Friday, June 6, 2008

Contracts as Good as Gold

That's a title of an op-ed in yesterday's WSJ.

Let me say from the outset that its author, Amity Shlaes, rocks. Her recent book, "The Forgotten Man: A New History of the Great Depression," was superb. She said what needed to be said: that FDR's policies prolonged the Great Depression.

One of the worst policies was created 75 years ago yesterday: the abolition of the "gold clause." This was an inflation-hedging clause in old, old leases that could force a tenant to pay in gold. The vestiges of the gold clause can be found today in leases that increase rent by the rise in the CPI. When people lost their inflation hedges thanks to a careless disregard for property rights, chaos ensued and interest rates predictably rose.

Some ancient long term ground leases may still have these clauses in them. Some years ago I encountered one, and argued that the gold clause (which has been reinstated for new obligations arising after 1977) had been reinstated by a 1988 lease amendment. The Illinois Court of Appeals, some years after I left the case, agreed. It is a reminder to (a) draft carefully, especially about the so-called routine boilerplate and (b) look hard at your lease documents; you never know where you might find money!

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