It is a well-established principle of law that, in most circumstances, documents conveying interests in real estate – such as purchase agreements, leases, easements and mortgages – are subject to the Statute of Frauds and therefore must be established in writing. In New Jersey, however, it is not as well known that leases of real estate for terms of less than three years are not required to be in writing. N.J.S.A. 25:1-12. The right to contract orally also applies to the extension of leases for terms of less than three years and to the assignment of leases with terms (or remaining terms) of less than three years. (See Stark v. National Research & Design Corp., 33 N.J.Super. 315 (App. Div. 1955) (regarding the oral assignment of a lease with less than three years remaining in the term).
Given the continuing uncertainty in the commercial real estate market, the climate is ripe for players on all sides of a lease transaction to take advantage of this loophole in the statute. For example, tenants who have empty or partially empty premises may be searching for potential subtenants or assignees. Other tenants may want to remain in their current space at below-market rent for a few months after the expiration of their current leases. Landlords may be trying to fill empty premises or favoring short lease extensions to keep their premises filled and maintain cash flow.
Whether it be during telephone conversations between principals of the parties or the constant flow of email among the parties and their brokers or attorneys, there arises the possibility that one side will take a seemingly innocuous discussion about the proposed terms of a lease, lease extension or assignment and rely upon the discussion as constituting a mutual agreement for a leasehold interest of less than three years. With that in mind, parties negotiating shorter-term leases, lease extensions, and subleases or assignments should be cautious and keep in mind the following practice pointers:
- At the inception of negotiations, make it clear both verbally and in writing that any agreement between the parties must be reduced to a formal written contract executed by both parties. Also, make it clear that brokers and attorneys cannot agree to the terms of a contract on your behalf.
- As always, be cognizant of the words you use during negotiations, and follow-up telephonic and inperson negotiations with an e-mail documenting what transpired and reiterating that the negotiations do not constitute an oral agreement between the parties.
- Be aware of the other party’s responses to your comments and whether they take, or intend to take, actions that evidence that they are relying on the negotiations as constituting an oral contract. For example, if a potential tenant engages an architect to draw up plans for the improvement of the premises that is the subject of discussions, then the potential tenant may later state that it engaged such contractor solely because it believed that the landlord had orally agreed to a lease and that it was relying on that fact.
- For a potential long-term tenant or a potential purchaser of rental property, it would be prudent to ask the landlord or seller, as applicable, whether they have discussed any short-term leases (or extensions) with new or existing tenants. If the seller answers in the affirmative, it may be prudent to require an indemnity to cover any risk associated with a tenant claiming to have an oral lease.
- Landlords should consider whether, at the outset of discussions, they should require a potential short-term tenant or an existing tenant who is interested in an extension of less than three years to sign a pre-negotiation agreement that would make it absolutely clear that no agreement will be reached unless and until a definitive agreement is signed between the parties.
Please feel free to reach out to one of the members of our Real Estate Practice Group at any point during your consideration of a short-term lease, lease extension or assignment, to discuss ways to help avoid the potential pitfalls presented by this loophole in New Jersey’s Statute of Frauds. We are also available to help in formulating appropriate prenegotiation agreements and discussing how to combat another party’s claim that you entered into an oral lease.