Opinion
No. 31120
Decided December 23, 1947.
Landlord and tenant — Written lease for real property — Provision giving lessee right to renew and extend for three years — Lease automatically extended by lessee giving specified notice — Rental for extended term subject to agreement between parties — Implicit that such rental shall be reasonable — Equity court fixing rental not making contract for parties — Specific performance — Court may fix reasonable, where lessor refuses to co-operate.
1. Where a written lease for real property provides that the lessee shall have the right to renew and extend such lease for a further term of three years upon the giving of specified notice, the giving of such notice automatically extends such lease for the duration of such further term of years.
2. Where the lease described in paragraph one above contains the provision that the rental for such extended term shall be subject to agreement between the parties, it is implicit in such agreement that the rental shall be a reasonable rental.
3. Where all the terms of such a lease are fixed save that the rental for the extended term is to be fixed by agreement between the parties, the fixing of the rental by a court of equity is a matter of form rather than of substance and does not amount to the making of a contract for the parties.
4. Where the lessor refuses to co-operate toward the fixing of the rental for such extended term, a court of equity may fix a reasonable rental in an action for specific performance.
APPEAL from the Court of Appeals for Lake county.
Plaintiffs, as lessees, entered into a written lease with J.G. Davet, as lessor, for a storeroom and basement for a term of two years. The lease contains the following covenant:
"Second party [plaintiffs] shall have the right and option to renew and extend this lease for a further period of three (3) years from said July 31, 1946, by giving to first party notice in writing of their intention so to do three months in advance of the expiration of this lease; the rental to be paid for said renewal period to be subject to agreement between the parties at that time." (Italics ours.)
Defendant, Dewey C. Olson, acquired title to the leased premises from J.G. Davet with notice of the lease to plaintiffs. Defendant refused to carry out the foregoing covenant to renew. Plaintiffs brought this action for specific performance.
In addition to the foregoing facts, it is alleged in plaintiffs' petition as follows:
"Plaintiffs say that the aforementioned option was duly exercised and that the said defendant was served with notice in writing of the exercise of said option on the 29th day of April, 1946, being not less than three months prior to July 31st, 1946, and further say that request was made of the defendant that defendant enter into negotiations with lessee for the purpose of agreeing upon the rental to be paid for said renewal period but that the defendant refused to enter into such negotiations and still refuses to do so and say further that contrary to the provisions of the said lease, as aforementioned, the defendant did advise lessee in writing of the termination by him of the said lease, on July 31st, 1946, and say further that on June 20th, 1946, by and through defendant's counsel, defendant again refused to enter into any meeting with plaintiffs for the purpose of arriving at any rental.
"Plaintiffs say that they have no adequate remedy at law and that they did spend large sums in preparing the demised premises for the use by them as a food market; that such sums for improvements would not have been expended nor would the lease have been entered into by these plaintiffs if the said lessor had not granted to lessee the option contained in said lease.
"Plaintiffs further say that a reasonable rental for the premises for the renewal or extended period would be one hundred fifty dollars ($150) per month and that plaintiffs are ready, willing and able to pay to said defendant the said sum of one hundred fifty dollars ($150) per month or such other sum as the court may deem to be reasonable.
"Wherefore, plaintiffs pray for a decree requiring the defendant to specifically perform the agreements of said lease in accordance with its provisions, for a term of three years from and after July 31st, 1946, at a reasonable monthly rental to be fixed by the court, at one hundred fifty dollars ($150) per month and for such other and further relief as the application of equity may require."
Defendant filed a general demurrer to the petition, which demurrer was sustained by the trial court with the following journal entries:
"This cause comes on to be heard upon the defendant's demurrer to plaintiffs' petition for the reason that it appears upon the face of the petition that the facts therein contained do not constitute a cause of action. The petition seeks a decree of specific performance ordering the defendant to renew the lease under a purported option of renewal. The original lease provided for a renewal at a rental '* * * to be subject to agreement between the parties at that time.'
