Occupancy Alone Does Not a Commercial Tenant Make, New Jersey Appellate Division Rules

August 13, 2014

When does an occupant become a tenant, and when does consent to that occupancy become a lease agreement? A recent case involving a property owner and a construction company posed each of these questions as the two sides battled regarding the construction company’s holdover on the owner’s property after the expiration of the term stated in the two sides’ written agreement. Ultimately, the New Jersey Appellate Division decided that the construction company was, while occupying the property before signing the written lease agreement, merely a licensee and not a tenant under an oral lease. As a result, the owner could enforce the written lease contract.

Armored, Inc., a stone crushing and construction company, contracted with Applied Companies in 1997 to do some work at Applied’s properties near the Jersey City waterfront and the Liberty National Golf Course. Armored began storing several pieces of equipment on the golf course at that time. Armored and Applied’s successor, WA Golf Company, LLC, signed a six-month lease agreement in 2006 for Applied to rent a lot near the golf course where Armored would store its equipment and materials. Armored agreed to perform certain work for WA in lieu of rent.

Armored never performed the work, but neither side mentioned the failure to perform the work, or pay rent, or the expiration of the lease’s six-month duration until January 2011. At that time, WA gave Armored notice demanding that Armored leave the property. Armored did not leave, so WA filed the appropriate summary dispossess action, and Armored vacated on June 30, 2011. WA later added claims for holdover rent and breach of the duty of good faith and fair dealing.

WA’s case did not persuade the trial court. That court threw out the landlord’s case entirely, determining that the parties had an oral lease going back to 1997 and that the 2006 written lease was an attempt to modify the original 1997 agreement. Since WA offered no additional consideration for the 2006 agreement, that meant the written lease was invalid.

The Appellate Division saw things differently. That court explained that not all occupants of land have a “leasehold interest.” Sometimes, the occupant is merely a licensee. The difference, as the court explained, is that “a lease gives exclusive possession of the premises against all the world, including the owner, while a license confers a privilege to occupy under the owner.” In Armored’s case, it was a licensee and not a tenant when it first began occupying the golf course space in 1997. The court made this conclusion by looking at the relationship, in which the owner required Armored to pay no rent or perform in-kind services in exchange for the occupancy.

Having concluded that no lease agreement existed in 1997, the appeals court decided that the 2006 agreement represented a valid lease contract, not an invalid modification. The landlord was not, however, entitled to collect holdover rent for the entire period from the expiration of the lease in April 2007 forward. By failing to demand that the tenant pay up or leave the premises, it waived its right to demand rent for the period in which it silently allowed the tenant to stay. However, once WA demanded that Armored leave, the tenant was required to leave within 30 days or pay for any occupancy after the expiration of that 30-day window. As a result, WA was entitled to receive holdover rent for the period from February to June 2011.

Commercial leasing arrangements may be simple or extremely complex but, for the protection of both sides, should always be put down in writing so that all involved can be certain about the agreement reached. For your next commercial lease agreement, reach out to the real estate attorneys at Samuel C. Berger, P.C. Our New Jersey real estate attorneys can help you secure a lease agreement that properly protects all your business interests. Reach us online or call (201) 587-1500 or (212) 380-8117.

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Photo credit: M.O. Stevens at Wikimedia Commons.