In the Spotlight: Use It or Lose It!

Can a landlord who fails to collect rental payment increases recover the unpaid amounts years after such amounts should have been due, or even after the expiration of the lease, despite the fact that the landlord failed to seek such payments throughout the term of the lease? We are all familiar with provisions in commercial leases that require base rent to increase automatically at certain times, whether due to changes in the Consumer Price Index (CPI) or other formulas or adjustments. However, what happens when the landlord does not pursue such payments until after (sometimes years after) such adjustments were to be made?

While some cases deciding this issue have concluded that the landlord was barred from collecting the increased rental amounts from the tenant when the landlord failed to give timely notice of such increase, other cases have held that the tenant remained liable for the increased amount even after the lease had terminated. A review of the facts of some of these cases provides helpful (and perhaps surprising) insight for landlords and tenants alike.

New York Decisions

In New York, there have been multiple cases refusing to allow a landlord to enforce an increased payment obligation against a tenant when the landlord failed to timely notify the tenant of the increased amount due. Some New York courts have reached this decision on the basis that timely notice of the increase from the landlord is a condition precedent to the tenant's obligation to pay the increased amount, despite the fact that the language of the lease does not expressly condition the tenant's duty to pay upon the tenant's receipt of such notice. For example, in Winfield Capital Corp. v. Mahopac Auto Glass, Inc., 208 A.D.2d 715 (N.Y. App. Div. 1994), the lease required the tenant to pay a share of increased property taxes each year. The landlord was to provide the increased amount to the tenant by Feb. 1 of each year, and the tenant was to make payment by Feb. 15. The landlord sought payment of the increased tax amount after 11 years.

The court found that the landlord had to provide annual notice of the increased amount due by Feb. 1 of each year in order for the tenant to be obligated to pay such amount in that year. Since the landlord failed to give timely notice, the tenant had no obligation to pay. The court made this finding notwithstanding a no-waiver provision in the lease providing that a failure of the landlord to insist upon strict performance under the lease was not a waiver and any waiver had to be made in writing and also despite the fact that the lease itself did not expressly condition the tenant's obligation to pay on such notice.

Another example of a New York court declaring that notification of the increased payment is a “constructive” condition precedent to the tenant's obligation to pay such increase is Mount Sinai Hospital v. 1998 Alexander Karten Annuity Trust, 110 A.D.3d 288 (N.Y. App. Div. 2013). In this case, however, the lease specifically provided that the obligation to pay the additional rent survived the expiration or termination of the lease for two years and any delay of the landlord in billing such costs for a period not to exceed two years would not constitute a waiver of the tenant's obligation to pay such costs. After 12 lease years had expired, the landlord sent the tenant billing statements covering additional rent for all 12 years, but the court only permitted the landlord to recover the additional rent for the two immediately preceding years. The court found that even though the lease did not expressly condition the tenant's payment upon receipt of a statement from the landlord and expressly included survival and non-waiver language, justice required that the delivery of a statement of additional rent within two years after such rent was incurred serve as a condition precedent to the tenant's obligation to pay such additional rent.

Other States; Other Decisions

Other courts, including courts in New York, have barred landlords from recovering unpaid rental increases based on theories of equity, such as waiver, laches, or estoppel. In Waters v. Taylor, 527 So. 2d 139 (Ala. Civ. App. 1988), a five-year lease required annual CPI rent adjustments. After the first year, the tenant sent a note to the landlord asking about the CPI increase for the year, but the landlord never responded and continued to send monthly invoices to the tenant at the current rental amount. A few months before the lease ended, the landlord attempted to bill the tenant for the adjusted rent over the entire five-year term. The court found that the landlord's delay in seeking to collect adjusted rent and the failure to respond to the tenant's initial inquiry amounted to a course of conduct evidencing the landlord's waiver of the right to collect the adjusted rent for any period prior to the date the notice was given, despite the non-waiver clause contained in the lease.

