Last week Insider published an article by Richard Rothfelder titled “Make Lease Renewal Clauses Consistent.“ Rothfelder has litigated a lots of issues over lease renewal rights, including those that afford the right of the lessee/billboard company to renew the lease on like terms at their sole discretion.   We’re reprinting below a December 2017 article on unilateral lease extensions.  Rothfelder advises clients to use such clauses with caution, as sophisticated lessors are likely to object and even litigate them. 

By Richard Rothfelder, Rothfelder and Falick

Introduction

If a lease grants the Lessee the unilateral power to renew the lease, the lease may still be considered valid. Courts have held that leases that unambiguously allow for automatic renewals at the sole discretion of the Lessee are enforceable.

Summary

• In Hull v. Quanah Pipeline Corp., 574 S.W.2d 610 (Tex. Civ. App.—San Antonio 1978, writ ref’d n.r.e.), the court determined whether a lease terminated or “was enforceable against the [Lessors] as a perpetual lease at the option of the [Lessees].”
• The lease in Hull contained a provision that read: “The Lessee shall have and is hereby granted by the Lessors, an indefeasible option to extend such lease for an additional year and from year to year thereafter for the same consideration and under the same terms and conditions as set forth herein by Lessee paying Lessors the annual rental provided herein each year prior to the anniversary date of this lease.”

• The court explained that the right to perpetual renewal is not favored. Additionally, there is not a presumption that the parties intended to create a perpetual right. However, if the intention to create a right of perpetual renewal is clearly and unambiguously expressed, then the obligation created is valid and enforceable.
• In Hull, the court found that the lease provision in question “clearly and specifically shows that it was the intention of both the lessor and the lessee that the lessee should have a right of perpetual renewal…The provisions of the lease are plain and unambiguous and they clearly evidence an intent and purpose to create a right of perpetual renewal.”
• The validity of the rule described in Hull was more recently recognized in 2014 by the United States District Court of the Southern District of Texas. Ezer v. Texas Tower Ltd., No. CIV.A. H-13-1805, 2014 WL 3669222, at *5 (S.D. Tex. July 22, 2014).
• Despite the afore mentioned rule, a Lessor may nonetheless argue that the lease is terminable at the will of either party because it is a contract that is indefinite in duration, length, extent or number of successive performances. However, the lease likely contains “ascertainable contingencies” that would render it definite in duration.
• Courts have held that “[w]hen a contract limits duration by the happening of any one of several ascertainable contingencies it is not terminable at will.” Rolling Lands Investments, L.C. v. Nw. Airport Mgmt., L.P., 111 S.W.3d 187, 197 (Tex. App.—Texarkana 2003, pet denied). Provisions that allow for termination of the contract by either party in the event of a payment default or the happening of events outside the control of the parties can constitute “ascertainable contingencies”, and it is likely that any lease would contain such provisions.

Takeaways

If a lease clearly and unambiguously shows that it was the intention of the parties to provide for perpetual renewals, the lease is likely to be considered valid and enforceable. However, this sort of lease provision is not recommended, as it might be subject to challenge by a savvy Lessor. If you have this type of lease renewal provision, be sure to exercise caution. It may be difficult to prove clearly and specifically that it was the intention of both the Lessor and the Lessee to give the Lessee such unilateral and perpetual power. Nonetheless, this unilateral renewal provision would afford the Lessee a great amount of bargaining power.

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