Tuesday, June 2, 2009

In the absence of language specifying how and when a lessee may extend the term of the lease, holding over and continued payment extends lease


This appeal involves the exercise of an option to extend a lease that did not specify how or when the option should be exercised. Approximately two and one-half years after the lessee believed he had exercised the option to extend the lease, the lessor sold the property to a third party who was aware that the lessee was actively farming the property. Thereafter, the new owner trespassed on the property and ordered the lessee to vacate. The lessee complied but filed suit in the Circuit Court for Knox County seeking damages for the new owner's trespass and for the profits he would have earned had he been permitted to continue to farm the property for the remaining term of the lease. A jury determined that the lessee had effectively extended the lease and that the new owner had actual notice of the lease. Accordingly, the jury awarded the lessee $82,534 in compensatory damages and $30,000 in punitive damages. The owner appealed. The Court of Appeals upheld the jury's $534 award for damages caused by the owner's trespass but vacated the remainder of the award of compensatory damages after concluding that the lessee had not effectively extended the lease. The court also vacated the punitive damages award because it was excessive in comparison to the reduced compensatory damages award and remanded the case for a new trial on punitive damages. Ellis v. Pauline S. Sprouse Residuary Trust, No. E2006-01771-COA-R3-CV, 2007 WL 3121666 (Tenn. Ct. App. Oct. 26, 2007). We granted the lessee's application for permission to appeal. In accordance with Carhart v. White Mantel & Tile Co., 122 Tenn. 455, 123 S.W. 747 (1909), we have determined that the lessee effectively extended the lease by holding over and continuing to pay the rent required by the lease. Accordingly, we reverse the judgment of the Court of Appeals and remand the case to the Court of Appeals for further proceedings consistent with this opinion.

Opinion my be found at the TBA website:

"[W]e are of [the] opinion that the mere continuance of occupancy by the tenant or lessee after the expiration of the lease period is ordinarily accepted as the exercise of the option reserved in the lease to occupy the premises for an additional term.  This is the presumption that ordinarily arises from the mere fact of holding over; but it is not conclusive of the lessee’s intention to accept the lease for an additional term.  If the lease, as in this case, provides for an additional term at an increased rental, and after the expiration of the lease period the tenant holds over and pays the increased rental, this is affirmative evidence on his part that he has exercised the option to take the lease for an additional term; but where, under a lease like the present, the tenant holds over after the expiration of the original term, and does not pay the increased rental as provided by the lease, but continues to pay the original rental, which is accepted by the lessor, this negatives the idea of the acceptance of the privilege of an additional term.  Under such circumstances, the lessee holding over will occupy the status of a tenant at will. "

"The principle that we recognized in Carhart – that the holding over and the continuing payment and acceptance of the agreed-upon rent creates a presumption that the lessee has effectively exercised an option to extend a lease that does not require the lessee to give notice of its decision to extend the lease – was then and continues to be the prevailing view. " Id.