In Zarlengo v. Farrer, 683 P.2d 1208 (Colo. Ct. App. 1984), a Colorado court held that despite non-waiver language in a lease, a landlord waived its right to collect increased rent by accepting rental payments that did not reflect any increase for nearly three years, without giving the tenant any notice that the rent should have increased pursuant to a formula set forth in the lease. In Gimbel Holding Co. v. Hirschman, No. 95 Civ. 9591, 1997 U.S. Dist. LEXIS 18293 (S.D.N.Y. Nov. 19, 1997), the lease provided for annual CPI adjustments as well as increases in taxes and operating expenses. The lease term expired without any increases being paid, and the landlord then sent the tenant a bill for all adjusted amounts owed. Even though the lease included a non-waiver clause, the court found the language in the lease created the expectation that the tenant would receive notices of applicable increases during each lease year. Enforcing the increases years after the fact would frustrate the reasonable expectations set forth in the lease, and thus the court concluded the landlord had waived the right to recover by failing to provide notice of the annual increases throughout the term of the lease.

Other courts have permitted landlords to collect payments for increased rent despite delays in seeking enforcement on the basis that the equitable defenses raised by the tenants were inapplicable. In DeLorenzo v. Tzokos, 2001 Mass. App. Div. 179 (Mass. App. Ct. 2001), the lease required that rent be adjusted for increases in taxes and operating expenses upon notice from the landlord, as well as automatic annual rent adjustments based on CPI increases. Just prior to the end of a renewal term, the landlord billed the tenant for adjusted rent and tax and operating expense increases for the entire five-year renewal period. The tenant objected and argued that the delay in notice and enforcement waived the landlord's right to collect the additional rent. The court noted that there was no statute of limitations bar and no evidence that the tenant was prejudiced by the delayed notice, regardless of whether the delay was unreasonable. Therefore, the tenant remained obligated to pay all amounts owed.

Similarly, in Pickering Wharf Realty Trust v. Victoria Station Salem, Inc., 2006 Mass. App. Div. 161 (Mass. App. Ct. 2006), the lease required that the tenant pay rent adjustments upon receipt of quarterly bills. The landlord notified the tenant that additional rent was due for the past three years. The court found that the lease did not expressly make the delivery of the quarterly bill from the landlord a condition precedent to the tenant's obligation to pay the adjustments. Also, the court noted that the lease expressly stated that waivers could only be given in writing, and no written waiver of the right to collect additional rent had been presented. Since there was no evidence that the tenant was prejudiced by delayed notice, the tenant remained obligated to pay the additional rent. But see Summer Hill Ltd. P'ship v. Double Dixon, Inc., 2010 Mass. App. Div. 109 (Mass. App. Ct. 2010) (finding that the tenant had demonstrated prejudice stemming from the landlord's failure to give timely notice of rental increases, and therefore equity barred the landlord from collecting the same).

Careful Drafting

These cases demonstrate that many courts have refused to allow a landlord to collect increased rental payments permitted under a lease when the landlord fails to take timely action to notify the tenant and enforce such payments, particularly when the lease expressly requires the landlord to deliver documentation reflecting any increased amounts owed. Some courts reach this result by inserting into the lease a “constructive” condition precedent, finding that the lease requires the landlord to give the tenant timely notice of the increased amount owed before the tenant is obligated to pay such amount. Other courts have permitted tenants to defeat a landlord's attempt to collect such increased payments using equitable defenses such as waiver, estoppel, or laches.

To be successful in raising such defenses, a tenant needs to demonstrate that it was prejudiced by the delay in notice of the increased amount owed. Some courts are more willing to allow landlords to collect unpaid additional rent even if the landlord does not seek enforcement until the end of the lease term, particularly if the lease does not contain a specific date by which the landlord is to notify the tenant of any increased amount owed.

To avoid results that may be contrary to what the parties intended at the time of their agreement, landlords and tenants should take care in drafting language relating to automatic rent adjustments, including lease provisions related to increases in a tenant's share of operating expenses or common area maintenance. The parties should include specific provisions regarding how such rent adjustments will be calculated, billed, and paid, including any notices to be provided in connection therewith and the time periods for such actions. Landlords should include express provisions that a tenant's obligation to pay such adjusted amounts survives termination of the lease and that any failure by the landlord to notify the tenant or collect such amounts during the lease term does not impair or waive the landlord's right to collect such rent.

Conclusion

Landlords need to be aware that reliance on boilerplate non-waiver provisions may not provide sufficient protection. Tenants, on the other hand, will want to negotiate a time limitation on any survival period or a specific deadline by which the landlord must give notice of any increase. Without such specific provisions, the tenant's obligation to pay, and the landlord's right to collect and enforce, such adjusted rental amounts may be uncertain.

Christy L. Abbott is an associate in the St. Louis, MO, office of Lewis, Rice & Fingersh, L.C., practicing in the areas of real estate, banking and finance, and creditors' rights.

