Lease Debt Liability Clauses May Not Bind Government Tenants

Finding a financially stable tenant that you know won’t go out of business and will have the financial resources to pay its rent every month no matter how long the lease lasts is every commercial landlord’s dream, especially in these tough economic times. That’s why it might be very appealing to lease space in your building or center to a government agency. Just be very careful if you do. While government tenants may be immune to economic trends, they may also be immune to something else: some of the terms of your lease.

Defining Our Scope

This analysis focuses on leasing to a U.S. federal, state, or municipal government agency as opposed to a foreign government agency. We’ll talk about the unique lease challenges posed by the laws of diplomatic immunity when renting to a foreign or international government or private entity in a future issue.

The Perils of Leasing to the Government

Government agencies can make for great tenants, as long as you’re willing to do things their way. First of all, you might have to throw that standard form lease you use with all your other tenants in the trash. When negotiating with a government agency, the starting point is likely to be an official government lease template. Thus, for example, many federal agencies are legislatively required to use a lease form created by the U.S. General Services Administration (GSA). Most states also have their own form leases that they require their government agencies to use when leasing with private landlords.

The other thing that makes leasing to government tenants so tricky is that it subjects you to the jurisdiction’s governmental budgeting and appropriations processes. Government agencies need money from the legislature, along with permission to spend the funding they’re appropriated. In addition, a government agency generally can’t incur obligations that would saddle future legislatures with debts they haven’t and may never approve.

Practical result: Government agencies might be able to walk away from their financial obligations under the lease. And because future expenditures are determined by politics, your lease agreement becomes subject to unpredictable political factors.

Legislative Immunity Trumps Lease Language

Landlords may try to take these statutory restrictions out of play by adding lease language purporting to hold the government agency liable for certain debts incurred under the lease. Unfortunately, you can’t lease around government immunity, especially when that immunity is expressly stated in a statute or piece of legislation. Thus, whatever carve-outs or lease language you negotiate will prove unenforceable.

Florida Landlord Gets Burned with $1.5M Rent Debt

A Florida landlord recently learned that lesson the hard way. The case began when a state agency leased an unspecified but apparently very large amount of space in the landlord’s Tallahassee office building. The tenant occupied the space but then moved out and stopped paying rent. And it didn’t attempt to back-fill the unoccupied space with another state agency. So, the landlord sued the tenant for $1.459 million of unpaid rent on the “dark space.”

State law (Section 255.2502 of the Florida Statutes) bans government agencies from entering into leases longer than one year, unless they include the following statement:

The State of Florida’s performance and obligation to pay under this contract is contingent upon an annual appropriation by the Legislature.

The lease in this case did include the above “contingent upon an annual appropriation” language required by law. And, as all sides acknowledged, the Florida Legislature didn’t actually defund the payments due under the lease.

Moreover, the landlord had what it thought was an ace up its sleeve—namely, the following addendum that the tenant agreed to insert into the lease:

In the event an annual appropriation is not made by the Legislature as contemplated in the first sentence of this Article, Lessee, on 30 days’ written notice to Lessor, may defer payment of rent on such portion of the premises as to which an annual appropriation is not made by the Legislature (the “Defunded Space”). All rent so deferred and not paid currently (the “Deferred Rent”) shall accrue and bear interest at the Prime Rate from time to time plus 400 basis points.”

However, the Florida court still tossed the landlord’s case without a trial, a ruling the appeals court upheld. The lease addendum had no effect, the court explained, citing the following sentence from the same Section 255.2502 requiring leases made by state agencies to include the “contingent upon an annual appropriation” statement:

The foregoing statement shall not be amended, supplemented, or waived. . . . Any contract in violation of this section shall be null and void.

We are not “unmindful of the landlord’s equitable arguments,” the court shrugged. In any other case not involving a state tenant, those arguments might have carried the day. But it’s “undisputed” that the lease in this case violated the state law and was thus void [Tallahassee Corp. Ctr., LLC v. Fla. Dep't of Mgmt. Servs., 2022 Fla. App. LEXIS 8423, 47 Fla. L. Weekly D 2498, 2022 WL 17335705].  

Takeaway

Leasing to government agencies can be tricky. The moral of the Tallahassee Corp. case is not that you should avoid entering into leases with government tenants, but rather that you need to recognize that doing so will probably require you to alter your standard leasing forms and practices. Thus, while seeking legal counsel is advisable for just about any leasing transaction, it’s especially crucial when the tenant to which you’re leasing is a government agency.