"There is a distinct split in authority as to whether or not such an option is void for uncertainty and indefiniteness. The weight of authority is definitely to the effect that such a covenant is void. The court has read with interest the minority point of view as expressed in the cases cited by the plaintiffs; however, until the Supreme Court of Ohio has adopted such a policy, this court is adhering to the majority view. The demurrer is sustained. Exception is noted for the plaintiffs."
Later the following entry was journalized:
"It appearing to the court that the journal entry entered herein on October 16th, 1946, sustaining the demurrer of the defendant, does not constitute a final order, said journal entry of October 16th, 1946, is hereby modified by adding thereto the following entry:
"The plaintiffs not desiring to plead further, the petition of the plaintiffs is dismissed and the costs of this action are hereby taxed against the plaintiffs, for which execution may issue. Exception is noted by the plaintiffs."
Upon appeal to the Court of Appeals for Lake county, the judgment of the trial court was affirmed.
The cause is in this court following the allowance of a motion to certify the record.
Mr. Wm. H. Rosenfeld and Mr. Alfred Palay, for appellants.
Mr. Wayne E. Davis, for appellee.
This case presents the following law question: Is a covenant to renew and extend a written lease for a specified term (upon the giving of the prescribed notice prior to the expiration of the original term) at a rental to be agreed upon between the parties, enforceable by a decree of specific performance upon the refusal of lessor to carry out his part of such covenant? In other words, is there no remedy for a lessee where a lessor fails to carry out his agreement to come to an agreement upon a single feature of the lease, to wit: The rental. (We are assuming here that there is no plain, adequate and complete remedy at law.)
While the exact question presented is new in this state, the case of Lowe v. Brown, 22 Ohio St. 463, is analogous in principle. In that case a 99-year lease, renewable forever, contained a provision for the adjustment of the rent every 20 years according to a return of eight per cent on the true value of the land to be fixed by appraisers. The appraisers failed to agree. In paragraph three of the syllabus this court held: "In such action, the court may refer the case to a master to take testimony and report therewith the 'true value' of the ground."
At page 467, Judge Day said: "But it is clear that the refusal of one party to comply with the covenants of the lease could not defeat the other party in the judicial attainment of his just rights."
In other jurisdictions there is a sharp conflict decision with perhaps the greater number of cases and texts holding that a renewal covenant in a lease, which leaves the rental to be determined by agreement between the parties, is void for uncertainty.
There is an important fact which must not be lost sight of in the instant case, which sets it apart from some of the cases which might otherwise be thought to be similar. The covenant under consideration here is not only for a renewal of the lease but for an extension thereof for three years at a rental to be determined by agreement. In other words, all the terms of the lease are fixed. When the lessees gave the prescribed notice, the identical lease was thereby extended for three years at a reasonable rental.
In the case of Kaufmann v. Liggett, post, the Supreme Court of Pennsylvania held that under such circumstances the fixing of the rental was not of the essence of the contract, and where the rental had not been fixed, nevertheless, the lessor might not dispossess the lessee.
If the lessor in the instant case refuses to co-operate or holds out for an unreasonable rental, may it be said that equity will not aid the lessee by carrying out the intention of the parties? For the court to fix a reasonable rental, where all other terms and conditions of the lease are fixed, would not amount to making a lease for the parties. The lease was already made and when proper notice thereunder had been given the lessor became bound to agree to a reasonable rental for the extended term.
We are of the opinion that, under the circumstances of this case, where all the other terms and conditions of the lease are fixed, the determination of the rental is a matter of form rather than of substance.
In the case of Town of Bristol v. Bristol Warren Water Works, 19 R.I. 413, 34 A. 359, 32 L.R.A., 740, the provision was that the town might purchase the waterworks for a fair and reasonable price to be agreed upon by the parties or fixed by arbitrators appointed for that purpose. The contract was held enforceable. In that case it was observed:
"In such a case the courts hold that the manner of determining the price is a matter of form rather than of substance; and if it becomes evident that it cannot be determined in the manner provided for in the contract, by reason of the refusal of one party to do what in equity he ought to do, the court will determine it upon the application of the other." (Italics ours.)
