Most landlords are familiar with the concept of a “holdover” tenant: When a lease sets a specific term such as 12 months, then the term expires without the parties explicitly renewing or ending the lease, and the tenant continues to occupy the space and pay rent. The lease generally continues under the same principal terms as the prior lease. But do all provisions of the lease continue? Most landlords and tenants understand that, at a minimum, the 12-month lease term does not automatically carry over; instead the tenant or landlord can give a 30-day or 60-day notice of termination, depending on how often rent is paid. What other terms do not automatically continue into such a “holdover” situation?
A California appellate court recently addressed whether one specific tenant right carries over: The right of first refusal for purchasing the property. Read on for an explanation of the issue and the court’s decision, and contact a knowledgeable San Diego real estate attorney with any questions.
California Appellate Court Holds Only “Essential” Terms Continue into a “Holdover” Tenancy
The matter of Smyth v. Berman concerned a tenant who rented a building from a landlord for his audio recording business. The lease included a “right to first refusal to purchase,” which would grant the tenant the right to purchase the building for an appropriate price before the landlord could sell the building to a third party. The lease term ended without the parties’ explicit renewal. The contract specified that a “holdover” tenancy converted the lease into a month-to-month tenancy. After the landlord signed a contract to sell the building to a third party, the tenant made an offer to purchase the building. The landlord rejected the tenant’s offer because it was much lower than the offer from the third party ($505,000 as compared to $676,000). The tenant sued under a variety of legal theories for damages and to stop the sale, generally relying on the right of first refusal.
The appellate court explained that when a lease expires but the tenant remains in possession, the relationship between the landlord and tenant changes. Per the court, the “new hold-over tenancy is presumed to continue under the same terms contained in the now-expired lease,” but not all terms carry over. The appellate court held that only the “essential” terms of a lease carry over into a holdover tenancy. These essential terms include the amount and time of payment of rent, and do not include the option to purchase the property, even in the form of a right to first refusal (unless the contract provides otherwise).
The court also rejected the tenant’s arguments that an oral agreement created a new lease or extended the old, rather than creating a holdover tenancy, and that an oral agreement extended the right of first refusal. Both arguments were barred by the legal presumptions that the written terms of a contract will not be contradicted by an unwritten oral agreement except in rare circumstances.
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