Does Your Lease Read like a Deed? Supreme Court of Virginia Weighs in on Execution Requirements for Most Leases in The Game Place, L.L.C. v. Fredericksburg 35, LLC

Seyfarth Synopsis: The Supreme Court of Virginia issued a unanimous opinion recently holding a 15-year commercial lease unenforceable since it was not executed with the formalities of a deed as required under Virginia law. In overturning the lower court’s ruling in The Game Place, L.L.C., et al. v. Fredericksburg 35, LLC, 813 S.E.2d 312 (Va. 2018), the Court held that, due to the fact that the lease was for more than five (5) years and did not contain a seal nor did it comply with any statutory seal substitutes, the lease was unenforceable with respect to the claims that the landlord brought. The Court held that the lease violated the Statute of Conveyances that requires that any lease for a term of more than five (5) years must be accomplished by will or deed and satisfy certain technical requirements.

Facts of the Case

The case stemmed from a dispute in which Fredericksburg 35, LLC (“Fredericksburg”), a commercial landlord, sued its tenant, The Game Place, L.LC. (“Game Place”) and its guarantor, after Game Place vacated the premises it was leasing from Fredericksburg prior to the expiration of the 15-year term and terminated what Game Place referred to as its “month-to-month periodic tenancy.” At the time Game Place terminated, it was current on its rent. Fredericksburg sued Game Place for unpaid rent that accrued after Game Place vacated the premises. Game Place argued that its lease was unenforceable under the Statute of Conveyances (Section 55-2 of the Code of Virginia) because it was not in the form of a deed, containing the common law requirements of a seal or a seal substitute available under Section 11-3 of the Code of Virginia.

Applicable Law

Section 55-2 of the Code of Virginia, also known as the Statute of Conveyances, provides in pertinent part “[n]o estate of inheritance or freehold or for a term of more than five years in lands shall be conveyed unless by deed or will…”

Pursuant to Section 11-3 of the Code of Virginia, there are several seal substitutes that are alternatives to a seal that will make a written instrument a “deed”: (1) a “scroll by way of a seal”; (2) an imprint or stamp of a “corporate or an official seal”; (3) the use in the body of the document of the words “this deed” or “this indenture,” or other words importing a sealed instrument or recognizing a seal; and (4) a proper acknowledgement “by an officer authorized to take acknowledgments of deeds.”

Court Ruling

The lease at hand did not contain a formal seal or seal substitute described by Section 11-3, and, as such was not a “deed.” Consequently, the Court ruled the lease was unenforceable. The Court further found that while the parties could repudiate the lease at any time, the lease was converted to a periodic tenancy tied to the rental payments, in this case, monthly rental payments. Here, since the tenant had paid all of its monthly rental payments prior to its termination of the lease, the Court held that the tenant did not have any further rental obligations to its landlord after the last month of occupancy of the premises.

Background and Analysis

The lower court had ruled in Fredericksburg’s (landlord’s) favor stating that the lease had met the requirements of a deed because it was “lengthy” (the lease was 17 pages long) and could just as easily have been called a “deed” or “indenture” reasoning that “the law looks at substance not form.”

The Supreme Court of Virginia wholly disagreed with the lower court’s analysis stating, inter alia, “[u]nder the common law, a sealed contract means just that, a contract with a seal” regardless of the length of the document. Further, even if the lease were titled “Deed of Lease” or “Lease Indenture,” this would not work to cure the deficiency as the words “this deed” or “this indenture” must appear in the body of the instrument and not merely in the title. The Court noted that the Virginia General Assembly, from time to time, had modified or abolished the seal requirement as it pertained to certain documents and the fact that it had failed to abolish it altogether for deeds governed by the Statute of Conveyances was indicative of its desire that such statute continue to be enforced as written.

Fredericksburg argued, as a last ditch effort, that Section 55-51 of the Code of Virginia overruled the common law seal requirement for deeds covered by the Statute of Conveyances. Section 55-51 provides that any deed that “shall fail to take effect by virtue of this chapter shall, nevertheless, be as valid and effectual and as binding upon the parties thereto, so far as the rules of law and equity will permit, as if this chapter had not been enacted.” However, by its own terms the foregoing statute only applies to deeds that fail “by virtue of this chapter.” Nowhere in Chapter 4 of Title 55 of the Code of Virginia, where the foregoing section is found, is there a statutory requirement that a deed be under seal. Such requirement is found in the definition of deed in the Statute of Conveyances in Chapter 1 of Title 55 of the Code of Virginia.

Despite the ruling that the lease was unenforceable and, as such, could not be enforced in an action for damages, the Court acknowledged that precedent in Virginia (Granva Corp. v. Heyder, 139 S.E.2d 77 (1964)) and in New York, required that once a tenant took possession of premises under a lease (even one that is unenforceable), a lessor-lessee relationship was created and the type of tenancy was dependent upon the manner in which the rent is paid. The Court held that in this case, rent was paid on a monthly basis and therefor the tenant occupied the premises on a month-to-month tenancy.

Looking Ahead

The Court ruling has created concerns amongst landlords leasing space in Virginia, and we expect a concerted effort by the real estate community to seek appropriate relief from the legislature.