In the case of Edwards v. Tobin, 132 Ore., 38, 284 P. 562, 68 A. L. R., 152, it was held in the third paragraph of the syllabus as follows:
"Under lease providing that lessee shall have option to renew lease at expiration thereof for period of five years, subject to conditions therein, on same terms as expressed, with exception of rental, which shall be determined at time of renewal, so as to be reasonable under then existing conditions, method of determining rent pertained more to form than to substance, and was not essence of contract as regards right to specific performance of covenant of renewal." (Italics ours.)
As lawyers, we boast that there is no right without a remedy. When a landlord covenants with his tenant that such tenant shall have a right to renew and extend at a rental to be agreed upon, it is the function of equity to hold the landlord to his covenant.
This court is interested in seeing that justice is done rather than in preserving forms which allow a man to violate a solemn covenant in his deed.
We concur in the language used in the opinion in the case of Edwards v. Tobin, supra, where specific performance was decreed under a lease covenant similar to that of the instant case. In the course of that opinion, the following is found at page 41:
"It is fundamental that equity will not decree specific performance of a contract which is vague, indefinite and uncertain, nor will it make a new contract for the parties. It may, however, in the furtherance of justice, compel a party to do that which in equity ought to have been done and which was in contemplation of the parties as expressed in their contract, assuming there is no adequate remedy at law. * * * Under such circumstances will equity permit the landlord arbitrarily and capriciously, in violation of the plain import of his agreement, to refuse to fix a reasonable rental? Will he be heard to say, 'my agreement is too vague and indefinite to enforce?' Common sense and justice dictate the answer."
In the case of Hall v. Weatherford, 32 Ariz. 370, 259 P. 282, 56 A. L. R., 903, it was held:
"Though renewal clause in lease leaves rent to be fixed by agreement, it is not void for uncertainty; a reasonable figure being implied."
In the A. L. R., the editors have used this syllabus for the foregoing case:
"A provision for renewal in a lease is not invalid because the rental is to be fixed by agreement of the parties, since upon failure of the parties to agree the amount will be fixed by the court at what is reasonable."
In the case of Young v. Nelson, 121 Wn. 285, 209 P. 515, 30 A. L. R., 568, it was held:
"Specific performance may be decreed of a provision in a five-year lease for an option to renew at such rental 'as may then be agreed upon between the lessor and lessee,' though there was no provision for arriving at an agreement as to the amount of the rent; since the provision was for the benefit of the lessee, which should not be defeated by an unreasonable demand, and the court in the exercise of its equity power could ascertain the reasonable rent that should be allowed."
The A. L. R. editors have condensed the foregoing syllabus as follows:
"A contract to renew a lease 'at such rental as may be agreed upon' at its termination may be specifically enforced, since the court may determine what rental would be reasonable."
In the course of the opinion in the last above-mentioned case it is said:
"In such a case as this we consider the agreement for renewal one for the benefit of the lessee; otherwise it would not have been included in the lease. It may be assumed that the owner may always find a tenant for his premises, and therefore such a provision is not particularly for his benefit. The tenant is not always in such state, and often desires such a provision in his lease. Evidently, therefore, it was intended for the benefit of the lessee, and may be supposed to have formed an inducement to the original letting." Young v. Nelson, supra, was followed in Hammond v. Ringstad, 10 Alaska 543.
In the case of Rainwater v. Hobeika, 208 S.C. 433, 166 A.L.R., 1228, 38 S.E.2d 495, it was held, as shown by the A.L.R. headnote:
"A provision of a lease giving the lessee an option for five additional years at the expiration of the lease, at a price to be agreed upon at that time, is not invalid for indefiniteness and uncertainty in leaving the renewal rental to be fixed by future agreement."
