Chapter 7: Leasing Real Property
· Today most jurisdictions view the lease as a hybrid, governed by both property law and contract law.
· Traditionally it was governed only by property law as it was seen as an estate in land.
· Today new rules in residential leases have favored the tenants over the landlords
· Principles concerning commercial leases have only undergone minor changes over the years.
· Immutable rules: they supersede any contrary provisions in the lease (can’t contract around)
· Default rules: Fill in gaps that the parties didn’t address in the lease. (use rules that are generally applicable in the jurisdiction—by statute or by common law)
· A. Creating the Tenancy
· 1. Selecting the Tenant
The Federal Fair Housing Act of 1968àthe most important statute regulating the landlord’s right to exclude.
· A. To refuse to sell or rent after the making of a bona fide offer, or to refuse to negotiate based on race, color, religion, sex, familial status, or national origin.
· B. To discriminate against any person (in the protected class, including handicapped people) in the terms, conditions, etc. of the sale or lease
· C. To print, publish, etc. any notice, ad, or statement that indicates any preference, limitation, or discrimination based on race, handicap,… relating to the sale or rental of a dwelling (this is unlawful even if the seller resides in the dwelling for rent)
· D. To prevent handicapped person from making necessary alterations to the dwelling at their own expense (handicapped person must restore the dwelling to original state after lease ends)
· E. To refuse to make reasonable accommodations (for a handicap) that afford such person equal opportunity to use and enjoy the dwelling.
States and localities often have their own statutes which may include more classes of people that are protected.
Neithamer v. Brenneman Property Services, Inc (1999)
· Facts: A gay, HIV positive man was denied a lease after several offers. Suspected he was being discriminated against.
· Issue: Whether plaintiff has provided enough evidence to give rise to an inference that defendants perceived he was HIV positive. (Whether rule 1 for prima facie case is satisfied)
· To establish prima facie case of discrimination (what plaintiff must show):
1. That he is a member of a protected class and defendant knew or suspected that he was.
2. That he applied for and was qualified to rent the property in question
3. That defendants rejected his application; and
4. That the property remained available after.
· Once plaintiff establishes a prima facie case, the burden shifts to the defendants to articulate some legitimate, nondiscriminatory reason for rejecting plaintiff’s application.
· If defendants satisfy this burden, plaintiff must show either that defendant’s reasons are pretext or that material facts are disputed, precluding summary judgment.
· **Since homosexuality is not a protected class under the FHA, plaintiff had to prove he was disabled. (being HIV positive, plaintiff was deemed to be disabled)
· Requiring a plaintiff to show definitive proof at the summary judgment level creates an impossible burden of proof
· It is sufficient for a plaintiff to demonstrate that there is a material dispute as to the defendant’s perception of him as an individual with HIV
The court found there were enough clues to allow a reasonable jury to conclude the defendants suspected plaintiff was infected with HIV or AIDS
Summary judgment for defendants denied.
· **Even if the plaintiff wasn’t HIV positive, but he was discriminated against under the mistaken belief that he was, he probably would still have a cause of action.
Exemptions from the Fair Housing Act
· The anti-discrimination provisions of the Fair Housing Act do not apply to two types of property:
· 1. If owner lives in residence (Dwelling containing living quarters occupied by no more than four families living independent of each other in which owner lives in one of the living quarters.)
Civil Rights Act of 1866
· Provides additional protection against racial discrimination
· 2. Selecting the Estate
The Common Law developed four nonfreehold estates (Different in two ways—duration and procedures for termination):
· 1. Term of Years tenancy
· 2. Periodic tenancy
· 3. Tenancy at will
· 4. Tenancy at sufferance
Term of Years Tenancy
· Has a fixed duration which is agreed upon in advance
· Once the term ends, the tenant’s possessory right automatically expires, and the landlord may retake possession of the premises. (no notice required)
· Lease automatically renewed for successive periods unless the landlord or tenant terminates the tenancy by giving advance notice.
· For month to month leases, the landlord must give a month notice of termination. (amount of advanced notice required increases with longer lease periods)
· CL said termination could only occur at the end of a lease period.
Tenancy at Will
· Lease has no fixed ending point. It continues “only so long as both the landlord and the tenant desire.”
· At CL the landlord could terminate the lease without notice but now most states require advance notice to end the tenancy, usually equal to the period of time between rent payments.
· (not devisable, term of years and periodic tenancy are)
Tenancy at Sufferance
· Created when a person who rightfully took possession of land continues in possession after that right ends.
