Words Landlords Use Every Day: Standing and Privity

“Standing” is the right to bring a case to court. “Privity” is a legal relationship.

A landlord and tenant may have (or may be in) privity of contract because they both agree to certain contractual terms in a lease. That same landlord and tenant may be in privity of estate because they both have an interest in the same real estate.

For a landlord to prove standing to sue a tenant for defaulting under a lease, the landlord must show privity. The interesting question is: does the landlord have to prove privity of contract, or is privity of estate sufficient? Usually a landlord has both, so in most cases, this question does not arise. However, assume that the landlord lost all of its contractual privity with the tenant as the result of an unusual bankruptcy ruling, or the takeover of property by an agency like the FDIC or because of the absence of any prior dealings with a subtenant. In those cases, the landlord may have privity of estate with the occupant, because they both have an interest in the same real estate, but the landlord would not be able to prove privity of contract.

In Hillside Metro Associates v. JP Morgan Chase Bank, Nat’l Assn, 747 F.3d 44 (2d Cir 2014) the court said that proving privity of estate was not enough to prove standing to sue. As a result, the landlord, who could prove privity of estate but not privity of contract, was prevented from suing the tenant for rent.  In Excel Willowbrook, LLC v. JP Morgan Chase Bank, Nat’l Assn 758 F.3d592 (5th Cir 2014), the court said that proving privity of estate was sufficient to prove standing to sue, so the landlord, even though it could not prove privity of contract, was allowed to suefor rent. The landlord in Excel used nearly identical proof as that offered by the landlord in Willowbrook. This disagreement between two federal circuit courts is significant — the sort of conflict that may be resolved by the U.S. Supreme Court.

These cases teach us that an assignment of rights under a lease, whether voluntary or involuntary, must be structured to preserve privity of bothcontract and estate. When that is impossible, a lease or assignment or other agreementmust be structured to assure that the landlord hasfull privity of estate with future occupants. Be certain to engage experienced lease counsel whenever the landlord-tenant relationship may be attacked or affected by third parties, whether subtenants, assignees, government agencies, creditors or courts.

Today’s real estate tip is brought to you by Rick Smith, a LEED Accredited Professional and member of Bernstein Shur’s Real Estate Practice Group and Green Building Team. Stay tuned for more useful tips for real estate professionals.

For more information, contact Rick at rsmith@bernsteinshur.com or 207 228-7228 or at 603 665-8829.