In the case of Joy v. City of St. Louis, 138 U.S. 1, 34 L.Ed., 843, 11 S.Ct., 243, it was held, as summarized in the Law Edition headnotes:
"Where two railroad companies have received from the public authorities a grant of a joint right of way through a public park, upon the agreement and condition to permit, upon reasonable regulations and terms, other railroads to use such right of way through the park and to the terminus of their road in the city, for a fair and equitable compensation, an easement for the benefit of the public is created, and one of said companies which has become the successor in interest of the other is bound to permit another railroad company, upon the consent of the public authorities, to use such right of way for a fair and equitable compensation." (Italics ours.)
The lower court in that case had fixed the compensation to be paid by the new company in a suit to enforce specific performance. The Supreme Court affirmed the decree of the lower court.
In the case of Kaufmann v. Liggett, 209 Pa. 87, 58A., 129, 67 L.R.A., 353, 103 Am. St. Rep., 988, it was held:
"As a general rule in construing provisions of a lease relating to renewals, where there is any uncertainty, the tenant is favored, and not the landlord, because the latter, having the power of stipulating in his own favor, has neglected to do so, and also upon the principle that every man's grant is to be taken most strongly against himself.
Where a lease provides for an extension for a period of years, and that the rental shall be determined by arbitrators, and the lessee gives the notice of renewal required by the lease, but the arbitrators disagree and fail to fix the rental, the lessor has no right to dispossess the lessee during the extended term, inasmuch as the fixing of the rental is not of the essence of the contract. In such a case while a court of equity cannot compel an arbitration, it has the power either by itself or by its officer to fix the amount of the rent to be paid by the lessee during the extended term."
In the case of Streicher v. Heimburge, 205 Cal. 675, 272 P. 290, it was held:
"1. Where the new estate has vested under a lease providing for arbitration, a failure of the arbitration provisions does not destroy or forfeit the lessee's rights, but, if need be, a court of equity will intervene to fix a reasonable rental, and, in effect, decree specific performance and thus maintain the integrity of the tenure of the lessee.
"2. In this action in unlawful detainer, after successive attempts had been made to fix by agreement or by arbitration the rental to be paid during the extended term as provided in the lease, it is held that, taking the lease as a whole and viewing it from all standpoints, it was never intended that the fixation of rental prior to the expiration of the original term of the lease was a condition precedent to the vesting of the new leasehold interest, and where defendant lessees complied with all the other terms and conditions of their lease relating to their right to a renewal thereof and to the vesting of the new leasehold interest, they had the right of possession but cum onere."
In the case of Bird v. Couchois, 214 Mich. 607, 183 N.W. 36, it was held:
"A lease for a term of eight years, fixing the rental to be paid for the first five years at $150 a year, and providing that the last three years the rent should be raised, the amount to be fixed by the lessors, is not void for uncertainty, since the lease covers the full period and provides for the fixing of the rent to be paid, and although not in the lease, the word 'reasonable' may be implied, in view of the previous dealings of the parties."
In the case of Arnot v. Alexander, 44 Mo., 25, 100 Am. Dec., 252, it was held:
"1. Leaving the amount of rent for the renewal term of a lease to be ascertained by what 'responsible parties would agree to give for the use of the premises' fixes the rent with as much certainty as though it were to be determined by a board of appraisers to be selected by the parties to the lease; and a court of chancery may in either case hear evidence and determine for itself' the rentable market value of the premises where the appraisement fails. What 'responsible parties will agree to give' for the use of the rentable business property is nothing more than its full or highest rentable value.
"2. Where by the covenant for renewal of a lease the lessee is entitled thereto, 'provided that parties can agree upon terms, or that said lessee is willing to give as much as any other responsible party will agree to give,' it is in every way reasonable and just that the lessee should elect his remedy, and either take damages at law or have a specific performance in equity.
In the case of Houston v. Barnett, 90 Ore., 94, 175 P. 619, it was held:
"Where fifteen-year lease contained an arbitration clause, which defined minimum rent and purchase price for the last five-year period, and provided how and by whom the increase should be determined, a court of equity, upon lessee's refusal to comply, has jurisdiction to ascertain rental payable during last five years, and to grant specific performance of the arbitration agreement, which was a mere incident of lease and not of the essence thereof."
