Parties Must Agree On Terms to Form Lease

Tenants who participate in lease negotiations that involve “letters of agreement” should make sure that they are in complete agreement with the owner on all terms, otherwise they could end up losing their space. That is exactly what happened to a retail tenant in Louisiana.

In Lafayette, LA, a retailer and developer signed a letter of agreement that discussed the terms of a lease the parties expected to sign in the near future. Although no formal lease was ever signed by either party, the retailer moved into the space. The retailer later sued the developer, claiming that it had relied on the developer’s statements that the building would be developed more quickly and built to suit business owners. The developer argued that, under the lease, the retailer owed rent and other charges.

The trial court ruled against the developer, holding that no lease existed because the parties had different interpretations of when the rent payments should begin. However, the court also dismissed the retailer’s claim and held that because of the misunderstanding, it was not in legal possession of the space and the developer had the right to evict. The developer appealed the trial court’s rent collection decision but was unsuccessful.

The appeals court based its decision on the parties’ interpretation of the letter of agreement. The tenant believed that it was obligated to pay rent only when the entire building was completed. The owner believed that the letter of agreement constituted an actual lease and the retailer was obligated to pay rent once its space was completed. The court rejected the owner’s argument and explained that, for the letter of agreement to have the legal effect of a lease, the parties must agree on all terms. Because the parties did not agree on the rent commencement date, there was no lease and the tenant did not owe any rent. At the same time, because there was no lease, the court ruled that the tenant had no legal right to possess the space and the owner had the right to evict.

Source: Prejean v. River Ranch, LLC