§ 14.01 Operation of Condition of Limitation

• Jurisdiction: United States
• Publication year: 2022

§ 14.01 Operation of Condition of Limitation

[1]—Requirements for a Condition of Limitation

A condition of limitation is a condition or a specific event set forth in the commercial lease document that, if triggered, will terminate a demising before the end of the lease term.² In other words, the condition will self-activate a limitation on the term causing the automatic and immediate ending of the leasehold estate. A condition of limitation is one of the more complex existing legal theories in the landlord and tenant relationship. At best, it is complicated. At worst, it is very difficult to properly analyze and correctly implement. This is a consequence of the complex history of real property law development in England.³

Two New York lower court opinions provide a discussion of the historical treatment of conditional limitations by New York courts, the frequent confusion on this subject, and questioning of the continuing value of the arcane law governing defeasible estates.⁴ In summary, the original New York statute of 1820 (Chapter 194), which first authorized summary dispossession, was viewed by the courts as being in derogation of common law.⁵ In order to avoid an immediate forfeiture of the tenancy for a breach of a condition of the lease, the courts narrowly construed the statute to apply it only to nonpayment of rent and the expiration of the lease term by lapse of time. Thus, the summary dispossess statute was found not to apply to the situation of a landlord exercising an option to declare the lease at an end because of a breach of a condition, and in such case the landlord was relegated to the more lengthy common law action of ejectment.

In this early analysis, the courts made a distinction between a lease "expiring" and a lease "terminating," with the latter being the case of landlord's proceeding based on a breach of condition. In time, however, this distinction between a lease "expiring" and a lease "terminating" grew hazy and finally became mostly obliterated through a series of cases which ultimately found that a landlord's right to "terminate" a lease upon the happening of an event, when coupled with a notice of time after which the lease would "expire," constituted a conditional limitation and could confer summary proceeding jurisdiction on the courts.⁶ The distinction was made between the case where the landlord makes an election or exercises an option to give effect to the termination based on default (a "condition subsequent" or simply "condition") and the case where the lapse of time fixed in the landlord's default notice effects the lease termination (a "conditional limitation").⁷

This distinction is critical because the available remedies have remained unchanged. That is, enforcement of a breach of a condition or condition subsequent allows resort only to the more lengthy action of ejectment, while a conditional limitation, operating to end the lease term, allows for a summary holdover proceeding to be brought. The Woodmere and Besmanoff opinions⁸ question the reasoning of the cases that uphold the distinction between conditions (not allowing summary proceedings) and conditional limitations (allowing summary proceedings). The courts in those cases opine that this is a fiction based on unknown and unenunciated considerations, and argue that in whatever manner a lease comes to an end, summary proceedings should be available to the landlord. However, those courts also acknowledge that they are constrained to follow the weight of the authority of the cases upholding such distinction until a higher court rules otherwise.

Although that argument may have some merit based on practical considerations of what course of action should be available to landlords, it seems that the argument in the Woodmere and Besmanoff opinions was not based on an accurate understanding of the development of the law of defeasible estates or of the value of maintaining the technical distinctions between conditions subsequent and conditional limitations. Analogous technical legal distinctions make a difference in a variety of legal questions, and recognizing them supports reliance on precedent and predictability of legal results. If summary proceedings were to be made available for both condition subsequent cases and conditional limitation cases, there would still be a significant difference because the basis for the condition subsequent cases would be limited to only the six grounds available under the statute for which the summary proceeding can be brought. This would leave many possible condition subsequent situations not subject to a summary proceeding anyway. All of the elements of the cause or causes of action would have to be tried and proved to obtain a judgment including lease termination, while the only issue to try and prove in a conditional limitation situation is that the limitation actually operated to end the lease and make the tenant a holdover, one of the grounds available to bring a summary proceeding under the statute. In any event, a change in the applicability of the summary proceedings statute would have to be enacted by the state legislature, and New York's highest court has continually upheld enforcement of conditional limitations in accordance with their terms, so that absent "some element of fraud, exploitative overreaching or unconscionable conduct on the part of the landlord to exploit a technical breach, there is no warrant, either in law or equity, for a court to refuse enforcement of the agreement of the parties."⁹

Conditions of limitation constitute a set of conditions under which a tenant will be in default of its demising agreement. If the condition is breached, the tenant is generally required to receive an unequivocal straightforward notice from the landlord specifying the default and requesting a cure. Usually there is a "grace" period during which the tenant may cure the default. In the absence of cure, or in the event of a dispute as to whether there has actually been a cure, the landlord sends a second notice, referred to in the leasing field, although not necessarily in the lease itself, as a condition of limitation notice. This notice specifies that the default for which there has been previous notice has remained uncured and that at the end of a specific number of days documented in the lease, the lease by its terms will expire and come to an end as if it were the stated expiration date of the demising.

If the lease provides for a condition of limitation notice, it cannot be elective nor does it require any further action or discretion on the part of the landlord. The notice must specify the following: (1) the complained of default has occurred; (2) it has not been cured; and (3) the lease will, by its own terms, expire within a specific number of days after sending the condition of limitation notice.

Any variations on these procedures will effectively negate the attempt to utilize the condition of limitation for several reasons. First, the condition of limitation is a creature of strict contract construction and demising law and must be followed to the letter. Second, once a landlord attempts to exercise a condition of limitation to end the term of a lease, the landlord may have to resort to the courts to cause the tenant to vacate the premises. The tenant, in all likelihood, will raise defenses, such as that no default existed or the default has been cured. However, the only available defenses in equity with any chance of success against the landlord's exercise of a condition of limitation is that the condition of limitation was not effectively and properly exercised or that the condition of limitation failed contractually or procedurally as a matter of law.

Many states recognize the conditional limitation as having developed under the common law.¹⁰ It is one of the estates "on condition" that is applicable to the construction and interpretation of conveyances, demisings, wills and other means of establishing real and personal property interests. The specific application of the conditional limitation principle to, and its operation on, commercial leases in any given state, however, may be determined by applicable case law or may be modified by statute. Therefore, this issue in each particular case must be adequately researched and determined. In most jurisdictions where a condition of limitation can be reviewed in case law, once the condition has been effectively exercised and the lease terminated, the courts of equity have found themselves wanting for any power or jurisdiction to review whether a default condition indeed existed or whether it was actually cured. In the absence of fraud, the courts limit themselves to a determination of the existence of a condition of limitation right and the proper exercise thereof.

To add to the complexity of this subject, conditional limitations can be categorized into three different types.¹¹ The first type is where the lease terminates upon a specified or objective contingency not controlled by either landlord or tenant, such as the destruction of the premises. The second type is where the lease expires upon the occurrence of a specified contingency agreed upon by both parties, which is set in motion by the landlord, such as automatic termination upon landlord's sale of the property, without any election by the landlord (otherwise, it would be a condition subsequent, and not a conditional limitation). The third type of conditional limitation is where the lease terminates upon the occurrence of a specified contingency, but which is the passing of the time fixed in a landlord's notice of termination given after a tenant's uncured lease default. To ensure enforceable versions of any of these three types of limitation, the lease provision must be carefully drafted so that the limitation language is clear.

It is the third type of conditional limitation that has spawned the most problems, and the justification for this third type is made...