Drafting and Litigating Leases and Easements

PREPARED FOR:

IBOUSA FALL CONFERENCE 2023 – INDIANAPOLIS, IN

OCTOBER 4-6, 2023

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Billboard Insider Articles

Andy Goodman on Lease Issues

Requirements for a Writing

• The Statute of Frauds requires a signed writing for the transfer of an interest in land.
• This applies not only to the sale of land but to the transfer of any interest such as a mortgage, easement, leases of a year or more in length, etc.
• The Statute of Frauds also requires that the conveyed property and key terms be sufficiently described.
• Some guidelines include:
• Identify property with “reasonable certainty”
• Provide information to locate general area of property – tract, survey, county, size, shape and boundaries of property
• Parties
• Rental Amount
• Term

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Recording Considerations and Memorandum of Lease

• It is always a good idea to at a least record memorandum of lease
• How: include a provision in the lease requiring property owner to execute a memorandum for recording in real property records
• Leave out sensitive or confidential information and provisions (Monetary values, unnecessary or special provisions, etc.)
• Notary execution and stamp
• Actual and constructive notice
• Constructive notice (i.e., filing in real property records) of lease as a matter of law binds subsequent purchasers, but…
• Typically a purchaser will have actual notice because a billboard sign is clearly visible and hard to miss when inspecting a property
• Duty to inquire and use diligence

Foreclosures and Subordination Agreements

• Foreclosures and Subordination Agreements
• If a mortgage, deed of trust, lien, etc. is executed after a lease is executed (and recorded), and then the mortgage is foreclosed upon, the lease will not be terminated
• In contrast, if a mortgage, deed of trust, lien, etc. is executed prior to a lease and it’s foreclosed upon, the lease is a junior interest that will be terminated
• Fix: obtain subordination agreement from bank or other lienholder, and secure such a right in the lease

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Tax Foreclosures and Redemption Clauses

• Tax foreclosure sales by governmental entities as opposed to debt foreclosures by lenders, almost always result in the termination of junior interests (leases, easements, etc.), regardless of when those interests were executed or recorded.
• The government won’t agree to a subordination agreement, so options are limited
• Fix: Include in the lease a right to notice of tax foreclosure and a right to redeem (i.e., pay the delinquent taxes to prevent foreclosure), which would provide some protection

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Disputes over Sign Ownership

• Disputes over sign ownership and lease validity often arrive after the purchase of the property, especially if the lease (or memorandum) is not recorded, or through foreclosure

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• Sign Ownership – lease should always contain provision stating that lessee owns sign and permits
• Sample Clause:

“This agreement is a Lease, and all sign(s), structure(s), improvements and appurtenances thereto placed on the premises by or for the LESSEE, its agent or predecessor, shall remain the property of the LESSEE and LESSEE shall have the right to remove the same at any time during the term of the Lease and for a reasonable period [ rather than “reasonable period”, state a specific timeframe] after the expiration of the Lease term. If LESSEE removes it’s structure(s), only above grade portions of said structure(s) shall be removed. The future existence of below grade improvements shall not constitute continued occupancy of the Property by LESSEE.”

• Notice of Ownership Change
• Lease should include requirement that lessee receive written notice anytime property changes hands
• Sample Clause:

“LESSOR agrees to notify LESSEE of any change of ownership of the Property or of LESSOR’s mailing address within thirty (30) days of such change. LESSOR agrees to hold LESSEE harmless from any action resulting from failure to provide said notice. Subject to the provisions of Paragraph 16 of this Lease, LESSOR shall not assign it’s interest under this Lease or any part thereof except to a party who purchases the underlying fee title to the Property.”

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Disputes over Lease Validity

• Lease Validity and Enforceability
• New landowners often claim that lease is unenforceable and/or demand removal of sign
• Include provision in lease stating it is binding on subsequent purchasers (though not legally necessary)
• Sample Clause:

“This Lease shall be binding upon the heirs, executors, personal representatives, successors and assigns for the parties hereto. LESSOR warrants that LESSOR is the owner of the Property and has full authority to enter into this Lease.”

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Right of First Refusal Provisions

• Gives lessee the right to match any offer acceptable to the lessor to purchase the property
• Strictly construed – mirror image rule
• If property is sold without honoring right of first refusal and you discover after the fact, then law allows you to demand the property to be sold to you for price paid by current owner
• This is valuable because it allows you to purchase property, reserve the easement, and sell to another buyer

Right of First Refusal Provisions

• Sample Clause:

“During any term of this Lease and for a period of ninety (90) days following any termination of this Lease, LESSOR grants LESSEE the right of first refusal to match any offer acceptable to LESSOR for the use or purchase of the Property or any portion of the Property. A written copy of any such third party offer received by LESSOR shall be delivered to LESSEE by certified mail-return receipt requested. LESSEE shall then have twenty (20) business days from the date of receipt in which to match such offer by giving notice of acceptance to LESSOR.”

• The Courts on Rights of First Refusal:
• “a right of first refusal, also known as a preemptive or preferential right, empowers its holder with a preferential right to purchase the subject property on the same terms offered by or to a bona fide purchaser.” Tenneco Inc. v. Enter. Prod. Co
• “it is indisputable that a purchaser from a lessor who has given lessee a right of first refusal to buy takes the property subject to that right and lessee must be granted the opportunity to purchase at the price transferred.” Sanchez v. Dickinson

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RothfelderFalick.com

Renewal Clauses and Unilateral Rights to Renew

• Automatic Renewal Clauses
• Require termination within specific window – e.g., no less than 90 days and no more than 180 days before end of lease term – otherwise lease renews on like terms
• Sample Clause:

“This lease shall continue in full force and effect for its term and thereafter for subsequent successive like terms unless terminated at the end of such term upon prior written notice by either party served no less than ninety (90) days and no more than one hundred eighty (180) days before the end of such term.”

