In the 2011 case of First Nat. Mortg. Co. v. Federal Realty Inv. Trust, 631 F.3d 1058 (9th Cir. 2011), the Ninth Circuit Court of Appeals upheld a district court’s decision that a signed document, entitled “Final Proposal,” was an enforceable ground lease agreement even though the document omitted an essential term (the duration of the ground lease) and indicated that a future legal document was intended to finalize the pending agreement.
The court noted that: “The mere fact that a lease term is essential” does not mean that it has to be express in the contract. On the contrary, although extrinsic evidence cannot be used to supply an essential term, it can be used “to explain essential terms that were understood by the parties but would otherwise be unintelligible to others.” Indeed, “California courts have not hesitated to imply a term of duration when the nature of the contrary and surrounding circumstances afford a reasonable ground for such implication.”
The court acknowledged that an “agreement to agree” is not a binding contract. However, it went on to say that the intention of the parties primarily determines whether a document is a final agreement or an unenforceable agreement to agree. In this case, the Court examined the extrinsic evidence and found that the parties intended to create an enforceable agreement.
Several real estate groups, including BOMA (the Building Owners and Managers Association International) and the National Apartment Association, filed a joint brief of Amici Curiae (which is a brief by someone who is not a party to a case, but volunteers to offer information to assist a court in deciding a matter before it) arguing against interpreting the Final Proposal as a binding document.
The Amici Curiae brief argued that by allowing preliminary documents that lack many of the elements commonly found in final leases to be considered binding, parties will be discouraged from exchanging these types of preliminary documents that the industry considers useful in negotiating real estate transactions.
The brief also argued that the court’s ruling will create “unexpected and unintended obligations” in an industry where the near universal practice requires that final and binding transactions be documented by detailed and comprehensive agreements that unmistakably evidence the intent of the parties to be bound.”
Although we would never advise a client to leave out essential terms of an agreement, this case provides interesting precedent in determining what is and is not an enforceable lease, and further emphasizes the importance of knowing what exactly it is you are signing.
If you are looking into entering into a commercial lease and would like assistance negotiating or reviewing the agreement, or any proposals prior to signing, contact Brewer Offord & Pedersen LLP at (650) 327-2900, or on the web at www.BrewerFirm.com.