit against escalations it had previously paid, and the base rent was never intended to be decreased.
In denying each partys summary judgment motions, the court decided the lease language was ambiguous at best, and it could not conclusively determine the parties intent regarding whether a credit against fixed rent was intended as a result of the reduction in taxes.
The court looked outside the four corners of the lease and examined extrinsic evidence. It noted it would be important to examine prior drafts of the lease to ascertain the intent of the parties. However, neither party produced earlier drafts of the lease. Testimony at trial also failed to offer any indication of intent of a fixed rent reduction.
Only one witness testified about the current norms in the New York City commercial leasing market. Adding to the confusion, the witness testimony was actually cited by both sides in support of their respective positions. On one hand, the witness stated it was not common for a tenant to be granted credit against fixed rent when taxes are reduced below the base-year amounts. The same witness later testified he has a number of clients whose leases contain such clauses. Due to the inherent inconsistencies, the court apparently discounted the evidentiary value of the witness testimony.
Ultimately, the most compelling factor in the courts decision was the conduct of the parties. The court found that Citibank had been a party to countless commercial leases in New York City, and Citibank could not identify one instance where it would be entitled to reduction in fixed rent by virtue of a reduction of taxes below the base-year level. It was clear that, based on its past lease negotiations, there was no expectation by Citibank that it would be entitled to a fixed rent reduction under these facts.
Several other tenants at 666 Fifth Ave. forged attacks similar to Citibanks to pursue rent reductions based on the ambiguous clause. In Executive Office Network Ltd. v. 666 Fifth Avenue Partnership, the lower court agreed with the tenant and awarded summary judgment for nearly $500,000. However, the appellate court vacated the award, stating that the lease language was hopelessly ambiguous, and directed the case to be tried in an attempt to prove what this poorly drafted language really meant.
A similar challenge was made in Agip Petroleum Co. Inc. v. 666 Fifth Avenue Limited Partnership. Interestingly, this time, the appellate court found no ambiguity in the drafting of the lease contrary to the same courts holdings in Citibank and Executive Office.
The fact that different panels in the same court had opposing views on substantially the same lease, with similar fact patterns, only further underscores the severity of the problems encountered because of lease ambiguity. But what would cause courts to award summary judgment to two separate tenants, only to have them reversed at the appellate level?
Neither the landlord nor its attorneys intended to have an ambiguous lease. They labeled it an escalation clause, and yet two tenants were awarded substantial rent reductions that were later reversed and remanded on appeal. The landlord may ultimately prevail, but not without lengthy litigation, including appeals addressing the hopelessly ambiguous clause.
Perhaps the landlord will be spared because the tenant presented virtually no credible evidence that the parties intended that fixed rent would be reduced due to lower real estate taxes, or that the tenant itself believed it was entitled to such a reduction, or that such clauses are customary in New York City leases. One wonders whether the next tenant who sues 666 Fifth Avenue Limited Partnership will learn from these mistakes.
The problem suggests the solution. The practitioner should consider the following:
Keep it clear.Fixed rent or base rent should stay fixed and immutable. Mortgage lenders need to know these amounts can never decrease. Additional rent should encompass all escalations and any credits or refunds. Review form leases with a critical eye, as a disinterested third-party arbiter would, to uncover potential ambiguities. If there is any confusion, clarify the language.
Use examples.Sample calculations and examples are excellent for clarifying a concept difficult to follow. Still, examples are not a cure for poor drafting. Use them to illustrate how a clause works and to help the reader follow the computation. Do not rely on a clear example to repair a problematic clause.
Get help.Landlords administrative or financial staff should make sure they understand the clause and are instructed by counsel how to bill.
Retain lease drafts to establish intent.Lease drafts can evidence intent. The court may look beyond the four corners of the lease; make sure to retain prior drafts that could be used stop a claimant from taking a variant position. Modern document-imaging techniques, e-mail and retaining drafts on CD may be more manageable than maintaining paper files for the number of years of the lease term.
Melvyn B. Ruskin has been practicing law form more than 30 years and is a founding partner of Ruskin Moscou Faltischek P.C., a 55-attorney firm that maintains offices in Hauppauge, New York City and Uniondale, N.Y. He can be reached at 516.663.6650 or [email protected].
Eric C. Rubenstein is a partner and co-chair of the firms Real Estate Department, where he specializes in zoning, land use and environmental issues. He can be reached at 516.663.6513 or [email protected]. For more information about the Ruskin Moscou Faltischek, visit www.rmfpc.com.