In the case of Anderson v. Frye Bruhn, 69 Wn. 89, 124 P. 499, it was held:
"A lease for one year with the privilege of two year's renewal at a rental satisfactory to both lessor and lessee, is a single contract, calling for renewal at a reasonable rental, and not subject to the objection that the agreement for renewal was without consideration or unenforcible."
In the case of United Woolen Mills Co. v. Honaker, 96 W. Va. 166, 122 S.E. 440, it was held:
"Where the renewal clause of a lease provides that if at the expiration thereof the premises be for lease the lessee shall have the privilege of renewing or extending the lease 'provided it is willing to pay the same rental therefor as is offered by any other responsible person in good faith,' but the lessor, though willing to lease the premises, fails to submit to the lessee any offers from responsible persons, equity upon proper application by the lessee therefor, will ascertain the fair rental value of the premises and will decree specifically the extension or renewal of the lease."
In the case of Bechmann v. Taylor, 80 Colo. 68, 249 P. 262, it was held:
"In an action for specific performance of the terms of a lease containing an option for renewal, the objection that the law furnished an adequate remedy overruled, and the complaint held to state a cause of action for specific performance."
In 51 Corpus Juris Secundum, 856, Section 232 j, it is said:
"Where the language of a lease is ambiguous, in ascertaining the intention of the parties the court may consider the surrounding facts and circumstances which existed at the time of its execution. For this purpose the court should place itself as nearly as possible in the position of the parties when the instrument was executed; and if the language of the lease is ambiguous the court may consider the situation of, and the relations between, the parties, the situation, character and surroundings, and the condition of the property, and also the object of the lease, or the purpose which the parties sought to accomplish. Each clause of the lease will be construed, if possible, so as to promote the general purpose."
At page 597, Section 56 b (2), ibid., it is said:
"* * * However, it has been held that a contract is enforceable which provides that the lessor shall fix the amount of the rent, or which provides for a renewal at a rental satisfactory to both lessor and lessee, or at a rental to be agreed on by the parties, where under the circumstances it is to be implied that the rent for the new period is to be a reasonable rent."
In 32 American Jurisprudence, 809, Section 962, it is said:
"As a general rule, in construing provisions relating to renewals, where there is any uncertainty, the tenant is favored, and not the landlord, because the latter, having the power of stipulating in his own favor, has neglected to do so, and also upon the principle that every man's grant is to be taken most strongly against himself."
"It is a maxim of law that that is certain which may be made certain: id certum est quod certum reddi potest; Co. Litt. 43." 1 Bouvier's Law Dictionary, 441. Where parties agree to fix a rental for an extended lease term, there is implicit in such agreement that the price to be fixed is reasonable. When such parties fail to agree, a court of equity has the power and authority to fix a reasonable rental.
In the instant case, the lease was extended when lessees gave to lessor the prescribed notice. Both parties thereby became bound, the lessees to pay and the lessor to accept a reasonable rental during the extended term. (Subject, of course, to all the conditions of the original lease save the duration and rental. The duration of the extended term was definitely fixed, the amount of rental was also fixed being a reasonable rental which the court could decree.) The court did not need to make a contract for the parties; the parties had made a contract for themselves. A decree for specific performance will compel the lessor to abide by his contract.
It is alleged in the petition and admitted by the demurrer that the lessees spent large sums in preparing the demised premises for use as a food market; that such sums for improvements would not have been expended nor would the lease have been entered into by plaintiffs if the lessor had not granted to lessees the option contained in the lease. If an action in damages for breach of the lease were brought by lessees against the lessor the question of speculative damages would arise.
We are of the opinion that the plaintiffs do not have any plain, adequate or complete remedy at law.
Therefore, we are of the opinion that the judgment of the Court of Appeals should be and it hereby is reversed and this cause is remanded to the Court of Common Pleas for proceedings not inconsistent with this opinion.
Judgment reversed.
