Landlords and Tenants Beware: A Lease Amendment Could Threaten the Viability of the Original Lease

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.

Upon dissolution of the ground lease in 2019, the owner notified JCP that the JCP sublease was no longer in force, JCP was a tenant at will, and now owed holdover rent. JCP filed a complaint for declaratory judgment that, under the owner agreement, the owner was required to honor the terms of the JCP sublease and any extensions thereof through at least January 31, 2029. The court agreed with JCP and interpreted the phrase “any extension thereof,” in the owner agreement to mean (1) the 25-year initial term, the store expansion-triggered 15-year extension, and the four optional five-year extensions; and (2) any additional extension properly entered into between [JCP] and Crown. Thus, the owner would be bound to recognize any properly entered extension of the JCP sublease. However, the 2003 lease modification did not properly extend the JCP sublease.

The trial court held, and the superior court affirmed, that the 2003 lease modification significantly altered material terms of the JCP sublease and, therefore, replaced the JCP sublease. On appeal, JCP argued a general principle of contract construction: parties may always modify a written contract previously entered into. The court did not disagree; however, the real issue was how far can a modification go before it supplants the underlying contract? In affirming the trial court’s decision, the superior court reasoned that the terms of the 2003 lease modification vastly differ from the nature of the extensions set forth in the JCP sublease. And, further, the lease modification agreement did not provide that the parties would continue under the same terms as the JCP sublease. It was not an extension of the JCP sublease as contemplated in the owner agreement. The 2003 lease modification was a standalone agreement.

Because the 2003 lease modification was a new agreement and not an extension of the JCP sublease, the owner was not bound by its terms. Accordingly, the court determined that the JCP sublease expired on January 31, 2004, following which JCP remained in possession of the premises as a tenant a will.

The holding in J.C. Penney Corp., Inc. v. GFM 23, LLC et al., is a cautionary tale not to take the easier path of amending when a new agreement is needed. Parties often enter amendments as a short cut without contemplating long-term implications. Ultimately, everyone gets burned and nobody ends up with the rights and obligations they thought they had. As often is the case, slow and steady wins the race.