Don't Lead Tenant to Reasonably Rely on Promises of Your Employees

Commercial property owners, and especially those that own large or multiple properties, are likely to have several employees. If you have a staff of professionals who help you operate your properties, be very careful about how much official power you give to them and how much interaction they have with tenants during the negotiation process. If one of your employees even seems to a prospective tenant, or one that’s renegotiating or renewing its current lease, to have the authority to make deals, you could be left on the hook for promises that employee made—even if he didn’t have the power to do so in the first place. That’s why it’s crucial to officially determine what level of authority employees have, but to also be aware of which of those employees is interacting with tenants in negotiations and specify to them what actions they can take and what they shouldn’t promise.

A Rhode Island retail center owner learned the hard way that allowing an employee without the authority to make promises to give the appearance of having authority made his unauthorized promises to a tenant enforceable. 

Continual Communications Sent Wrong Message

In that case, an employee of a retail property owner had a title that included “vice president” and over a number of years during a tenant’s lease term had communicated with the tenant regarding its lease. The lease required the tenant to notify the owner by May 30, 2013, if it didn’t want to renew; otherwise, the lease would automatically renew for five years. Faced with this deadline, the tenant reached out to that employee to negotiate changes to the lease. The tenant later argued that under both contract and promissory estoppel theories, these communications—from an employee who had regularly communicated with the tenant in the past—extended the lease’s nonrenewal notice deadline and then converted the lease to a month-to-month tenancy. The owner disagreed, arguing that it never agreed to amend the lease in such a way. Thus, according to the owner, since the tenant missed the notice deadline, the lease automatically renewed for five additional years. The tenant and owner asked a Rhode Island trial court to determine who was correct, and it ruled in favor of the tenant.

Don’t Accidentally Bestow Actual or Apparent Authority

The parties hotly disputed whether the employee had any authority to amend or waive provisions in the lease. The owner argued that it had two vice presidents, and the employee with that title who dealt with the tenant didn’t have any authority. (The owner admitted that this distinction was never communicated to the tenant.) Importantly, the employee didn’t have “actual authority” to amend the lease to change the tenancy to month-to-month status; however, the tenant believed that he had the authority to agree to the month-to-month status change. Thus, the tenant didn’t send a nonrenewal notice by the deadline, because he was satisfied with the employee’s representations that were sent in an email.

The trial court analyzed the employee’s agency relationship with the owner. Rhode Island law recognizes an agency relationship “based upon either actual authority or apparent authority.” Actual authority “requires evidence of an actual understanding between the principal and agent that the latter is to act on behalf of the former.” Here, the owner never bestowed authority to amend the lease on the employee. The owner and other vice president retained that authority. Consequently, the employee did not have actual authority to amend the lease.

But the employee’s apparent authority is a different matter, said the trial court. Apparent authority “arises from the principal’s manifestation of such authority to the party with whom the agent contracts.” And this manifestation of authority “need not be in the form of a direct communication to the third person.” Instead, “the information received by the third person may come from other indicia of authority given by the principal to the agent; for example, a principal can cloak an individual with apparent authority by giving the person a position with generally recognized duties, or by allowing a person to act in ways that give the appearance that the person has authority,” said the trial court.

Here, it was clear to the court that the owner, at a minimum, cloaked the employee with apparent authority. First, it allowed him to hold himself out as the company’s “Senior Vice President and Director of Leasing,” a title that certainly conveys authority to negotiate and amend property leases. The employee was the tenant’s primary contact throughout the term of the lease, engaging in “ongoing negotiations” during the lease term. If that wasn’t enough to establish the employee’s apparent authority, said the trial court, at least after January 2009, the owner held out the employee as having actual authority to amend and waive lease provisions—at that time, his name and signature appeared at the bottom of a letter amending the lease.

The trial court determined that because the owner had projected to the tenant (by the employee’s title, his admission that he engaged in ongoing negotiations, and his signature appearing on amendments to the lease) that he had authority, it “more than suffices for the court to conclude that [the employee] had apparent authority to negotiate, amend, and waive lease provisions on behalf of the owner.”

The trial court concluded that the tenant had prevailed on its promissory estoppel claim and that it wasn’t bound by the supposed five-year renewal. Under Rhode Island law, promissory estoppel claims lie where: (1) one party has made a clear and unambiguous promise; (2) a second party reasonably and justifiably relies upon that promise; and (3) the second party’s reliance on the promise causes it a detriment. All three elements applied to this tenant [Cranston/BVT Assocs. Ltd. P’ship v. Sleepy’s, LLC, September 2016].