MATTHIAS, HART, ZIMMERMAN, SOHNGEN and STEWART, JJ., concur.
In the majority opinion appears the following quotation from 32 American Jurisprudence, 809, Section 962:
"As a general rule, in construing provisions relating to renewals, where there is any uncertainty, the tenant is favored, and not the landlord, because the latter, having the power of stipulating in his own favor, has neglected to do so, and also upon the principle that every man's grant is to be taken most strongly against himself."
However, on the next page appears the following statement.
"A renewal covenant in a lease which leaves the renewal rental to be fixed by future agreement between the parties has generally been held unenforceable and void for uncertainty and indefiniteness."
This statement is repeated in the annotations in 30 A. L. R., 573, and 68 A. L. R., 157.
Likewise, in the majority opinion appears a quotation from 51 Corpus Juris Secundum, 597, upon which reliance is placed. However, immediately preceding that statement is the following summary of the rule, beginning on page 596:
"A provision for extension or renewal of a lease must specify the terms and conditions of the renewal or extension with such definiteness and certainty that the court may determine what has been agreed on, and if it falls short of this requirement it is not enforceable. It must be certain and definite both as to the time the lease is to extend and the rent to be paid. * * * Accordingly, a provision dealing with a renewal which by the use of the expression 'such terms as may be agreed upon,' or by similar language, expressly makes the renewal dependent on future agreement of the parties, is unenforceable."
Also in 3 Thompson Real Property (Perm. Ed.), 360, Section 1263, the rule representing the great weight of authority is restated as follows:
"A general covenant providing for the renewal of a lease is sufficiently certain since it implies a new leasing upon the same terms and conditions as the old lease. On the other hand, if the renewal clause provides that the lease may be renewed upon such terms as the parties may agree upon, the same is void for uncertainty."
The Ohio rule is stated as follows in 24 Ohio Jurisprudence, 1238, Section 483:
"The requisites and validity of contracts generally, and especially of contracts for an original lease, would seem to apply to provisions for renewal. Where an option for an additional term has been exercised, it would seem that the rules as to the requisites and validity of leases generally would apply to the creation of the additional term. The rule that a provision for a renewal must be definite and certain in order to render it binding and enforceable is followed in Ohio."
In the majority opinion appears the following quotation from the opinion in the case of Young v. Nelson, 121 Wn. 285, 209 P. 515, 30 A. L. R., 568:
"In such a case as this we consider the agreement for renewal one for the benefit of the lessee; otherwise it would not have been included in the lease. It may be assumed that the owner may always find a tenant for his premises, and therefore such a provision is not particularly for his benefit."
It is submitted that this assumption is wholly unwarranted and contrary to fact, as indicated by the vacant properties observable in less prosperous periods. There is no reason why a renewal or extension provision may not be placed in a lease for the benefit of the lessor as well as the lessee. In the instant case the provision happens to be for the benefit of the lessees. But if it had been for the benefit of the lessor, would an action for specific performance be available to him, as well as to the lessees?
Or, if the renewal provision were uncertain as to the term instead of the rental, would an action for specific performance be available to either the lessor or lessees? If not, why not?
It is said that the most important features of a lease are the property, the rental and the term. If a court can remedy an uncertainty as to one of them, why not as to the others?
The result of the majority view will be that the trial court will be required to substitute its own idea of a rental and thereby disregard the plain language of the lease that "the rental to be paid for said renewal period to be subject to agreement between the parties at that time." (Italics supplied.) It is to be noted that the parties did not agree that a rental — reasonable or otherwise — should be determined by arbitration or by a court or by anyone but themselves. Although the lease provides for no rental except an agreed one, the lessees will pay and the lessor will receive a rental to which neither party has agreed. When government, acting through the courts, interferes in this manner with the wholly private affairs of competent private citizens enjoying freedom of contract, it is to be wondered whether this is the justice to which reference is made in the majority opinion wherein it quite properly said that this court is interested in seeing that justice is done.
It would seem that the unanimous judgment of the lower courts should be affirmed.