Agreeing to Agree Isn’t Enough to Lock in a Lease Renewal

June 6, 2019

It’s hard to determine today how much rent to charge a tenant for a lease renewal (or extension) that won’t happen until years later. It may be tempting to skirt this problem by providing for the renewal at an unspecified rent “to be negotiated” or “agreed to” in the future. Agreeing to agree is fine as long as you actually do reach an agreement at renewal time. But if you don’t and the dispute lands in court, the party seeking to enforce the renewal provision may find itself out in the cold.   

It’s hard to determine today how much rent to charge a tenant for a lease renewal (or extension) that won’t happen until years later. It may be tempting to skirt this problem by providing for the renewal at an unspecified rent “to be negotiated” or “agreed to” in the future. Agreeing to agree is fine as long as you actually do reach an agreement at renewal time. But if you don’t and the dispute lands in court, the party seeking to enforce the renewal provision may find itself out in the cold.   

Agreeing to Agree Is Too Vague to Enforce

A contract isn’t enforceable unless its essential terms are clear and certain. And one of the most essential terms of any renewal agreement is the amount of the renewal rent. So, if the agreement doesn’t list either a specific rental amount or a clear and mutually acceptable calculation method, it can’t be enforced. In case after case, courts across the country have made it clear that a promise to negotiate isn’t enough to demonstrate a true “meeting of the minds.”

Option Is Unenforceable

For example, in one case, a lease gave the tenant the option to renew at a “monthly rental which both parties shall agree to negotiate no less than 90 days prior to the time of the lease’s expiration.” The New York court ruled that the option was “too indefinite” and refused to enforce it [Seiden v. Francis, 585 N.Y.S.2d 562 (1992)]. Other formulations that courts have struck down as too vague:

  • Renewal rent “to be determined by mutual agreement” [ETCO Corp. v. Hunter, 161 Cal. App. 3d 1154, 208 Cal. Rptr. 118 (1984)];
  • “The monthly lease payments shall be increased to an amount mutually acceptable to the parties” [Kaplan v. Floeter, 657 S.W.2d 1 (Tex. Ct. App. 1983)];
  • Tenant may renew “at the then prevailing market rate for comparable commercial office properties” [Jahangiri v. 1830 North Bayshore, LLC, 253 So. 3d 699, 2018 Fla. App. LEXIS 11068];
  • Renewal “at a monthly rental to be arbitrated, negotiated and determined among the parties to this lease at said time” [Edgewater Enters., Inc. v. Holler, 426 So. 2d 980, 983 (Fla. 5th DCA 1982);
  • Renewal for a “monthly rental fixed on the comparative basis of rental values as of the date of the renewal with rental values at this time reflected by the comparative business conditions of the two periods” [Walker v. Keith, 382 S.W.2d 198 (Ky. 1964)].

Option Is Enforceable

In one case, the lease provided “for negotiation and agreement between the parties at the time of the extension, or, in the event the parties could not agree on a new rental price, that [tenant] would be given the right of first refusal of any bona fide offer received by the landlord.” The clause was “valid and enforceable,” ruled the Florida court. While the clause didn’t list a specific rental price, it provided “a method by which a rental price could be established.” The right of first refusal, the court explained, would enable the parties to determine the fair rental value and then make a decision based on the offers, if any, the landlord received [Ludal Dev. Co. v. Farm Stores, Inc., 458 So. 2d 781 (Fla. 3d DCA 1984)].

Three Possible Leasing Strategies

Ways to make renewal provisions without specific rental amounts enforceable include:  

  • Giving the tenant first refusal rights (as in the Ludal case above);
  • Establishing a binding arbitration or appraisal process for setting the renewal rent in case you don’t reach agreement;
  • Pegging the renewal rent increase to the Consumer Price Index or other numeric indicator (as opposed to a vague formulation like “market rate”).

 

Some States Give Tenants a Break on Renewal Options

Courts in a handful of states, including Alaska, Arizona, California, Colorado, Michigan, Nevada, North Dakota, Ohio, Tennessee, and Washington, have ruled that a renewal option in the tenant’s favor can be enforced at a “reasonable rent” set by the court when there’s no clear rental amount or formula and the parties can’t agree on the renewal rent. In such cases, the court has the authority to set a “reasonable rent.” Reasoning: The fact that the tenant paid and the landlord accepted consideration for the option is evidence of the parties’ intent to make it binding.

 

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