Is 'Stipulation of Settlement' Agreement Mutually Beneficial?

Q A tenant that rents space in one of my office buildings has been struggling. It didn't pay rent for several months. I sued the tenant for nonpayment of base rent and additional rent. We signed a “stipulation of settlement” in which it agreed that if it didn't pay its overdue rent in six installments, I could evict it. By that time, the situation had begun to affect my ability to pay the mortgage and other expenses for my property. Because of that, the stipulation specifically mentioned that “time was of the essence” as to the tenant's obligations under the stipulation agreement.

The tenant's business continued to suffer. It paid base rent for two consecutive months, but the payments didn't include additional rent. Since I now need to get a replacement tenant to cover my expenses, I'm suing to evict the tenant. In whose favor, the tenant's or mine, is a court likely to rule?

A Because of the purpose behind the stipulation of settlement agreement the tenant signed—to settle its dispute by having it determined through negotiation rather than by a court—a court could lean toward ruling in your favor. After all, the tenant agreed that it owes back rent to you, set up a payment plan of sorts, but then fell through on its promise to pay it.

This situation is similar to the dispute in an important case between a New York commercial real estate tenant and owner where both parties agreed to a stipulation of settlement so that the tenant could stay in its space and the owner could recoup late rent. But when the tenant in that case broke the agreement, a New York court refused to stop the eviction. That's because the court felt that stipulations of settlement should be strictly enforced because the parties are free to “chart their own litigation course.” In other words, when a tenant voluntarily chooses to handle an issue by making a promise in a formal document, the tenant shouldn't be able to later claim that it doesn't have to follow the agreement.

In this case, the tenant didn't dispute that the owner was entitled to both base rent and additional rent under the stipulation. And the tenant couldn't prove that it had paid the additional rent. Because the tenant had no excuse for not complying with the stipulation's “time is of the essence” payment provision, the tenant wasn't entitled to terminate the eviction, said the court [Madison/64th Properties, LLC v. SKV, Inc., March 2007].

Don't Just Delay the Inevitable

While a stipulation of settlement agreement may have been attractive to the tenant in this case because it gave the tenant a way to avoid eviction while setting up a payment plan for back rent, the tenant should've avoided this agreement—unless it knew that it would definitely be able to strictly comply with its terms. And you should've avoided the agreement if you suspected that the tenant's business wasn't recovering enough to pay you according to the deal.

While it would have been better for the tenant to try to work out some other agreement with you, rather than expect that it would be able to afford the payment terms in the stipulation of settlement, you should also have anticipated that without some indication that the tenant's financial situation was improving, it wouldn't be able to stick to its promise.

In the future, carefully consider whether a stipulation of settlement agreement will be beneficial for you and the tenant, or just create an added headache when the tenant doesn't comply with it.