Could Tenant Hold You to Your Conduct Later?

Lease terms aren’t solely the deciding factor in who prevails when an owner and tenant disagree. The way in which one or both parties have behaved during the lease period can also be important—especially if the lease is ambiguous. In that case, a court may look to the “course of conduct” of both sides to determine how to proceed. So, when dealing with your tenant, make sure that you don’t do anything repeatedly that you wouldn’t want to be held to as a requirement later by a court. Recently in New York, an owner found out the hard way that it couldn’t change its mind about how to handle electricity payment.

There, since the start of its lease with a tenant, a building owner paid for electricity for the tenant’s space and charged the tenant 50 percent of the cost as part of the additional rent due. The lease didn’t require the owner to provide electricity, it just specified the formula for calculating how much the tenant owed if the owner did provide it.

After the owner stopped providing electricity, the tenant was responsible for setting up electricity delivery to its space. But the tenant disagreed with the owner that it should pay for 100 percent of the cost. The tenant argued that under the terms of the lease, the tenant should still have to pay only 50 percent. In a lawsuit against the owner for other claims related to the lease, it asked a trial court for a determination of the proper calculation of electricity costs and a reformation of the lease to reflect that decision in the additional rent clause.

A New York trial court dismissed the claim. The trial court noted that three provisions in the lease regarding the cost of electricity as it related to the calculation of additional rent conflicted. The trial court said that neither the owner’s nor tenant’s interpretation of the lease was supported by its language. Rather than reform the lease, the trial court dismissed the claim, but made a determination as to how the electricity charges should be calculated. To do this, it decided to “look to evidence of the parties’ course of conduct,” including the owner’s billing for, and the tenant’s payment of, additional rent since the inception of the tenancy, “showing the methodology that had been utilized to compute additional rent.”

The appeals court concluded that, despite how the owner began interpreting the calculation of electricity as soon as it stopped providing it, it was undisputed that the owner had been charging only 50 percent in its calculation of operating expenses in the past [Carey & Assoc. LLC v 521 Fifth Ave. Partners, LLC, March 2015].