Ganje: The South Dakota Supreme Court discusses ranch (here read commercial) leases
Ganje Law Office
A well-known lyricist wrote these words: “When logic and proportion have fallen sloppy dead and the white knight is talking backwards.” I suspect the lyricist, Ms Grace Slick, did not have leases in mind as she wrote the words. But I take her advice as spot on when you consider the subject of leases discussed in this opinion piece. The South Dakota Supreme Court recently decided a quite messy ranch lease case. A ranch lease is a commercial lease. A commercial lease is a ranch lease. The two are one animal, one species and one thing inseparable. Those writing and negotiating a ranch lease tend to disregard the wisdom found in the language of a commercial lease. There is little ingenuity and care practiced in the leasing business.
For me the court’s ranch lease decision was deja vu all over again. I’ve seen too many problematic agriculture, farm and commercial leases in my two or three years on this good earth. History repeats itself. It’s easier to follow a pattern from the past when writing and negotiating a lease rather than spending the time and money to get it right. My comments in this column affect commercial leases, agricultural leases and ranch leases all the same.
Matters related to how a lease will succeed or fail were one of the weaknesses of the written leases in the ranch lease case. As the court discussed the background it was clear the leases in question did not fully address the lessors and lessees anticipated relationship with a grazing association and with a potential grazing permit. No written guidelines were provided in the leases for navigating with a grazing association, or for how a party might obtain a grazing permit. Fraud and deceit claims were also asserted in the litigation. This trouble could have been avoided by the writing of what I call a legal road map with a legend to the legal map. In legal parlance the leases should have included complete representations and warranties. These are also called “reps and warranties” to insiders in the legal industry.
A representation is a statement in a lease about particular facts, given by the party as true and correct, and given to induce the other party to enter into a lease. A warranty is a promise to legally back up the harmed party if the representation presented in a lease fails or is false.
Representations and warranties allow the parties to allocate responsibility for risks between the lessor and lessee. Typical representations might be a promise that there is no legal condemnation of the property pending, or that there are no disputes or litigation pending or threatened concerning the use and operations of or on the property. Representations and warranties can act conjunction with due diligence by the prospective lessee. Don’t lease property or buy property in the dark. You might run into something you can’t handle.
What reps and warranties do? They put on the table the legal authority of the lessor to lease the property and importantly these terms govern the use and maintenance of the property during the lease.
A lessor usually wants to lease the property on an “as is” basis or with limited representations and warranties. This approach eliminates promises about the condition of the property and about the uses to which the lessee may use the property. The as is approach lets the lessor minimize its risk, and reduce any claims in litigation. A lessee on the other hand should want a complete a set of representations and warranties in order to avoid risk, ensure certainty of the nature of the property, and reduce any need for clarifying or enforcing litigation.
No one should rely completely on reps and warranties. Due diligence is still in order. Use your head, not your eagerness to do a deal. It easier to get to a destination with a road map than with my inscrutable intuition. The lyrics of Grace Slick again provide us with a lesson: “Remember what the dormouse said; feed your head, feed your head.”
David Ganje. David Ganje of Ganje Law Office practices in the area of natural resources, environmental and commercial law. The website is Lexenergy.net