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Can a landlord who fails to collect rental payment increases recover the unpaid amounts years after such amounts should have been due, or even after the expiration of the lease, despite the fact that the landlord failed to seek such payments throughout the term of the lease? We are all familiar with provisions in commercial leases that require base rent to increase automatically at certain times, whether due to changes in the Consumer Price Index (CPI) or other formulas or adjustments. However, what happens when the landlord does not pursue such payments until after (sometimes years after) such adjustments were to be made?

While some cases deciding this issue have concluded that the landlord was barred from collecting the increased rental amounts from the tenant when the landlord failed to give timely notice of such increase, other cases have held that the tenant remained liable for the increased amount even after the lease had terminated. A review of the facts of some of these cases provides helpful (and perhaps surprising) insight for landlords and tenants alike.

New York Decisions

In New York, there have been multiple cases refusing to allow a landlord to enforce an increased payment obligation against a tenant when the landlord failed to timely notify the tenant of the increased amount due. Some New York courts have reached this decision on the basis that timely notice of the increase from the landlord is a condition precedent to the tenant's obligation to pay the increased amount, despite the fact that the language of the lease does not expressly condition the tenant's duty to pay upon the tenant's receipt of such notice. For example, in Winfield Capital Corp. v. Mahopac Auto Glass, Inc. , 208 A.D.2d 715 (N.Y. App. Div. 1994), the lease required the tenant to pay a share of increased property taxes each year. The landlord was to provide the increased amount to the tenant by Feb. 1 of each year, and the tenant was to make payment by Feb. 15. The landlord sought payment of the increased tax amount after 11 years.

The court found that the landlord had to provide annual notice of the increased amount due by Feb. 1 of each year in order for the tenant to be obligated to pay such amount in that year. Since the landlord failed to give timely notice, the tenant had no obligation to pay. The court made this finding notwithstanding a no-waiver provision in the lease providing that a failure of the landlord to insist upon strict performance under the lease was not a waiver and any waiver had to be made in writing and also despite the fact that the lease itself did not expressly condition the tenant's obligation to pay on such notice.

Another example of a New York court declaring that notification of the increased payment is a “constructive” condition precedent to the tenant's obligation to pay such increase is Mount Sinai Hospital v. 1998 Alexander Karten Annuity Trust, 110 A.D.3d 288 (N.Y. App. Div. 2013). In this case, however, the lease specifically provided that the obligation to pay the additional rent survived the expiration or termination of the lease for two years and any delay of the landlord in billing such costs for a period not to exceed two years would not constitute a waiver of the tenant's obligation to pay such costs. After 12 lease years had expired, the landlord sent the tenant billing statements covering additional rent for all 12 years, but the court only permitted the landlord to recover the additional rent for the two immediately preceding years. The court found that even though the lease did not expressly condition the tenant's payment upon receipt of a statement from the landlord and expressly included survival and non-waiver language, justice required that the delivery of a statement of additional rent within two years after such rent was incurred serve as a condition precedent to the tenant's obligation to pay such additional rent.

Other States; Other Decisions

Other courts, including courts in New York, have barred landlords from recovering unpaid rental increases based on theories of equity, such as waiver, laches, or estoppel. In Waters v. Taylor , 527 So. 2d 139 (Ala. Civ. App. 1988), a five-year lease required annual CPI rent adjustments. After the first year, the tenant sent a note to the landlord asking about the CPI increase for the year, but the landlord never responded and continued to send monthly invoices to the tenant at the current rental amount. A few months before the lease ended, the landlord attempted to bill the tenant for the adjusted rent over the entire five-year term. The court found that the landlord's delay in seeking to collect adjusted rent and the failure to respond to the tenant's initial inquiry amounted to a course of conduct evidencing the landlord's waiver of the right to collect the adjusted rent for any period prior to the date the notice was given, despite the non-waiver clause contained in the lease.

In Zarlengo v. Farrer , 683 P.2d 1208 (Colo. Ct. App. 1984), a Colorado court held that despite non-waiver language in a lease, a landlord waived its right to collect increased rent by accepting rental payments that did not reflect any increase for nearly three years, without giving the tenant any notice that the rent should have increased pursuant to a formula set forth in the lease. In Gimbel Holding Co. v. Hirschman, No. 95 Civ. 9591, 1997 U.S. Dist. LEXIS 18293 (S.D.N.Y. Nov. 19, 1997), the lease provided for annual CPI adjustments as well as increases in taxes and operating expenses. The lease term expired without any increases being paid, and the landlord then sent the tenant a bill for all adjusted amounts owed. Even though the lease included a non-waiver clause, the court found the language in the lease created the expectation that the tenant would receive notices of applicable increases during each lease year. Enforcing the increases years after the fact would frustrate the reasonable expectations set forth in the lease, and thus the court concluded the landlord had waived the right to recover by failing to provide notice of the annual increases throughout the term of the lease.

