Fool's Gold: Avoiding Pitfalls of 'Gold Clauses' in Long-Term Leases

The result has been an increasing amount of litigation in recent years over whether an assignment or modification of a pre-1933 lease results in a revival of the 'gold clause,' thus requiring payment in gold measured at its value as of the lease inception. The economic effect of revitalizing a 'gold clause' can be substantial: in a matter that was recently litigated, a rental obligation of $2,000 per year would have become a rental obligation of nearly $40,000 per year if the 'gold clause' were enforced.

The courts have been surprisingly receptive to reviving gold clauses based on the assignment or amendment of a pre-existing lease after October 27, 1977, even when it has been apparent that the parties did not contemplate reviving the 'gold clause.' The central inquiry is whether the amendment or assignment resulted in a novation that created a new obligation, as opposed to a mere continuation of the old contract. With respect to assignments or transfers of leasehold interests, see, Trostel v. American Life and Casualty Insurance Company, 92 F.3d 736 (8th Cir. 1996), vacated 519 U.S. 1104 (1997), reinstated 133 F.3d 679 (8th Cir. 1998) (gold clause revived based on assignment and assumption of 'all terms and conditions' of original lease); Wells Fargo Bank, N.A. v. Bank of American NT&SA, 32 Cal.App.4th 424, 38 Cal.Reptr.2d 521 (1995).

More recently, in Nebel v. Mid-City National Bank of Chicago, 329 Ill.App.3d 957, 769 N.E.2d 45 (1st Dist. 2002), the Illinois Appellate Court considered the effect of a lease amendment which recited in a boilerplate integration clause that all provisions of a 1906 lease that were not expressly amended were 'reaffirmed.' The court held that this language unambiguously and as a matter of law created a new obligation which had the effect of incorporating and reviving the original 'gold clause.' The court reached this result notwithstanding the fact that the parties never discussed the gold clause in connection with the lease amendment and also notwithstanding the fact that the amendment had been in effect for nearly 10 years before the landlord demanded payment in gold.

Consequently, it is important to be aware of this issue in connection with any amendments, assignments, transfers or other transactions ' even seemingly routine ones ' that involve long-term leases of real estate entered into prior to 1934.

Richard L. Fenton is a litigation partner in the Chicago office of Sonnenschein Nath & Rosenthal specializing in commercial, executive compensation and real estate matters.

All lawyers dealing with transactions involving transfers, assignments or amendments of long-term leases entered into prior to 1934 need to be aware of the possible ramifications of a 'gold clause' in the original lease.

Prior to June, 1933, it was quite common for real estate leases to contain a 'gold clause' requiring payment in 'standard gold coin of the United States, of not less than the present weight and fineness, which is at the present time measured by the standard of weight and fineness observed by the mint and fixed by the laws of the United States of America.' This clause was a hedge against inflation.

In June, 1933, Congress passed legislation rendering unenforceable all obligations, including pre-existing obligations, requiring payment in gold. However, in 1977, 31 U.S.C. ' 5118(d) was amended to permit obligations arising after October 27, 1977 to require payment in gold.

The result has been an increasing amount of litigation in recent years over whether an assignment or modification of a pre-1933 lease results in a revival of the 'gold clause,' thus requiring payment in gold measured at its value as of the lease inception. The economic effect of revitalizing a 'gold clause' can be substantial: in a matter that was recently litigated, a rental obligation of $2,000 per year would have become a rental obligation of nearly $40,000 per year if the 'gold clause' were enforced.

The courts have been surprisingly receptive to reviving gold clauses based on the assignment or amendment of a pre-existing lease after October 27, 1977, even when it has been apparent that the parties did not contemplate reviving the 'gold clause.' The central inquiry is whether the amendment or assignment resulted in a novation that created a new obligation, as opposed to a mere continuation of the old contract. With respect to assignments or transfers of leasehold interests, see , Trostel v. American Life and Casualty Insurance Company , 92 F.3d 736 (8th Cir. 1996), vacated 519 U.S. 1104 (1997), reinstated 133 F.3d 679 (8th Cir. 1998) (gold clause revived based on assignment and assumption of 'all terms and conditions' of original lease); Wells Fargo Bank, N.A. v. Bank of American NT&SA , 32 Cal.App.4th 424, 38 Cal.Reptr.2d 521 (1995).

More recently, in Nebel v. Mid-City National Bank of Chicago , 329 Ill.App.3d 957, 769 N.E.2d 45 (1st Dist. 2002), the Illinois Appellate Court considered the effect of a lease amendment which recited in a boilerplate integration clause that all provisions of a 1906 lease that were not expressly amended were 'reaffirmed.' The court held that this language unambiguously and as a matter of law created a new obligation which had the effect of incorporating and reviving the original 'gold clause.' The court reached this result notwithstanding the fact that the parties never discussed the gold clause in connection with the lease amendment and also notwithstanding the fact that the amendment had been in effect for nearly 10 years before the landlord demanded payment in gold.

Consequently, it is important to be aware of this issue in connection with any amendments, assignments, transfers or other transactions ' even seemingly routine ones ' that involve long-term leases of real estate entered into prior to 1934.

Richard L. Fenton is a litigation partner in the Chicago office of Sonnenschein Nath & Rosenthal specializing in commercial, executive compensation and real estate matters.