Joseph Martin, Jr., Delicatessen, Inc. v. Schumacher

Court of Appeals of the State of New York · 1981 · Contracts

ContractsLease renewalDefinitenessAgreements to agreeSpecific performancecontractsreal property leasesrenewal option

Facts

In 1973, the landlord leased a retail store to the tenant for five years at escalating monthly rent from $500 to $650. The lease gave the tenant a right to renew for an additional five years at "annual rentals to be agreed upon," provided the tenant gave timely written notice. The tenant gave timely notice, but the parties could not agree on rent: the landlord would renew only at $900 per month, while the tenant obtained an appraisal stating fair market rent was $545.41. The tenant then sought specific performance compelling renewal at the appraised figure or another court-set reasonable rent.

Issue

Is a lease renewal clause providing that rent for the renewal term is "to be agreed upon" enforceable, so that a court may determine a reasonable rent and specifically enforce the renewal? More broadly, does such language supply a sufficiently definite material term in a real property lease?

Rule

A mere agreement to agree, in which a material term is left for future negotiations, is unenforceable under New York contract law. This is especially true where the material term is the rent to be paid for the lease of real property and specific performance is sought. A renewal clause may be sufficiently definite if the lease itself provides a methodology or objective extrinsic standard by which rent can be made certain, but not when it says only that rent is "to be agreed upon."

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In Buffalo, Nora Kim leased storefront space from Elm Harbor Properties, LLC for four years. The lease gave Nora an option to renew for another four years at a rent "to be negotiated by landlord and tenant upon renewal," and Nora timely exercised the option, but the parties could not agree on price.

If Nora sues for specific performance and asks the court to set a fair rental rate, what is the strongest argument for Elm Harbor?

Explanation. A lease renewal provision that leaves the rent "to be negotiated" or otherwise to future agreement is too indefinite when rent, a material term, is not fixed by the agreement and no methodology or objective extrinsic standard is provided. Under the majority rule, a court may not impose its own notion of fair or reasonable rent in order to specifically enforce such a clause.