Paper Footsteps Can Creep Up in Future Lease Disputes

In prolonged tenant-landlord negotiations, certain provisions in documents, particularly proposed leases, may be overlooked. If negotiations break down, the paper trail from the discussions may become significant. Understanding the significance of those documents, even in the negotiation stage, could prevent an unfavorable decision to a dispute down the road.

That point is illustrated in the 1985 Illinois case Albert C. Ebert v. Dr. Scholl's Foot Comfort Shops, Inc., 484 N.E.2d 1178. On April 22, 1980, the tenant, Dr. Scholl's Foot Comfort Shops, wrote to the landlord's agent, acknowledging its April 30, 1981, lease expiration and requesting a lease renewal meeting. The parties, however, were unable to meet until March 9, 1981. At that meeting, the landlord informed the tenant's agent, Herbert Kotkin, that he intended to remodel the 19-21 N. Wabash Ave. property and divide the tenant's space into two rental spaces. This division would reduce the shop's 40-foot frontage to a 20-foot frontage at 21 N. Wabash Ave. Kotkin did not object to the space reduction, and prospective rental fees were not determined at that time.

Negotiations between the parties and their agents continued throughout April 1981. On May 5, 1981, the landlord's agent sent the store a standard form lease, requesting that the tenant sign and return it within 10 days. Paragraph 17(g) of the form lease read: "Submission of this instrument for examination does not constitute a reservation or an option for the premises. The instrument becomes effective as a lease upon the execution and delivery both by Lessor and Lessee."

The tenant made changes and deletions in the form lease before signing and returning it to the landlord on May 14, 1981, but paragraph 17(g) remained intact. On the same day, Kotkin sent the landlord the following letter.

"As you know, we have been working diligently...on the correction and execution of our final lease draft. Meanwhile, we realize that our existing lease expired April 30, 1981, and we wish to acknowledge, by this letter, that we have agreed to the new rate that is effective May 1, 1981, so that our accounting department can proceed to reimburse you at the correct rental. This rate for May 1, 1981, through April 30, 1982, is $9,583.30 a month. This totals to $115,000 for this coming 12 months."

However, at that point, the landlord rejected the May 14 lease and, on May 20, 1981, sent the tenant a new lease that differed from the May 14 lease. On June 15, 1981, the tenant told the landlord that the May 20 lease was unacceptable and that it no longer wished to enter into a long-term lease for the property. The tenant offered to continue to lease the property as a month-to-month tenant at the rate noted in the May 14 letter.

The landlord subsequently signed the previously rejected May 14 lease and mailed it to the tenant. He also deposited the tenant's May and June rent checks. Further negotiations between the parties failed, and the shop vacated the premises on July 9, 1981.

On July 27, 1981, the landlord filed his initial complaint, alleging that the tenant had breached an existing lease agreement. Thereafter, the shop filed a counterclaim alleging overpayment for the holdover period, and, having paid $19,166.66, requested judgment in the amount of $6,916.66.

In hearings on May 2 and July 13, 1983, the trial court not only found in the tenant's favor on all issues, but also awarded the tenant $4,574.64 on the counterclaim.

The landlord appealed, arguing that the various conversations, writings, and proposed leases that passed between the parties during negotiations indicated ambiguities concerning the parties' intent. The court found, however, that this argument was contravened by the clear language of paragraph 17(g) in the proposed lease, which stated that submission of the instrument constituted no reservation or option for the premises, and that the lease would become effective only "upon the execution and delivery both by Lessor and Lessee." The court further found that the paragraph's plain language indicated that the parties did not intend to be bound at any time prior to the final execution of the lease agreement. Because that final execution never occurred, no intent to be bound could be inferred.

Initially, the landlord maintained that the acts and conduct of the parties constituted "sufficient acceptance and meeting of the minds to have a completed contract." However, the court applied a basic rule of contract law: For a contract to exist, there must be both an offer and an acceptance, and the acceptance must comply strictly with the terms of the offer. An acceptance requiring any modification or change of terms constitutes a rejection of the original offer and becomes a counteroffer that must be accepted by the original offeror before a valid contract is formed. A rejected offer cannot be revived by later acceptance. Thus, the landlord's letter accepting the rejected counteroffer did not constitute a meeting of minds and, therefore, failed to establish any valid contract.

The landlord additionally maintained that a contract was created by the tenant's May 14 letter, which expressed the intention to finalize the proposed lease within the next few weeks. However, the ruling found that if the later execution of a formal agreement was a condition precedent to forming a binding contract, no prior writing would create an effective contract. The May 14 letter not only was not a binding agreement in and of itself, but also was precluded from constituting a final agreement by the language of paragraph 17(g).

With the counterclaim, the court had no problem finding that the original terms were controlling. It observed that when a tenant remains in possession and continues to pay rent after a lease expires but simultaneously carries on negotiations for a new lease, such negotiations negate the possibility of any acquiescence or election by the lessor to create a holdover tenancy.

There can be no doubt that the language that the landlord inserted in the proposed draft of the lease agreement was designed to prevent the parties from being considered to have entered into a lease agreement.

The lesson is clear: Understand the importance of letters and other documents even at the negotiation stage; they still could significantly impact the outcome of future disputes.

Hanon W. Russell, CCIM, JD

Hanon W. Russell, CCIM, JD, is a partner in the firm of Cantor, Floman, Russell, Gross, Kelly, & Amendola, P.C., located in Orange, Connecticut. Russell can be reached by phone at (203) 795-1211 or by e-mail at hwr@chesscafe.com. The discussion of legal issues involved in this column is for informational purposes only. Results may vary depending on state laws and particular facts.