Other courts have permitted landlords to collect payments for increased rent despite delays in seeking enforcement on the basis that the equitable defenses raised by the tenants were inapplicable. In DeLorenzo v. Tzokos , 2001 Mass. App. Div. 179 (Mass. App. Ct. 2001), the lease required that rent be adjusted for increases in taxes and operating expenses upon notice from the landlord, as well as automatic annual rent adjustments based on CPI increases. Just prior to the end of a renewal term, the landlord billed the tenant for adjusted rent and tax and operating expense increases for the entire five-year renewal period. The tenant objected and argued that the delay in notice and enforcement waived the landlord's right to collect the additional rent. The court noted that there was no statute of limitations bar and no evidence that the tenant was prejudiced by the delayed notice, regardless of whether the delay was unreasonable. Therefore, the tenant remained obligated to pay all amounts owed.

Similarly, in Pickering Wharf Realty Trust v. Victoria Station Salem, Inc. , 2006 Mass. App. Div. 161 (Mass. App. Ct. 2006), the lease required that the tenant pay rent adjustments upon receipt of quarterly bills. The landlord notified the tenant that additional rent was due for the past three years. The court found that the lease did not expressly make the delivery of the quarterly bill from the landlord a condition precedent to the tenant's obligation to pay the adjustments. Also, the court noted that the lease expressly stated that waivers could only be given in writing, and no written waiver of the right to collect additional rent had been presented. Since there was no evidence that the tenant was prejudiced by delayed notice, the tenant remained obligated to pay the additional rent. But see Summer Hill Ltd. P'ship v. Double Dixon, Inc. , 2010 Mass. App. Div. 109 (Mass. App. Ct. 2010) (finding that the tenant had demonstrated prejudice stemming from the landlord's failure to give timely notice of rental increases, and therefore equity barred the landlord from collecting the same).

Careful Drafting

These cases demonstrate that many courts have refused to allow a landlord to collect increased rental payments permitted under a lease when the landlord fails to take timely action to notify the tenant and enforce such payments, particularly when the lease expressly requires the landlord to deliver documentation reflecting any increased amounts owed. Some courts reach this result by inserting into the lease a “constructive” condition precedent, finding that the lease requires the landlord to give the tenant timely notice of the increased amount owed before the tenant is obligated to pay such amount. Other courts have permitted tenants to defeat a landlord's attempt to collect such increased payments using equitable defenses such as waiver, estoppel, or laches.

To be successful in raising such defenses, a tenant needs to demonstrate that it was prejudiced by the delay in notice of the increased amount owed. Some courts are more willing to allow landlords to collect unpaid additional rent even if the landlord does not seek enforcement until the end of the lease term, particularly if the lease does not contain a specific date by which the landlord is to notify the tenant of any increased amount owed.

To avoid results that may be contrary to what the parties intended at the time of their agreement, landlords and tenants should take care in drafting language relating to automatic rent adjustments, including lease provisions related to increases in a tenant's share of operating expenses or common area maintenance. The parties should include specific provisions regarding how such rent adjustments will be calculated, billed, and paid, including any notices to be provided in connection therewith and the time periods for such actions. Landlords should include express provisions that a tenant's obligation to pay such adjusted amounts survives termination of the lease and that any failure by the landlord to notify the tenant or collect such amounts during the lease term does not impair or waive the landlord's right to collect such rent.

Conclusion

Landlords need to be aware that reliance on boilerplate non-waiver provisions may not provide sufficient protection. Tenants, on the other hand, will want to negotiate a time limitation on any survival period or a specific deadline by which the landlord must give notice of any increase. Without such specific provisions, the tenant's obligation to pay, and the landlord's right to collect and enforce, such adjusted rental amounts may be uncertain.

Christy L. Abbott is an associate in the St. Louis, MO, office of Lewis, Rice & Fingersh, L.C., practicing in the areas of real estate, banking and finance, and creditors' rights.

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