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Rent is an Essential Element of a Lease, and “Agreements to Agree” on Future Rental Rates are Unenforceable

on Friday, 6 March 2015 in Dirt Alert: David C. Levy, Editor

The Nebraska Supreme Court, in Gibbons Ranches, L.L.C. v. Bailey, 289 Neb. 949 (2015), held that rent was an essential term in a lease agreement. Accordingly, lease clauses providing for “annual review of rental rates” were unenforceable.

Under nearly identical five-year leases, Gibbons Ranches, L.L.C. (“Gibbons”) leased farm ground to Joel Bailey and Jaimee Bailey, a married couple (“Bailey”), and B Agri-Services, Inc., doing business as Circle B Farms (“Circle B”). The leases provided for a set amount of rent for the first year and an “annual review of rental rates” to determine future rental rates.

Gibbons and Circle B negotiated a modification to the rental rate for the second year. Bailey agreed to the same new rate, and both Bailey and Circle B paid rent in accordance with the new rate. The parties did not agree on rental rates for the third year; rather, the tenants submitted checks based on the second-year rates and continued to farm Gibbons’ land.

Gibbons sued both tenants to determine the rental rates for the third year, arguing the tenants refused to negotiate in good faith and were paying rates that were less than reasonable. The tenants answered that their leases sufficiently stated Gibbons’ rights.

The district court entered judgments for the tenants. The leases were valid for five years and the tenants were not obligated to alter the terms of rent.

Gibbons appealed. The central issue before the Nebraska Supreme Court was whether the leases were valid if the parties did not agree to rental rates after the second year.

The Supreme Court affirmed. “[W]hen an express lease agreement contemplates the payment of rent in money, the amount of rent is an essential term of the agreement.” Nebraska case law had been unclear regarding whether rent was an essential term in a lease agreement. The Supreme Court distinguished prior case law, explaining that monetary rent was not essential, and that the law implied a promise to pay rent when a tenant did not vacate the premises after the expiration of a lease, even though there was no definite agreement as to the amount of rent.

The Court then interpreted the meaning of “annual review” in the leases and held that “review” meant an examination with a view to amendment but without a requirement of agreement. Because new rental rates were not the necessary result of the annual review, the rates in effect stayed in effect until the parties reached an agreement to modify them. The leases were valid, but the provisions for annual review were not enforceable, and Circle B and Bailey could pay second-year rental rates for the remainder of their leases’ five-year terms.

A full copy of the opinion is available here.

Anthony D. Todero

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