As I have mentioned in other “Watch Your Language” articles for our Blog, as a general rule, courts will uphold language in a commercial lease (and ancillary lease documents such as assignments and amendments), unless it is contrary to statutory law or public policy. Because of this judicial deference to lease language, you must say what you mean, precisely, or a judge will decide what you meant. Failure to follow this principle cost the buyer in 17 Mile, L.L.C. v. Kruzel, 2013-Ohio-3005 (8th Dist. Ct. of Appeals, Cuyahoga Cty.) $8,200 (representing past due rent of one of the property’s tenants), plus costs and attorneys’ fees.
In the 17 Mile case, Richard and Mary Kruzel sold a communications tower (leased by A T & T and T-Mobile) to 17 Mile LLC, the buyer. In conjunction with the sale, the Kruzels and 17 Mile LLC executed a lease assignment/assumption agreement. While typically, a landlord’s lease rights and obligations transfer to a buyer with notice of the lease, without need for an assignment/assumption agreement, such an agreement provides certainty to the process, and presents a good vehicle to decide upon issues such as indemnifications (e.g., buyer indemnifies seller for post-closing landlord obligations; seller indemnifies buyer for pre-closing landlord obligations), responsibility for outstanding leasehold improvements and obligations re: past due rents owed by tenants.
The assignment of leases and assumption agreement in the 17 Mile case, provided, in pertinent part: “[the Kruzels] hereby grants, conveys, sells, assigns, transfers and delivers to [17 Mile] all of its right, title and interest in and to the AT&T Lease and T-Mobile Lease. [17 Mile] hereby accepts the assignment of the AT&T Lease and T-Mobile Lease and hereby assumes, and otherwise agrees to pay, satisfy and discharge all liabilities of [the Kruzels] under the AT&T Lease and T-Mobile Lease before and after the Closing Date…”
17 Mile LLC argued that the trial court erred when it interpreted the assignment agreement and the Kruzels’ transfer of “all right, title and interest in and to the AT&T Lease and T-Mobile Lease” to 17 Mile LLC to not include the right to past-due rents owed by AT&T that accrued prior to the assignment. The Kruzels argued that the trial court got it right when it applied the following general law: “The general rule of law is that rent, which has accrued and remained unpaid at the time of a sale, is due and payable to the [seller], in the absence of an agreement between the [seller] and the [purchaser] that it shall be payable in whole or in part to the latter.” 17 Mile LLC had no problem with the general law as stated, just the court’s failure to recognize that the language: “all right, title and interest in the lease…” constituted an agreement to assign the right to collect past due rents to the purchaser.
The 8th District Court of Appeals upheld the trial court’s decision in favor of the sellers (the Kruzels). The court first cited prior case law (including the Federal 6th Circuit Court of Appeals) establishing the common law presumption that back rent belongs to the seller, absent agreement to the contrary. The court further explained that the assignment agreement in question did not evidence a clear intention on the part of seller to relinquish this right. Since the lease did not include a specific provision regarding past due rents of a tenant to be paid to a successor of landlord, the right to such rents was not a specific right of the lease being assigned. Also important to the court was the fact that the assignment agreement contained specific language calling for the buyer to be obligated for lease liabilities before and after the closing date, but was silent as to lease rights accruing prior to the closing date.
What is the moral of this story? Clearly, the buyer intended for “all lease rights” to include buyer’s rights to past due rent. However, the lease assignment, according to the court, did not grant buyer such rights. In other words, “Say what you mean, precisely, or a judge will tell you want you meant.” As a result of this case, lease assignments must specifically assign rights to past due rents to buyers, in order for buyers to be entitled to same. Prospective buyers can also protect themselves by requiring, as a condition to closing, acceptable estoppel certificates from tenants certifying as to no defaults (and no, uncured, prior defaults); and/or, an escrow holdback agreement re: past due rents.