It seems fairly obvious that a party cannot claim to have a valid lease if the other side did not agree to it. However, in a recent New York case, a landlord tried to argue that a prospective tenant should not get back money it paid in advance for a lease that the prospective tenant never executed. The New York Appellate Division, First Department addressed the question of whether a lease can still be enforceable even if both sides did not sign it.
Family Health Mgt., LLC v. Rohan Devs., LLC involved a commercial lease. During negotiations and before signing the lease, the plaintiff-tenant’s attorney sent $96,000.00 to the defendant which represented two months’ security and an advance of six months’ rent. Subsequently, the plaintiff sued for conversion of the $96,000.00 because the defendant retained the money even though the proposed lease was never signed by the plaintiff and the plaintiff never took possession of the premises.
The lower court ruled for the plaintiff and the defendant appealed. The Appellate Court affirmed the decision for the plaintiff after discussing what a party needed to prove in order to establish a claim for conversion. In the decision, the Court held that the plaintiff did demonstrate that the funds at issue constituted a “specific sum” and were “specifically identifiable” as required for conversion. The defendant had claimed that by forwarding the funds to its attorney for deposit into the attorney’s trust account, the plaintiff had waived its right to a conversion claim as the funds were then intermingled with the other funds in the attorney’s trust account and no longer “specifically identifiable.” Therefore, it was impossible for the plaintiff to establish a claim for conversion once the funds were distributed to the defendant.
While both the lower court and the Appellate Division disagreed with the defendant, there was a dissenting opinion filed in the appellate case. The dissenting judge argued that the funds were no longer “specifically identifiable” because they were commingled in the attorney’s trust account. However, the judge noted that since the complaint also contained a claim for unjust enrichment, the plaintiff was entitled to the $96,000.00 on that claim as the defendant had no legal right to retain those funds,
The Appellate Court’s decision noted that even though some of the lease exhibits were signed by the plaintiff and a guarantee was signed by the guarantor, the fact that the plaintiff never signed the lease meant that it was not binding upon it and that the defendant, therefore, could not retain the funds which had been prematurely paid to it by the plaintiff’s attorney.
The importance of this case is that it establishes that a lease (as with all transactions involving real estate) must be in writing and signed by the “party to be charged” for that party to be obligated to perform. Here, as the plaintiff never signed the lease, it was not a binding, enforceable agreement and the funds previously deposited with the defendant had to be refunded to the plaintiff.
If you are negotiating a lease or having an issue with a lease you have already entered into or some other real estate transaction, contact one of our real estate attorneys to discuss the same.