January 9, 2016
When drafting leases, contracts and other agreements, frequently my client informs me that a key provision has been negotiated or an impasse has been resolved by making an agreement to negotiate an agreement later.
For example, the question the parties have is: “what is to be the lease rate upon a renewal in five years?” Or, “what will be the location of a utility easement across land of the seller to serve new property being acquired by the buyer?” And the answer the parties provide is: “will be negotiated at that time” or “we will decide at a later date.”
These answers are, of course, not answers at all. And they constitute no agreement at all, for what if the parties fail to agree?
In the lease scenario, five years goes by, and the tenant exercises a renewal option subject to a “will negotiate the rental rate later” provision. Then, the parties negotiate and cannot come up with an agreement. Is the renewal effective? If so, at what rate? If the parties don’t set some sort of procedure (e.g., an appraiser will decide the rate) or some sort of benchmark (e.g., applying CPI inflation rate since the signing off the lease). The “agree to something later” formulation is the recipe for conflict if not disaster.
In the easement scenario, the seller agrees to provide water, sanitary sewer and electricity easements after the closing on the property being sold, at a location to be decided between the parties. But what if the seller offers access only at a location costly and inconvenient to the buyer? What if the buyer demands access in a location that makes the remainder of seller’s property undevelopable? Again, without some procedure (a neutral third party will arbitrate disputes) or benchmark (as close to the east property line as practical), the agreement to provide agreed utility easements at a later date is a hallow promise and an illusory contract.
Now, if the parties trust one another, have a history of getting along, or have economic motivations to cooperate, it may make sense for parties to an agreement to “agree to agree later,” but don’t labor under the illusion that the agreement reached is in itself meaningful, binding or clear.