One More Step To Take When Signing A Lease

When a building owner and a tenant sign a lease, the second to last step usually consists of the tenant’s signing the lease and returning it to the owner. Then the owner countersigns and returns the countersigned lease to the tenant. Each party puts the fully signed lease in their file and the parties go live their real estate lives.

A recent New York case indicates that a property owner needs to do something more if it wants to be able to enforce the lease against the tenant. It’s not enough for the property owner to be able to show that the tenant signed the lease and the property owner has a copy of the signed lease. Instead, the property owner also needs to show that the tenant received a copy of the final signed lease. That usually happens automatically whenever the parties sign a lease, of course, especially if attorneys are involved. But sometimes it doesn’t happen, so a property owner won’t necessarily have actual proof that it happened. The recent case suggests that any property owner ought to create and keep that proof in the file.

In the recent New York litigation, the owner of a business entered into a lease with a corporation long ago. It expired. The corporation dissolved, but the business stayed in the space and kept paying rent. At some point, the parties negotiated a lease extension agreement. In that document, the sole shareholder and owner of the original tenant agreed that he had actually been the tenant under the lease for years, and would remain the tenant under the lease going forward. He apparently signed the lease extension agreement and returned it to the owner.

When the lease extension went into default, the individual who had signed it asserted that he had never received a copy of the signed extension. The owner couldn’t prove that he had given the individual the signed extension.

The court declared: “a leasehold estate cannot be conveyed without a legal delivery of the fully executed lease to the lessee.” The fact that the individual tenant had stayed in the space, paying rent for years, didn’t change anything, the court reasoned. That’s because the individual’s occupancy and payment were consistent with his just being a month-to-month tenant without a lease. As a result, the owner couldn’t enforce the lease extension against the individual tenant.

Logically, the court could have ruled differently, although the case law does support the court’s approach. For example, if a tenant returns a signed lease document to the owner, one could reasonably put the burden on the tenant to demand a copy of the countersigned document shortly after delivering it to the owner. If the countersigned copy isn’t forthcoming, ordinary legal principles would allow the tenant to withdraw its signature by giving notice to that effect. If the tenant didn’t do that within a reasonable time, then it would be reasonable to assume the tenant received a countersigned lease and it became effective.

Instead, the court forced the property owner to prove that the tenant had received the signed document. That’s not difficult to do, especially if the owner has their attorney handle it. Not every property owner does that, though. Occasionally the parties sign their lease in person and everyone walks away with a signed lease. There’s no proof anyone actually received a copy of the lease, unless the owner videotapes the proceedings. Regardless of how the tenant receives their copy of the signed lease, a typical owner will very likely not maintain adequate records to prove it happened.

Obtaining proof of delivery of a signed lease creates a counterintuitive addition to the lease signing process. It’s a good housekeeping measure. Most owners probably don’t think of it as being crucially important. It seems they are wrong about that.