Some Commercial Real Estate Leases Must Be in Writing 2024

QUESTION: Landlord negotiates a five year commercial lease and offers it to tenant to sign. Tenant signs at Landlord's office. Landlord goes to home office to sign the lease but then changes lease by increasing the negotiated rent demanded. Then he thinks twice and refuses to sign its own modified lease. Is this an enforceable lease in its original or modified terms?

The short answer is: NO. At this particular point in time, there is no valid lease and there is no live offer from tenant.

CONTRACT THEORY.  As a background matter, in order to have a contract (of which a lease is simply a particular kind of contract) you simply need (1) an offer by one party, (2) an acceptance of that offer by another party, (3) some sort of consideration, meaning something of value to exchange, and (4) the subject matter of the agreement must not be illegal.

Here you have the Landlord making an offer in the form of the lease that she presents to the Tenant and Assignee. The Tenant accepts the offer by signing the lease. The terms of the lease involves an exchange of consideration:  presumably the landlord provides the property (a thing of value) and the tenant pays money (also a thing of value).  We will assume this commercial lease is for lawful activity, not for engaging in criminal enterprise. Normally this would be sufficient for a valid and enforceable agreement. But not in this case. In this case we have an exception called the statute of frauds.

STATUTE OF FRAUDS. The statute of frauds says that there are certain categories of agreements that must be signed in writing. In California, the statute of frauds applies to a lease if the rental term exceeds one year. See Cal. Civ. Code §§ 1091, 1624(a)(1)-(3); Cal. Civ. Proc. Code §§ 1624(a)(3), 1971. This five year commercial lease (running longer than a year) is not valid until all parties, including the landlord signs the lease. Since the landlord has refused to sign, the parties have no enforceable agreement, neither in its original form, nor in its modified form.

COUNTEROFFER.  Moreover, the Landlord has rejected the Tenant's signed lease by making a counteroffer. A counteroffer is (1) a rejection of the last offer and (2) makes a new offer of terms.  Here, the Tenant signed the lease, turning that document, effectively, into an offer for the Landlord to then accept or reject. The Landlord rejected that lease offer by making material changes in the lease terms, increasing the rent. Now the signed lease offer is a dead offer. The Tenant has no obligation to make good on the original signed offer, and is not bound by the old signed lease. The Tenant may now accept, reject, or counteroffer the Landlord’s last offer as Tenant sees fit.

PROMISSORY ESTOPPEL. To make things more complicated, although the Parties may not have a valid lease, Tenant may have an action for promissory estoppel against the Landlord. Despite the statute of frauds, an oral agreement may be enforceable if (1) the tenant detrimentally changed position in reasonable reliance on the agreement and unconscionable injury would occur should it not be enforced or (2) the landlord accepted the benefits of the agreement and would be unjustly enriched by its nonenforecment. Here the facts are not clear if the Landlord forced the Tenant to “change position” –meaning do something that made the Tenant worse off in reliance on the Landlord’s promise--something like give notice to another landlord and move out, leaving the Tenant now with no place to conduct business. But if the elements of promissory estoppel are met then the Tenant may have an action against the Landlord, not for breach of lease but for reliance on an ORAL promise.

On this issue, an important treatise notes, landlords should avoid “duping” their prospective tenants:

Statements to a prospective commercial tenant like, “Don't worry, your lease is as good as signed ... ” . . . may “dupe” the prospective tenant into relying on the landlord's word. If the prospective tenant then starts spending money on the space, thinking he or she already has a deal (e.g., hiring space designer, ordering new business cards and stationery), the landlord is sure to draw a lawsuit if he or she reneges on the supposed “deal,” contending a lease was never signed!

Terry B. Friedman et al., Cal. Prac. Guide Landlord-Tenant § 2:90 (2011).