Unintended Effects of a 'Belts and Suspenders' Approach

As a general rule, where an easement is granted in the context of a lease, unless otherwise provided, it is intended to benefit the leasehold interest for the duration of the lease, and does not create a perpetual easement.

For example, in DR/CR Family, LLLP v. Burger, a group of property owners owned land on which a shopping center was constructed. 80 P.3d 948 (Colo. App. 2003). One of the lots comprising the shopping center, Lot 4, was subject to a lease, a memorandum of which was recorded, that granted the tenant use of the common areas of the adjacent shopping center, including 32 parking spaces. The lease also provided that the tenant was responsible for a pro-rata share of common area and parking lot maintenance costs and real estate taxes. The property owners subsequently encumbered all of the shopping center property, excluding Lot 4, with a mortgage lien. After the property owners defaulted on the loan, the lender foreclosed, and a new owner purchased the shopping center. The new owner sued the original owners, who had retained Lot 4, arguing that the Lot 4 owners were unjustly enriched by receiving rent from the tenant, part of which was attributable to the benefit the tenant derived from its right under the lease to use parking areas on the adjacent shopping center.

The new owner claimed it was entitled to a pro-rata share of the rent payable by the tenant to the Lot 4 owners based on the portion of the shopping center burdened by the parking easement. The appellate court rejected this argument, finding the parking easement was appurtenant to the tenant's leasehold interest, not to the Lot 4 owners' fee interest, and there was no evidence that the parking easement was intended to survive the termination of the lease.

Unless a written document expressly states whether rights are to terminate at a certain time or survive indefinitely, it may not be clear whether the parties intended for an easement to survive the leasehold estate. For example, in Weinmiester v. Ingersoll, the plaintiff and defendant each owned half of a building that had three floors, each party owning one half of each of the three floors. 10 N.W. 67 (Mich. 1881). The defendant desired to lease the second and third floors of the plaintiff's half of the building for use as a boarding house in conjunction with operating its half of the building. In connection with such leasing, the parties agreed to construct certain improvements to accommodate the combined use of the floors contemplated by the defendant, including a hallway located wholly on the defendant's half of the second floor (which hallway allowed the parties to enlarge the leased rooms on plaintiff's half of the floor), doorways and a staircase to allow defendant and his tenants access to all of the rooms to be used as part of the boarding house. After the lease terminated, the plaintiff claimed it had a permanent easement over such improvements in order to allow the plaintiff continued access to the hallway on the defendant's half of the building post lease termination. The appellate court, however, disagreed with the plaintiff, noting that it was not credible that the plaintiff had intended to burden his property perpetually with a stairway from the defendant's side of the property or that the defendant intended to perpetually burden his property with improvements that substantially limited defendant's usable space on the second floor.

The court concluded there was insufficient evidence that the parties intended the improvements to create a perpetual easement that would burden the property beyond the term of the lease.

Inconsistent Provisions

Revisiting the Agreement first discussed above, whether or not the parties to the Agreement had intended to create perpetual easements or had intended that the Agreement serve to provide more detailed notice to third parties of the tenant's rights under the lease, belts and suspenders to the memorandum of lease already recorded, was not clear from the four corners of the Agreement because of the following inconsistent provisions:

• The Agreement was between the owner of all of the property as “Landlord” and the tenant of the leased parcel as “Tenant,” it referenced the lease agreement, and expressly stated that the parties were “desirous of restating” certain agreements between the parties.
• The Agreement used the word “easement” in describing the rights as opposed to a “license.”
• The Agreement did not state that the easements were perpetual or that they were to “run with the land,” but the Agreement did provide that it was binding on the parties' “respective heirs, representatives, successors and assigns.”
• Perhaps most importantly, the Agreement did not state that the Agreement or the rights created therein would terminate with the lease, but neither did the Agreement state that such rights would survive the termination of the lease.

In light of the ambiguity created by the foregoing provisions, the title company concluded that it would only agree to remove the Agreement as an exception to the title policy upon the recording of a release or termination of such Agreement executed by all of the current owners of the original 52 acres. Considering the Agreement was recorded in 1977, the 52 acres had been the site of more than one failed shopping center, and the original 52 acres were now owned (and in many instances also leased) by multiple unrelated owners, obtaining such a release would be an arduous task.

Furthermore, upon receiving a request to execute such a release, it was likely that some or all of such individual owners would argue that they did have rights under the Agreement, the termination of which entitled them to just compensation. As an alternative to obtaining a written release or termination, the owner of the property could have filed a quiet title action to determine whether any rights survived. However, this alternative was not more attractive because such proceedings can be costly and time-consuming.