· It is more a convenient label for a type of wrongful occupancy than a true estate
· At CL landlord could:
· 1. Treat holdover tenant as a trespasser and evict him (ejectment) or get damages; or
· 2. Renew (force) tenant to renew tenancy for another term.
· **Most states have abolished the second option in order to avoid unfairness to the tenant.
· Some states require the payment of double rent during the holdover period, while others limit the length of the renewed tenancy to no more than one year.
Kajo Church Square, Inc. v. Walker (2003)
· Facts: Walker donated property to church while at the same time attempting to retain a lifetime lease (or a life estate) in the property. The property was sold, and after giving notice the new owners terminated Walker’s lease.
· Walker then sought a declaratory judgment that they had retained a life estate interest or a lifetime lease.
· 1. What kind of lease was created by the deed?
· 2. Was the termination of the lease a breach of contract?
· The court finds that the language in the deed is unambiguous and therefore the parties’ intent can only be made known by the express language of the deed.
· (A condition statement signed by Kajo wasn’t allowed to be used to determine the intent of the parties)
· Rule: A lease which terminates upon the death of a lessee is a tenancy at will rather than a tenancy for life (a tenancy for life does not exist)
· 3. Negotiating the Lease
Statute of Frauds
· 4. Delivering Possession
Legal right to possession—landlord owns the property and executes a lease giving the tenant the legal right to occupy the property
Actual possession—legal right to be on the property
Keydata Corp. v. United States (1974)
· (United States Court of Claims—court where federal government is a party)
· Issue: Whether the court is bound to follow the Massachusetts rule because the real property is located there and, if not, what standard to apply
· Rules on the liability of a landlord when the demised premises are occupied by a third party at the commencement of the lease term:
· **American Rule: the landlord merely covenants that possession will not be withheld by himself or by one having paramount title. (current rule in MA)
Only requires landlord to deliver legal right to possession (not actual possession)
The only possible remedy for a tenant is to bring an ejectment action against the holdover tenant
· **English Rule: requires that, when the lease is silent on the point, the landlord deliver actual possession of the premises at the beginning of the term. (most states use this rule now)
If the lessee cannot take possession because of a holdover tenant, or some other obstructing third person, the landlord is in breach of his obligation.
For such a breach, the tenant may terminate the lease and sue for damages or tenant may affirm the lease and not pay rent until holdover tenant leaves (and get damages).
· Holding: The court determines they are not bound by the Massachusetts rule and establish that the English Rule will control for government leases.
· The court finds that leases are not sufficiently different from other federal procurement contracts to call for a different policy across-the-board in their construction terms.
· It is settled that contracts of the Federal government are normally governed, not by the particular law of the states where they are made or performed, but by a uniform federal law.
· The court then determines that the English Rule is better for several reasons (listed on p.460)
Therefore, under the English Rule the U.S. has the right to terminate the lease.
2. Condition of the Premises
1. The Challenge of Substandard Housing
· As urbanization accelerated during the early 1900s, housing conditions worsened and slums developed. Health and safety concerns led to the development of housing codes which required that each dwelling meet certain minimum living standards.
· Many landlords concluded that they could maximize profits by ignoring the housing codes.
· In Re Clark
§ The law traditionally assumed that a tenant could protect his interests by negotiating an appropriate lease.
§ Clark and many other residential landlords insisted on the use of standard form leases and refused to bargain for any changes.
§ These forms typically placed the repair burden on the tenant, who lacked the knowledge, skills and resources to fix defects.
· If the form contained no provision about repairs, the tenant was still responsible for making repairs under the CL doctrine of permissive waste.
· Even a lease which did assign the burden to the landlord often provided no benefits to the tenant, because the promises in a lease were seen as independent covenants at CL–i.e. the tenant couldn’t terminate the lease but could sue for damages.
§ The housing code often failed to solve problems because when a violation was proven, the penalty imposed on the landlord was typically a small fine–often less than the cost of repairs.
§ **In part because of situations like Clark, there is a modern trend toward imposing higher penalties.
2. Constructive Eviction
· The CL offered one special protection for the tenant in defective leased premises: the doctrine of constructive eviction
§ Wrongful conduct by the landlord that substantially interfered with the tenant’s beneficial use and enjoyment of leased premises was deemed a constructive eviction.
· Under these circumstances, the tenant could vacate the premises and end the lease, thus avoiding liability for future rent.
· How the doctrine evolved:
§ The CL acknowledged that each lease included an implied covenant of quiet enjoyment–
· A promise by the landlord that he would not wrongfully interfere with the tenant’s possession.
· The promises in a lease were originally seen as independent covenants, so the landlord’s breach of this covenant did not excuse the tenant’s continued performance.
