§ 1.03 Life of the Lease

• Jurisdiction: United States
• Publication year: 2022

§ 1.03 Life of the Lease

[1]—Signing vs. Execution

As noted above, the lease must contain the signatures of the parties. While some practitioners use the words "signing" and "execution" synonymously, most experts consider "signing" to be the act of physically putting one's signature on paper and "execution" to be signing, plus the delivery of the signed document. New York, for example, requires an actual delivery of the contemporaneous conveyancing document or the granting of a real property interest after its signing.¹

As previously noted,² to be effective, a present grant of a real property interest must satisfy two distinct requirements, the first being a writing signed by the party to be charged (the "Statute of Frauds"),³ and the second being the delivery of the evidentiary writing of the grant or demising. The latter necessity originated with the common law requirement of livery of seizin, which, although officially eliminated by statutes, remains in the form of the requirement to deliver the "muniment" of title, that is, the writing.⁴

Although the delivery rule may at first appear to be settled, closer analysis reveals that its application hinges on the sufficiency of delivery as evidence of the parties' intent to make an agreement. In 219 Broadway Corp. v. Alexander's, Inc.,⁵ after reconfirming the requirement for a lease to be delivered to be effective and to support a cause of action for its breach, the Court of Appeals stated that it did not reach the question whether, had there been an allegation by plaintiff of defendant's breach of an executory contract to enter into a lease, the complaint should have been dismissed, nor did it consider the broad question whether, and in what circumstances, signature alone will suffice to create an enforceable contract. Although the court did note that "[t]he due signature of the lease instrument is but one step in the process of conveying an interest in land. Delivery requires something more. There must be evidence of an unequivocal intent that the interest intended to be conveyed is, in fact, being conveyed. The mere signing of the instrument by parties not in the presence of each other, without more, does not evince such intent."⁶ The holding in 219 Broadway Corp. was based on the principle that a fundamental purpose of a lease remains to serve as a vehicle for the conveyance of an interest in real property. "Until this end is achieved, any rights or obligations of the parties which may be embodied in the lease remain dormant."⁷ It should be noted, however, that in this case the transaction was intended as a present demising, which parallels delivery of a deed in a sale situation.

The legal conclusion in 219 Broadway Corp., therefore, may not be appropriate if the lease contains a contract interval and agreements between the parties independent of the conveyance of the leasehold estate. In this regard, it can be argued that if a lease contains affirmative covenants obligating a party to satisfy conditions precedent to the conveyance of the leasehold interest, the lease constitutes an executory contract to convey a real property interest, and, therefore, that the delivery rule does not apply.⁸ Alternatively, delivery of possession of the premises without delivery of the signed lease may provide sufficient evidence of intent. In Balsam v. Axelrod,⁹ the court concluded that delivery of a contract is not an essential element of an agreement to sell real property. This case interpreted 219 Broadway Corp. as holding that delivery is only required where a present interest in real property is being conveyed.

A subsequent case, Manhattan Theatre Club, Inc., v. Bohemian Benevolent and Literary Society of the City of New York,¹⁰ reaffirmed the rule that a contract to sell real property is not binding absent delivery, but limited its holding to the instant case and still tied the delivery rule to its ultimate evidentiary purpose of demonstrating intent. "The absence of delivery, even if not an absolute requirement, is conclusive evidence here that defendant did not intend to be bound."¹¹ The court declined to follow the Balsam court's distinction between a lease as a current conveyance and a contract to sell as an executory contract to convey, because this would result in the incongruity of a higher evidentiary standard to demonstrate intent for the transfer of a leasehold interest than for the transfer of the greater fee interest. In its affirming opinion, the Court of Appeals did not rely on any reference to a hard and fast delivery rule, but stated that "the circumstances presented here fail to demonstrate the requisite objective manifestation of intent of the parties to enter into a contract."¹²

The objective manifestation of intent, whether by delivery of the document or otherwise, appears to be the deciding factor which New York courts have considered in resolving such disputes. This focus on intent to contract, even if appropriate in particular cases, has so far allowed the courts to avoid acknowledging the validity of the logical parallel between an agreement to demise a leasehold interest in the future and one to convey a fee interest in the future. A significant, if not major, portion of leases are now such hybrid lease/contract to deliver documents. A view through this parallel logical framework would allow focus on the two major components of both lease and sale documents, namely the actual delivery or grant of the real property interest, and the agreement to deliver it, and on the separate real property law and contract law principles, and the separate but parallel remedies appropriate for resolving the distinct legal issues related to each of these two major ingredients. Admission of the reality that leases are often not current conveyances would dissolve the evidentiary standard incongruity which the Balsam and Manhattan Theatre Club courts wrestled with. Until a line of decisions takes this evolutionary step, practitioners would be wise to note that the courts have, without logical basis, sidestepped analysis of the parallel conveyancing and executory contract components of leases and contracts to sell.

In addition, some practitioners differ over the meaning of "execution" versus "final execution" by all necessary parties to the document. Under this interpretation, "execution" means the act of signing and delivering the document for execution by other essential parties, while "final execution" does not take place until the document is signed and delivered by the last of all the essential parties to the document.

However these terms are interpreted, the document must be signed by the proper parties. Careful attention should be given to identifying the actual record owner of the real property and the one with the right to demise. This is important since a contractual obligation may still arise among parties, even when the purported property owner has no actual title rights to the property being demised and no authority to convey. In addition to such obligations, rights for damages and other remedies may arise even though a demising may never have occurred or actually could never have taken place in the particular situation. This is an area commonly overlooked, even by the most sophisticated practitioners. Proper parties can be determined by a title search. It is a good idea to have title certified by a title company.

The mere signing of a commercial lease document containing an interval between the execution of the contract and right to possession of the premises by the tenant potentially gives rise to obligations even if that agreement is torn up immediately after execution. Care should be taken when closing lease transactions containing a contract interval¹³ to see that the document itself contains a prominent statement above the signature line stating that it is conditional and is predicated on subsequent events or the actual delivery of the document.

Additionally, the parties should be careful to differentiate between the effectiveness of the demising and the creation of contract obligations. A party may sign and have the demising conditional, but still be responsible during the contract interval for certain obligations or liabilities. Careful attention to a particular state's or jurisdiction's treatment of these elements is essential.

[2]—Contract Interval Before Possession

The period of time from the dating and creation of a lease document, until the time that a right to possession or "possessory interest" in the premises arises, is customarily referred to as the "contract interval" of the lease. Determining when a possessory interest begins and the contract interval ends is extremely important and can be handled in different ways within the document.

The least obvious method for stating the time when a possessory interest begins is when a landlord under the lease contract specifies that at a certain time the tenant may have the right to enter the premises for a limited purpose such as inspecting, doing measurements or sending contractors to prepare for work. The tenant may not even be given a key to open the door by itself.

The most obvious way to specify the time of possession is the use of the term "occupancy." In most jurisdictions, "occupancy" signifies the time when the tenant may actually enter and occupy the premises. In other jurisdictions, "occupancy" can be further broken down to "occupancy for installation and construction of improvements," "occupancy for preparing for operations," and "occupancy for normal business operations." "Occupancy" can be defined in a very limited scope, such as "occupancy for safeguarding of materials, files, and equipment" prior to commencement of actual operation of the tenant's normal...