After a lease expires, but a tenant holds over, what terms and conditions of the lease are still enforceable? The North Carolina Court of Appeals issued an opinion on May 7, 2019 partially answering this question by ruling where the parties to a written lease containing a right of first refusal to purchase the leased property failed to extend the lease, the right of first refusal did not survive the lease’s expiration and did not continue into the holdover tenancy.

On May 19, 1999, Crystal Cogdill, the tenant, entered into a written lease with Sylva Supply Company, the landlord. The term of the lease was for seven years, with an option to extend the lease for a second seven-year period. The lease also granted Cogdill a right of first refusal to purchase the property, should Sylva wish to sell.

Following the expiration of the initial lease term, and without any extension, Sylva sold the property to a third party, without first offering the property to Cogdill. The purchaser initiated a summary ejectment action against Cogdill. That proceeding initially reached the Court of Appeals, which ruled in Ball v. Cogdill in December of 2017 that the lease became a year-to-year tenancy following the expiration of the parties original lease, and that proper notice to terminate that tenancy was not provided to Cogdill.

Following the Court’s 2017 opinion, the parties then argued whether the right of first refusal continued into the year-to-year tenancy.  On that point, the Court of Appeals concluded that it did not, as a matter of law, continue following the expiration of the original lease.  First, the Court explained that the year-to-year tenancy creates a new tenancy relationship between the parties.

Second, the Court explained the key question is whether this term—the right of first refusal— “is a term ‘applicable’ to a year-to-year tenancy created by operation of law after the expiration of a written lease.” The Court of Appeals relied on two prior Court decisions to conclude that options to purchase property in connection with a lease could not be construed as “applicable” to a subsequent year-to-year tenancy created when a tenant remains in possession at the lease’s expiration. The Court reviewed the leases at issue in those cases, and concluded there was nothing on their face to suggest an intent to allow either an obligation or opportunity to purchase the property to continue after the leases’ expiration.

Likewise, the Court, when reviewing the original lease between Cogdill and Sylva, noted the lease expired by its express terms on May 31, 2006, and Cogdill never exercised her right to either renew the lease or purchase the property from Sylva. To allow Cogdill to enforce the right of first refusal, would “come outside the extended term of the lease,” and would allow Cogdill an opportunity to enforce this right nearly nine years after the lease expired. This, the Court explained, would contradict not only North Carolina law, but also the majority rule among other states. As a result, the Court concluded Cogdill was not entitled to be given the right of first refusal prior to the sale of the property, as that term expired with the parties’ original lease.

In a dissenting opinion, Judge Tyson concluded the parties’ recorded memorandum of their original lease was, at best, ambiguous as to whether the parties’ intended the right of first refusal to continue beyond the term of the lease, and one additional seven-year extension. As evidence of this ambiguity, Judge Tyson pointed to the fact Sylva Supply Company had, as was shown in the prior Court of Appeals’ proceeding, provided Ms. Cogdill with an opportunity to purchase the property during the holdover tenancy, but that transaction never closed. Given the parties’ subsequent conduct, and the ambiguity contained in the lease and Memorandum, Judge Tyson concluded that this dispute could not, as the majority opinion concludes, be resolved as a matter of law.

Ultimately, as is clear from Cogdill, a tenant—or landlord­—approaching the end of a lease term should fully evaluate the consequences of allowing that term to expire and the potential loss of key provisions in the lease if no formal extension of the lease is set out in writing. Given the Court’s consideration of this issue as a matter of law, it is important for any tenant or landlord to proactively address these concerns prior to the expiration of the lease term.

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