Daily Development for Tuesday, February 17, 2004 by: Patrick A. Randolph, Jr. Elmer F. Pierson Professor of Law UMKC School of Law Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri dirt@umkc.edu OPTIONS; EXERCISE; LEASE OPTIONS: Where an option provides for a fixed price a ninety-nine year lease term, the option is exercised by tender of notice of exercise together with the required price, and a simple notice of exercise is a nullity, even where the optionor never indicates that it regards the exercise as unsatisfactory. Brunswick Hills Racquet Club., Inc. v. Route 18 Shopping Center Assoc., No. A-1648-02T3 (N.J. Sup. Ct. App. Div. 2/04/04) (unpublished opinion) This case provides a wonderful example of the need for care in the exercising of important option rights. Tenant operated an indoor tennis facility within the boundaries of a shopping center. It had leased the ground within the center and spent over $1 million in constructing its facility. The twenty five year lease contained an option to purchase the property for $150,000. But the parties were concerned that the local authorities would not permit the subdivision of a parcel within an existing shopping center, so they fashioned an alternative method of providing for the tenant's continuation on the property. The option gave a right "to purchase the Demised Premises or otherwise convert this Lease into a fully vested ninety-nine (99) year land lease. . . " In the event the parties used the long term land lease, the tenant had the right to purchase the fee at any time for a dollar. The option language went on to provide "that with respect to either a purchase or lease . . . Tenant shall pay to Landlord, upon exercise of its right hereunder, a purchase price or rental (fully paid in advance) of [$150,000.]" The lease provided that if the tenant should "fail to exercise the right herein granted at the time and in the manner herein provided, or should Tenant fail to comply with the conditions herein set forth, this [option provision] shall automatically become null and void . . . {180 days prior to expiration of the Lease.]" Tenant sent notice exercising the option for the 99 year lease, but did not enclose a check. Thereafter, according to the court, the parties "engaged in a desultory exchange of correspondence." The Landlord never confirmed that the option had been exercised. Later, after the date for exercise had passed, and one month prior to lease end, the Landlord informed the Tenant that it regarded the exercise as null and void because there was no accompanying check. The court agreed, and the appeals court affirmed. The court cited New Jersey authority to the effect that options must be strictly construed. "The optionor is bound while the optionee is free to accept or reject; thus, courts will not hold the optionor any longer than he has greed to be held." The court observed that there was no "duty of candor" issue here (although other New Jersey authority has recognized such a duty,) since the duty had been recognized only in connection with the disclosure of unknown facts, and not with legal positions. The court also concluded that there was no good faith and fair dealing issue here, since, as stated above, there was no duty to warn the tenant concerning the landlord's legal position. Comment 1: There is a split in the jurisdictions on the question of how serious a court will take the time requirements for exercising an option. Certainly many courts will not require punctilious exercise of the consequence will be a serious lost of investment as appears to be the case here. Others permit late exercise where there is to be a loss of investment and the optionor is not harmed. See, e.g. Pitkin Seafood v. Pitrock Realty Corp., 536 N.Y.S. 2d 527 (App. Div. 1989). Although here the exercise was substantially delayed, arguably there was no harm to the optionor by the delay, and the delay was due to tenant's ignorance of landlord's requirement. Friedman collects the cases at Section 15.5. Comment 2: Probably we'd have had a much closer case if the parties had agreed upon a straight purchase option. Normal practice when property is transferred in fee is to arrange for the deed and the consideration to cross together in an escrow or table closing. Here, because only a prepaid lease was intended, the case is closer. Still, there is no indication that the parties had agreed in advance to the form of the lease. One would suppose that the tenant, at least, anticipated that there would be a formal execution of a new lease document and that the money would be paid at that time. There is some argument that the decision ought to turn on the special language of the option, which did mention that the tenant would pay the price "upon exercise of the option." Were this a fee transfer, however, one might still conclude that there would have to be a closing before money changed hands. By extension, the same reasoning would apply here, as stated above. In sum, in the editor's view, this case comes out wrong. Comment 3: For an interesting good faith and fair dealing case, imposing such a duty on the tenant to warn the landlord of the legal consequences of its actions in an option context, see Market Street Assoc. v. Frey, 21 F.34d 782 (7th Cir. 1994) , where the tenant was held to have a duty to warn the landlord that if the landlord refused to finance the tenant's proposed improvement of the leased premises, the tenant would be able to buy the property at a "steal" price due to appreciation in values in the unexpectedly long time that had run before the tenant asked for the financing. This case was the DD for 4/20/95 - one of the first DD's run on DIRT. Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. The same is true of all commentary provided by contributors to the DIRT list. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA. 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