· There was one exception to this rule: actual eviction–if the landlord physically evicted the tenant, this breached the covenant of quiet enjoyment and ended the lease.
· Over time, creative attorneys successfully argued that conduct other than actual eviction might so substantially interfere with the tenant’s possession that it was the functional equivalent of actual eviction. This concept was dubbed “constructive” eviction.
· Fidelity Mutual Live Insurance Co. v. Kaminsky
§ Constructive eviction occurs when the tenant leaves the leased premises due to conduct by the landlord which materially interferes with the tenant’s beneficial use of the premises.
Assignment–conveys the whole lease term
Subleasee is directly liable to the landlord (Privity of K and estate exist between landlord and assignee)
Sublease–transaction whereby a tenant grants an interest in the leased premises less than his own, or reserves to himself a reversionary interest in the term
Neither the privity of estate or contract between the lessor and lessee are affected by a sublease
Subleasee is not liable to the landlord; sublessor remains liable (no privity of estate exists between landlord and subleasee)
Objective Test–majority approach to distinguish between an assignment and a sublease–“did the tenant transfer his right of possession for all of the remaining lease term (assignment) or not (sublease).”
Subjective Test–look to the intent of the parties to determine whether an assignment or sublease was created.
o Privity of Contract–have rights and duties under contract law
o Privity of estate–have rights and duties arising under property law
o Standards governing consent to transfer:
Sole discretion clause–the lease might provide that Lessor may refuse consent for any reason whatsoever in his “sole discretion”
Reasonableness clause–the lease might provide that Lessor may refuse consent only on a commercially reasonable basis.
No Standard in Lease–the lease might require Lessor’s consent, but contain no standard to guide Lessor’s decision; such a provision is called a silent consent clause
o Kendall v. Ernest Pestana, Inc
Issue–whether, in the absence of a provision that such consent will not be unreasonably withheld, a lessor may unreasonably and arbitrarily withhold his or her consent to an assignment?
Holding–No. (court adopts minority rule)
The law generally favors free alienability of property
(Forfeiture restraint–where the lessor has the option to terminate the lease if an assignment is made without his or her consent)
Traditional Majority Rule–Where a lease contains an approval clause (a clause stating that the lease cannot be assigned without the prior consent of the lessor), the lessor may arbirtrarily refuse to approve a proposed assignee no matter how suitable the assignee appears to be and no matter how unreasonable the lessor’s objection
Justifications for Majority Rule
Lessor is under no obligation to look to anyone but the lessee for the rent
The lessee could have bargained for the addition of a reasonableness clause in the lease
Doctrine of Stare Decisis
Minority Rule (adopted by Ernest Court)–Where a lease provides for assignment only with the prior consent of the lessor, such consent may be withheld only where the lessor has a commercially reasonable objection to the assignment, even in the absence of a provision in the lease stating that consent to assignment will not be unreasonably withheld.
Reasonableness is a question of fact
· Some factors to determine reasonableness include: financial responsibility of assignee, legality of proposed use, nature of the occupancy, etc.
· Landlord can’t deny consent on the basis of personal taste or in order to charge a higher rent.
· Tenant has the burden of proof on unreasonableness
Rule comes from increased recognition that a duty of good faith and fair dealing is inherent in every contract
Ending the Tenancy
An abandonment of the leased property by the tenant occurs when he vacates the leased property without justification and without any present intention of returning and he defaults in the payment of the rent (Rest.)
Traditionally landlord had three options when a tenant abandoned the leased premises:
Sue for all rent: L could keep the premises vacant until the lease term expired, and then sue T for all the accrued rent.
Terminate the lease: L could treat T’s abandonment as an implied offer of surrender and terminate the lease
Mitigate Damages and then sue for rent: L could mitigate his damages by reletting the premises to another tenant, retaining the rent, and then suing T for the balance.
Sommer v. Kridel
Issue–whether a landlord seeking damages from a defaulting tenant is under a duty to mitigate damages by making reasonable efforts to re-let an apartment wrongfully vacated by the tenant.
Holding–yes, the court holds that a landlord does have an obligation to make a reasonable effort to mitigate damages in such a situation.
Majority rule–landlord is under no duty to mitigate damages caused by a defaulting tenant (court rejects this rule)
· Based on property law principles
“the tenant has an estate with which the landlord may not interfere”
New Rule–a landlord has a duty to mitigate damages where he seeks to recover rents due from a defaulting tenant
· Landlord is required to carry the burden of proving that he used reasonable diligence in attempting to re-let the premises
No standard formula (each case judged on its own facts)
· Justified as a matter of basic fairness