Unilateral Termination Rights

• Avoid “agreements to agree”
• Sample Clause:

“After the term hereof, this agreement shall renew for a like term, unless terminated at the end of such term, or any additional term thereof, by Lessee providing to Lessor written notice of termination no less than thirty days before the end of such term.”

Renewal Clauses and Unilateral Rights to Renew

• In Hull v. Quanah Pipeline Corp., 574 S.W.2d 610 (Tex. Civ. App.—San Antonio 1978, writ ref’d n.r.e.), the court determined whether a lease terminated or “was enforceable against the [Lessors] as a perpetual lease at the option of the [Lessees].”
• The court explained that the right to perpetual renewal is not favored. Additionally, there is not a presumption that the parties intended to create a perpetual right. However, if the intention to create a right of perpetual renewal is clearly and unambiguously expressed, then the obligation created is valid and enforceable.
• In Hull, the court found that the lease provision in question “clearly and specifically shows that it was the intention of both the lessor and the lessee that the lessee should have a right of perpetual renewal…The provisions of the lease are plain and unambiguous and they clearly evidence an intent and purpose to create a right of perpetual renewal.”
• The validity of the rule described in Hull was more recently recognized in 2014 by the United States District Court of the Southern District of Texas. Ezer v. Texas Tower Ltd., No. CIV.A. H-13-1805, 2014 WL 3669222, at *5 (S.D. Tex. July 22, 2014)

Eminent Domain

• Lessee is entitled to compensation for sign and its leasehold interest (if actual rent is less than market rent)
• Right to participate in condemnation award
• Allow relocation to remainder when legally and physically possible
• Lessor cannot terminate because of condemnation
• Sample Clause:
• “In the event of condemnation of the leased premises or any part thereof by proper authorities or expansion of the highway, Lessor grants to Lessee the right to relocate its sign structure(s) on Lessor's remaining property adjoining the condemned property or the relocated highway. Any condemnation award for Lessee's property (the sign and leasehold) shall accrue to Lessee.”

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Access Clauses and Disputes

• Standard clauses, but make sure they are clearly spelled out, or identified on exhibit
• Best if rights cover the entire Leased Premises
• Sample Clause:
• “Lessor grants to Lessee and its authorized agents the right of ingress and egress to and from the leased premises over property owned or controlled by Lessor for all purposes reasonably necessary for the proper erecting, placing, maintaining, relocating, and removing of the sign structure(s), including but not limited to, the trimming, cutting or removing of brush, trees, shrubs, vegetation or other obstructions of any kind which may limit the visibility of the sign structure(s) to the traveling public.”

Force Majeure Clauses in Billboard Transaction Agreements

A. A force majeure clause is provision in a contract that excuses, defers, or conditions delays or failures of performance on specified occurrences or events, all as expressly provided in the contract.

B. The contract will list the occurrences and events, which are typically those beyond the control of the contracting parties, such as war, fires, hurricanes, floods, tornadoes, strikes, and acts of God, and if included, could certainly include pandemics.

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Force Majeure Clauses in Billboard Transaction Agreements (cont.)

C. The contract will also address the eligible defects in performance, such a mere delay or an outright failure or inability to perform, due those listed occurrences.

D. And, finally, the contract will provide for the consequences if such a defect in performance results from such an occurrence, including deferring performance to a later date, discounting monetary obligations like rent, or complete excuse and release of remaining contractual obligations.

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Typical Force Majeure Clause in a Billboard Lease

• A. Most standard billboard ad contracts and ground leases don’t contain force majeure clauses, at least by this name, but they often contain a clause that affords the tenant/billboard company certain rights and relief upon unforeseen circumstances, such as the following: “If, in Tenant’s sole reasonable discretion, for any reason not caused by Tenant, including but not limited to (1) the Sign’s use is prevented or restricted by law or governmental order; (2) the electrical service or illumination to the Sign is unavailable or interrupted; (3) there is a diversion of traffic resulting in a reduction in the views of the Sign from the adjacent thoroughfare; (4) Tenant is unable to secure all necessary permits for the erection, maintenance, and operation of the Sign, or such permits are cancelled; (5) the Premises cannot be safely or efficiently used for the operation of the Sign for any reason; or (6) the Sign’s value and advertising potential is diminished, then Tenant may in its sole discretion (a) reduce the rent in direct proportion to the loss suffered for so long as such loss continues, or (b) cancel this Lease, thereby terminating any further obligations of either party.”

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Typical Force Majeure Clause in a Billboard Lease (Cont.)

• B. These types of clauses affording billboard company/tenants relief usually don’t expressly include pandemics among the enumerated circumstances; however, there’s a good argument that these “Stay at Home” governmental emergency orders qualify, as they prevent billboard company employees from working, and diminish the highway traffic and views and value of the signs.

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Venue

Venue

• Helpful, but not crucial if venue is the same county where sign located
• Law generally discourages fixing venue by contract, with limited exceptions

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• Sample Clause:

“A suit, claim, or other action to enforce the terms of this Agreement will be brought exclusively in the state and federal courts of Harris County, Texas. Parties hereby submit to the jurisdiction of that court and waive any objections it may have to that court asserting jurisdiction over Parties.”

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Attorney Fees

Attorneys Fees

• Attorneys’ fees are already recoverable under certain statutes for breach of contract (including leases)

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• Sample Clause:

“If any action or proceeding relating to this Agreement or the enforcement of any provision of this Agreement is brought against any party hereto, the prevailing party shall be entitled to recover reasonable attorneys’ fees, costs and disbursements (in addition to any other relief to which the prevailing party may be entitled).”

Conclusions and Questions