Proper Documentation Helps

While the parties ultimately agreed to close over the Agreement, properly documenting the parties' intentions would have avoided the issue altogether. For example, had the parties intended to create perpetual easements or restrictions on the properties, the landlord, as the owner of all of the subject property, could have unilaterally recorded a declaration against the property, binding on its successors and assigns and running with the land.

However, since the tenant was the named party to the Agreement and the Agreement was binding on the tenant's successors and assigns, and not the successors and assigns of the owner of the leased parcel, such provisions construed together could be interpreted as an indication that the parties had intended such rights to last only so long as the lease was in effect. In the alternative, keeping the tenant as the named party, the Agreement could have provided that the rights were to last so long as the tenant leased or owned the property, thereby demonstrating the intention that in the event the tenant were to acquire the fee interest in the property, the rights set forth in the Agreement at that time would become perpetual.

Conclusion

In those instances in which a tenant is granted rights in property in addition to the leased parcel, it is entirely appropriate for such tenant to request that a document referencing such rights be recorded against the burdened property. However, landlords should take care to permit only documentation that is reasonable and necessary to protect the tenants' interests to be recorded against their property and to ensure that such documentation clearly expresses the parties' rights, including whether such rights are intended to survive the leasehold estate.

Marisa Byram, a member of this newsletter's Board of Editors and is a member of Lewis, Rice & Fingersh, L.C. in St. Louis. The author wishes to thank the firm's summer associate, Michael Gallo, for his research assistance.

In the wake of the economic crisis, it has been this author's experience that title companies are less willing to take (what they perceive to be) risks in issuing title insurance. In light of this trend, commercial landlords should carefully consider and review what their tenants are requesting to be recorded against the landlords' fee interests in their properties, and ensure that such documentation is not so ambiguous or overly broad that it could have unintended consequences.

Recently, for example, in connection with the sale of a site formerly leased by a well-known big box retailer, the title search revealed a memorandum of lease between a previous owner as landlord and the retailer as tenant, and a separate, standalone agreement between such parties. This standalone agreement (the Agreement) recited the existence of the lease and referenced specific sections of the lease that established certain cross access and parking easements between the tenant's leased premises and the landlord's adjacent property. It also imposed certain building restrictions on the tenant's leased premises. The legal descriptions attached to the Agreement described the tenant's 10' acre premises and approximately 42 acres of the landlord's adjacent property. While the title company agreed to remove the reference to the memorandum of lease from the buyer's owner's title insurance policy with a seller's affidavit that certified the lease had been previously terminated, the title company was unwilling to delete the Agreement as an exception to the owner's policy. According to the title company, the argument that the Agreement created permanent reciprocal easements that continued to benefit and burden the entire 52 acres described in the Agreement created a potential risk which the title company was unwilling to insure.

No Perpetual Easements

As a general rule, where an easement is granted in the context of a lease, unless otherwise provided, it is intended to benefit the leasehold interest for the duration of the lease, and does not create a perpetual easement.

For example, in DR/CR Family, LLLP v. Burger, a group of property owners owned land on which a shopping center was constructed. 80 P.3d 948 (Colo. App. 2003). One of the lots comprising the shopping center, Lot 4, was subject to a lease, a memorandum of which was recorded, that granted the tenant use of the common areas of the adjacent shopping center, including 32 parking spaces. The lease also provided that the tenant was responsible for a pro-rata share of common area and parking lot maintenance costs and real estate taxes. The property owners subsequently encumbered all of the shopping center property, excluding Lot 4, with a mortgage lien. After the property owners defaulted on the loan, the lender foreclosed, and a new owner purchased the shopping center. The new owner sued the original owners, who had retained Lot 4, arguing that the Lot 4 owners were unjustly enriched by receiving rent from the tenant, part of which was attributable to the benefit the tenant derived from its right under the lease to use parking areas on the adjacent shopping center.

The new owner claimed it was entitled to a pro-rata share of the rent payable by the tenant to the Lot 4 owners based on the portion of the shopping center burdened by the parking easement. The appellate court rejected this argument, finding the parking easement was appurtenant to the tenant's leasehold interest, not to the Lot 4 owners' fee interest, and there was no evidence that the parking easement was intended to survive the termination of the lease.

