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So You Thought the Lease had an Option to Renew…Think Again.

By David J. Rabinowitz
September 2009
People: David J. Rabinowitz

Renewal options are important tools for both landlords and tenants to mitigate the risks and uncertainties associated with long-term leasing.  While commonplace in commercial leases, a recent decision by the New York courts voiding a tenant’s renewal options reminds us that great care should be taken when drafting this fairly standard lease provision.

The Bleecker Facts

In Bleecker Street Tenants Corp. v. Bleeker Jones LLC, et al., 882 N.Y.S.2d 42 (N.Y. App. Div. 2009), the tenant had a long-term lease that provided for an initial term of 14 years and several 10-year renewal options.   The tenant had the right to exercise each of the options by notice to the landlord 6 months prior to the expiration of the then-existing term.  The renewal option provision also included a “savings clause,” which is often found in option provisions, and which guarded against the inadvertent forfeiture of the tenant’s option.  A “savings clause” keeps a missed renewal option alive because it requires the landlord to first notify the tenant of an unexercised renewal option and then provides the tenant with an additional period of time in which to exercise its renewal option. Thus, the tenant gets a second bite at the apple if it forgets to exercise its renewal option.  In Bleecker, the tenant failed to timely exercise a renewal option and the landlord failed to give notice of the unexercised option, so the tenant remained in possession of its leased space on a month-to-month basis for 10 years.  Ultimately, the landlord brought the action to void the renewal options claiming they violated New York’s statutory rule against perpetuities, which is codified in EPTL 9 – 1.1(b) (the “RAP”), among other statutory and common law claims.  The Court in Bleecker, agreeing with the landlord in part, held that the renewal options violated the RAP and declared the renewal options void.

The Law

As explained by the Court in Bleecker, the RAP is a long-standing legal principle designed to ensure the productive use and development of property by voiding an interest in real estate (such as a purchase or lease option) if it does not vest (that is, take effect) in the statutorily prescribed period.  Although complicated when applied to natural persons, in New York when applied to corporate entities, the RAP invalidates any interest that does not vest within 21 years (plus the life of any person(s) specifically designated by the parties in the applicable document).

On the face of it, any renewal option which does not vest within the prescribed period would violate the RAP and would thus be void.  However, there is an exception under NY law for renewal options, if the renewal options (1) originate in one of the lease provisions, (2) are not exercisable after lease expiration, and (3) are incapable of separation from the lease (i.e., the renewal options cannot be assigned or transferred to another party apart from the entire lease). 

Applying the Law to the Facts in Bleecker - The Flaw in the Drafting

In Bleecker, the case turned on the second prong of the exception to the RAP – whether the options were only exercisable during the lease term.  The Court noted that the “savings clause” in the Bleecker lease expressly stated that “in the event the landlord fails to give the 60-day notice, then ‘[i]f the term shall have expired, Lessee shall remain in possession as a month-to-month tenant’ until the landlord does give the 60-day notice.”  Bleecker, 82 N.Y.S.2d at 43 (emphasis added).  Thus, the Court reasoned that the second prong of the RAP exception was not satisfied because the language in the “savings clause” gave the tenant the right to exercise the renewal options after the lease term had expired.  Unable to apply the exception, the Court held that the options violated the RAP, and declared the renewal options void.

Practical Considerations

The critical lesson from Bleecker is that merely keeping a renewal option alive does not insure its validity.  The problem with Bleecker, and perhaps with many other leases in use today, is that, while the “savings clause” attempted to keep the renewal options alive, it did not keep the lease term alive.  Tenants should take great care to avoid the Bleecker mistake by carefully drafting the renewal option provisions and corresponding savings clauses to expressly provide that the lease term is automatically extended during the period of time that the renewal options are kept alive by virtue of the savings clause.  It is also important to provide an outside date by which the term will expire regardless of the savings clause so as not to run afoul of the RAP.  Although the Bleecker decision is only applicable to leases governed by NY law, the same care should be applied to all leases to ensure that the application of, and exceptions to, the RAP in the governing jurisdiction are clearly understood and taken into account.

David Rabinowitz is a Director resident in our New York office, and is a member of the Real Estate Group

For more information on this and other related issues, please contact the authors as follows or speak with your usual attorney at Goulston & Storrs:

David J. Rabinowitz
(212) 878-5134
drabinowitz@goulstonstorrs.com

This advisory should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your situation and any specific legal questions you may have.

Pursuant to IRS Circular 230, please be advised that, this communication is not intended to be, was not written to be and cannot be used by any taxpayer for the purpose of (i) avoiding penalties under U.S. federal tax law or (ii) promoting, marketing or recommending to another taxpayer any transaction or matter addressed herein.

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