Too often, decades old leases are amended so frequently that the parties can hardly recall the original lease terms. Sometimes the original leases are lost or illegible, making it impossible for new owners to ascertain the terms of the tenancy. Lessors and lessees often cut corners and enter into a lease amendment to memorialize the “now” to avoid entering into a new lease. This is particularly true for anchor tenants in shopping mall developments that have operated for 40 or 50 years as the landlord-tenant relationship is often long-established, and the parties may try to cut corners expecting there won’t be any subsequent disputes or issues. But this can have implications for related third-party agreements. This issue recently came to a head before the Pennsylvania State Supreme Court.
On October 13, 2023, the Pennsylvania State Supreme Court unanimously denied an appeal filed by J.C. Penney Corporation, Inc. (JCP), thereby affirming the Superior Court of Pennsylvania’s ruling that, among other things, a lease amendment can go too far, cancel the underlying lease, and render a third-party recognition agreement obsolete. This decision is relevant to property owners, landlords, tenants, lenders, and interested third parties, especially with so many major redevelopments, and consequently amendments of decades-old documents, happening today.
In J.C. Penney Corp., Inc. v. GFM 23, LLC et al., JCP was the subtenant of Crown Construction Company, which constructed the mall and ground leased it from the owner of the land. The ground lease provided for a 35-year term with three five-year renewal periods totaling 50 years. JCP’s sublease had an initial 25-year term and provided for an automatic 15-year extension if JCP expanded its store, and four consecutive five-year renewal periods not tied to expansion. Shortly after Crown and JCP executed the sublease, JCP, Crown, and the owner entered into an “owner agreement” to protect JCP’s interest under the JCP sublease in the event that the ground lease was terminated. In such event, the owner would step into Crown’s shoes under the JCP sublease and be bound by its terms. Notably, the owner agreement provided that JCP “shall have and enjoy during the term of the [JCP Sublease] and any extension thereof” quiet use and enjoyment of the subject premises. (Emphasis added).
JCP exercised two of the four five-year extensions, resulting in a term that expired on January 31, 2004. However, on July 7, 2003, JCP and Crown entered into a “lease extension/modification agreement” that, among other things, modified the base term, the number of optional extensions, the timing and terms of renewal, and the rent calculation scheme. Applying the terms of the 2003 lease modification, the JCP sublease would expire on January 31, 2029, exceeding the term of the ground lease.