Chapter § 35.2 INTERPRETATION OF COMMERCIAL LEASE AGREEMENTS

• Jurisdiction: Oregon

§ 35.2 INTERPRETATION OF COMMERCIAL LEASE AGREEMENTS

The lease agreement governs the relationship between a commercial lessee and its lessor. See, e.g., Hanna Ltd. P'ship v. Windmill Inns of Am., Inc., 223 Or App 151, 194 P3d 874 (2008). Courts interpreting lease agreements follow the three-step process for contract interpretation described in Yogman v. Parrott, 325 Or 358, 937 P2d 1019 (1997):

In the first step, the court examines the text of the disputed provision in the context of the contract as a whole and determines, as a matter of law, whether the provision is ambiguous. . . . If the provision is ambiguous, the second step is for the trier of fact to examine extrinsic evidence of the contracting parties' intent. . . . If the ambiguity remains after those two steps, the court relies on appropriate maxims of construction.

Hanna Ltd. P'ship, 223 Or App at 160 (internal citation and internal quotation omitted).

In the first step of the analysis, "[w]ords or terms of a contract are ambiguous when they reasonably can, in context, be given more than one meaning." Pac. First Bank v. New Morgan Park Corp., 319 Or 342, 348, 876 P2d 761 (1994).

In the second step of the analysis, the extrinsic evidence available to resolve a contract ambiguity includes "evidence of the circumstances and conduct of the parties during the life of the agreement," such as the lessor's and lessee's prior course of dealings and earlier leases. Harris v. Warren Family Properties, LLC, 207 Or App 732, 738, 143 P3d 548 (2006) (citing Yogman, 325 Or at 364); see also Stark Street Properties, Inc. v. Teufel, 277 Or 649, 659-60, 562 P2d 531 (1977) (characterizing the parties' prior conduct was a "practical construction of the lease" and therefore "entitled to great weight").

Courts will enforce unambiguous lease terms as they are written. Yogman, 325 Or at 361. Courts will not, however, look to extrinsic evidence to interpret unambiguous terms. Harris, 207 Or App at 738 ("Because we conclude that the written contract provisions are unambiguous, we also conclude that the parties' conduct [during the lease] is not evidence of intent that is available to support interpretation of their agreement.").

For example, a restoration clause that required the tenant to return the premises to "original condition" did not include the tenant alterations to the premises during earlier lease terms; consequently, the tenant was obligated to restore the premise to the condition it was in at the start of...