Similar to any other contract between two or more parties, a commercial lease must contain essential terms between the parties to be found valid and enforceable. But does a commercial lease need to be in writing? Does the length of the lease affect the requirement for a lease to be in writing? What’s the effect if a lease is found void? In short – say it with me, lawyers – it depends.
Although Not Always Required, All Leases Should Be in Writing
The statute of frauds requires specific agreements to be in writing, and if they’re not in writing, the agreement would be unenforceable and void. One specific agreement that must be in writing is a lease with a duration of one or more years, at least in most states. Some states have enacted laws requiring a lease need only be in writing if the duration is three years or more. Regardless of your state’s requirements, it is imperative to have your lease in writing. Why? Because stuff happens. People change. Profit margin fluctuates. Who repairs what? Who’s paying for improvements/modifications? What is preventing a landlord from increasing rent unexpectedly with no basis for doing so?
With a verbal lease, nothing is for certain, and when a dispute inevitably occurs, prepare for some headaches. Courts will look at surrounding circumstances, discussions had, and past performance between the parties to make an educated guess as to what the parties actually agreed upon. With a written lease, barring any ambiguity or uncertain terms in the lease, the writing itself controls the terms of the parties’ agreement. Clearly, a written lease is much more convenient and ascertainable than having a court dive into an individual’s mind, personal life, he-said-she-said, etc. to determine the parties’ intent.
Requirement of Written Commercial Leases Vary by State
Your commercial lease may be enforceable even if it is not in writing, but the enforceability of the verbal lease depends upon where the property in question is located. For instance, Texas and Tennessee, among other states, follow the general rule requiring commercial leases for one year or more to be in writing.[i]On the other hand, states like North Carolina and Pennsylvania only require commercial leases for three years or more to be in writing.[ii]Yes, Tarheel state tenants, your verbal lease for 1,000 days may be found enforceable.
For restaurant owners, it is imperative to discuss your state’s lease requirements with a real estate attorney prior to discussing an agreement with potential landlords. Your representations, discussions and actions with a landlord without a written lease could bind you to a valid, oral lease. Consulting with an experienced real estate attorney is highly recommended when renting commercial space. Aside from whether a lease must be in writing, states vary in other requirements that can affect the validity of your lease.
Other requirements and tidbits that can affect the validity of your written lease
You have a lease in writing – great, it’s enforceable, right? Not quite. Aside from essential terms in a written lease (i.e. parties, price, premises, term), state law requirements can vary in establishing a valid, enforceable lease.
Signed – Generally, states require that commercial leases be signed by the party or parties to be charged. In other words, leases generally require signatures by landlord and tenant. On the other hand, the only signature required for a personal guaranty is the party subject to the terms of the personal guaranty.
Notarization – Some states, like Ohio, require that your commercial lease of three or more years not only be signed, but must be notarized in order to be valid.[iii]If your three-year lease is not notarized, it will be found invalid, effectively making the lease a month-to-month or year-to-year lease, depending on the circumstances.
Renewal options – This is huge. Many states have found that a lease establishing a one-year term, with a three-year renewal option, is actually a four-year lease, subject to the requirements of leases of three years or more.[iv]For example, an Ohio court would likely find a one year lease with a three year renewal option to be a four year lease. If said lease is not notarized, as required under Ohio law for leases for three or more years, the lease would be found void and automatically become a month-to-month or year-to-year tenancy, depending on surrounding circumstances.
Month-to-month or year-to-year tenancy – This depends on many circumstances and would be a case by case analysis. Using our Ohio example above, if tenancy has continued for more than one year and existence of the lease is recognized by Landlord and Tenant, then a year-to-year tenancy would likely be created. This means your lease is binding on a year-to-year basis, and without supplying a timely notice of termination, your lease could automatically renew year after year until sufficient notice of termination is given.
Alternatively, if a dispute arose in the first year, a court may find that the lease defaults to a month-to-month tenancy. One major factor in determining a default length of tenancy is how payment is made. Monthly payments generally follow a month-to-month tenancy while an annual payment follows a year-to-year tenancy. Some states also may look to the terms of the invalid agreement, excepting the terms of duration, to determine month-to-month or year-to-year tenancy.
Terminating a month-to-month or year-to-year lease – States vary, but generally, a 30-day notice is required to terminate a month-to-month tenancy. Year-to-year tenancies generally require a six-month notice, or as little as 30-day notice. Again, this depends on many circumstances and is typically a case by case determination. Some states may look to the terms of the invalid agreement, excepting the terms of duration, to determine notice of termination requirements.
Commercial v. Residential – Certain states have enacted a Landlord Tenant Act that only applies to residential parties. On the other hand, some states’ Landlord Tenant Acts apply to both residential and commercial. It’s imperative that you and/or your attorneys are referring to the appropriate real estate laws in your state.
Non-existing business entities – In order to legally conduct business within a state under a certain business name, an entity shall file appropriate documents within the state that they plan to conduct business in. At times, not-yet existing entities will negotiate terms and execute leases prior to filing appropriate applications/forms with the Secretary of State. This is troubling, as a party to a contract must be an existing individual or entity in order to be bound or obligated under the terms of an agreement.
States vary, but without proper filings with the state prior to executing a lease, a court may find the lease to be unenforceable against the not-yet existing entity, depending on the circumstances. Though, certain state courts have found that parties to an agreement are estopped from denying the existence of an entity in order to avoid liability and obligations under the agreement.[v]To help determine the validity of agreements with non-existing parties, courts generally consider, among other things, whether:
- Recognition – The parties recognized the existence of a valid entity, even if the entity had not yet formally existed;
- Ratification exists – If the not-yet existing entity came into existence after the contract was executed, the late existence and continued relationship under the terms of the lease may ratify the agreement thereby holding the entity to the contract;
- Form of signature – Depending how the entity’s signature was executed, a court may or may not find that legal entity to be a party to the contract. Instead, a court could find that whoever signed the contract could be personally liable, rather than holding a non-existing entity liable;
- Intent – Courts look at the parties’ intent to contract and whether the not-yet existing entity represented itself as the business entity that would be performing certain obligations under the agreement; and
- Fairness – Courts are reluctant in finding for parties that argue non-existence of their entity just to avoid liability.
In conclusion, the most important objective when entering into a lease is to make sure it is in writing. At the very least, a lease should include the parties, price, premises and length of the term. As stated above, states vary as to what else is required for leases to be found enforceable. Consulting with an experienced real estate attorney is highly recommended before negotiating a deal with a landlord.
More importantly, restaurant owners should be wary of one-sided leases. Such tenants should seek legal representation in assisting on negotiable terms of a commercial lease. In the article to follow, we will dig deeper into essential and necessary terms that restaurant owners should include, or at very least, negotiate, in a commercial lease.
[i]TX BUS & COM § 26.01 and T.C.A. § 29-2-101, respectively.
[ii]N.C.G.S. § 22-2 and PA ST 68 P.S. § 250.201, respectively.
[iii]R.C. §§ 5301.01 and 5301.08.
[iv]67 Corp. v. Elias, 3 Ohio App.2d 411, 210 N.E.2d 734 (10thDist. 1965); Wright v. Allred, 37 S.E.2d 107, 226 N.C. 113 (1946); Womble v. Walker, 181 S.W.2d 5, 181 Tenn. 246 (1944).
[v]Americare Health Servs. V. Akabuaka, 10thDist. Franklin No. 10-AP-777, 2010-Ohio-5631, ¶ 17; El Rio Oils v. Pacific Coast Asphalt Co.(1949) 95 Cal.App.2d 186, 192, 213 P.2d 1