Unless a written document expressly states whether rights are to terminate at a certain time or survive indefinitely, it may not be clear whether the parties intended for an easement to survive the leasehold estate. For example, in Weinmiester v. Ingersoll, the plaintiff and defendant each owned half of a building that had three floors, each party owning one half of each of the three floors. 10 N.W. 67 (Mich. 1881). The defendant desired to lease the second and third floors of the plaintiff's half of the building for use as a boarding house in conjunction with operating its half of the building. In connection with such leasing, the parties agreed to construct certain improvements to accommodate the combined use of the floors contemplated by the defendant, including a hallway located wholly on the defendant's half of the second floor (which hallway allowed the parties to enlarge the leased rooms on plaintiff's half of the floor), doorways and a staircase to allow defendant and his tenants access to all of the rooms to be used as part of the boarding house. After the lease terminated, the plaintiff claimed it had a permanent easement over such improvements in order to allow the plaintiff continued access to the hallway on the defendant's half of the building post lease termination. The appellate court, however, disagreed with the plaintiff, noting that it was not credible that the plaintiff had intended to burden his property perpetually with a stairway from the defendant's side of the property or that the defendant intended to perpetually burden his property with improvements that substantially limited defendant's usable space on the second floor.

The court concluded there was insufficient evidence that the parties intended the improvements to create a perpetual easement that would burden the property beyond the term of the lease.

Inconsistent Provisions

Revisiting the Agreement first discussed above, whether or not the parties to the Agreement had intended to create perpetual easements or had intended that the Agreement serve to provide more detailed notice to third parties of the tenant's rights under the lease, belts and suspenders to the memorandum of lease already recorded, was not clear from the four corners of the Agreement because of the following inconsistent provisions:

• The Agreement was between the owner of all of the property as “Landlord” and the tenant of the leased parcel as “Tenant,” it referenced the lease agreement, and expressly stated that the parties were “desirous of restating” certain agreements between the parties.
• The Agreement used the word “easement” in describing the rights as opposed to a “license.”
• The Agreement did not state that the easements were perpetual or that they were to “run with the land,” but the Agreement did provide that it was binding on the parties' “respective heirs, representatives, successors and assigns.”
• Perhaps most importantly, the Agreement did not state that the Agreement or the rights created therein would terminate with the lease, but neither did the Agreement state that such rights would survive the termination of the lease.

In light of the ambiguity created by the foregoing provisions, the title company concluded that it would only agree to remove the Agreement as an exception to the title policy upon the recording of a release or termination of such Agreement executed by all of the current owners of the original 52 acres. Considering the Agreement was recorded in 1977, the 52 acres had been the site of more than one failed shopping center, and the original 52 acres were now owned (and in many instances also leased) by multiple unrelated owners, obtaining such a release would be an arduous task.

Furthermore, upon receiving a request to execute such a release, it was likely that some or all of such individual owners would argue that they did have rights under the Agreement, the termination of which entitled them to just compensation. As an alternative to obtaining a written release or termination, the owner of the property could have filed a quiet title action to determine whether any rights survived. However, this alternative was not more attractive because such proceedings can be costly and time-consuming.

Proper Documentation Helps

While the parties ultimately agreed to close over the Agreement, properly documenting the parties' intentions would have avoided the issue altogether. For example, had the parties intended to create perpetual easements or restrictions on the properties, the landlord, as the owner of all of the subject property, could have unilaterally recorded a declaration against the property, binding on its successors and assigns and running with the land.

However, since the tenant was the named party to the Agreement and the Agreement was binding on the tenant's successors and assigns, and not the successors and assigns of the owner of the leased parcel, such provisions construed together could be interpreted as an indication that the parties had intended such rights to last only so long as the lease was in effect. In the alternative, keeping the tenant as the named party, the Agreement could have provided that the rights were to last so long as the tenant leased or owned the property, thereby demonstrating the intention that in the event the tenant were to acquire the fee interest in the property, the rights set forth in the Agreement at that time would become perpetual.

Conclusion

In those instances in which a tenant is granted rights in property in addition to the leased parcel, it is entirely appropriate for such tenant to request that a document referencing such rights be recorded against the burdened property. However, landlords should take care to permit only documentation that is reasonable and necessary to protect the tenants' interests to be recorded against their property and to ensure that such documentation clearly expresses the parties' rights, including whether such rights are intended to survive the leasehold estate.

Marisa Byram, a member of this newsletter's Board of Editors and is a member of Lewis, Rice & Fingersh, L.C. in St. Louis. The author wishes to thank the firm's summer associate, Michael Gallo, for his research assistance.