Redated DD 2/3/06 Hardball Rule on Late Notice of Extension/Renewal

>Sorry for the repeat.  Dates are clearly my worst thing.  This one and Monday's were so far off that I thought I needed to correct things.

>
>Daily Development for Friday, February 3, 2006
>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


>LANDLORD/TENANT; EXTENSIONS AND RENEWALS; TIMELY EXERCISE OF OPTIONS: Tenant’s 27 day delay in providing required ninety day advance notice of lease renewal means that tenant loses the right to extend the lease. 

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>Chesapeake Bank of Maryland v. Monro Muffler/Brake, Inc., No. 2288 (1/31/06)
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>Landlord leased property to Kimmel for a twenty year term expiring 10/31/02.  There were three extension ptions of five years each.  The option language provided for a 90 day notce by Lessee to exercise the option:

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>“, , , If LESSEE shal elect to exercise one or more of such options it shall do so by giving LESSOR written notice at least ninety days prior to the expiration of the primary term or of the then current extension, and in which notice LESSEE shall state the date to which it elects to extend the term.”

>
>In March, 2002, Monro informed Landlord that it was in the process of acquiring all the shares of Kimmel, and send Landlord a “landlord’s estoppel certificate,” which correctly  stated the lease expiration date “unless renewed or extended” and confirmed the existence of the extension options.

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>In May, 2002, Monro wrote Landlord to tell it that it has finalized the purchase of Kimmel and that concluded: “We look forward to a long and prosperous relationship with you and we welcome any questions or comments you may have relative to this relationship.”  In August, 2002, Monro wrote Landlord  to verify Landlord’s contact information.  Landlord responded. 

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>On August 29, Monro provided written notice of lease extension for the first five year extension period.   A week later, Landlord replied that the final date for exercise of the “right to renew” was “on or about August 2,” and, since Monro had not timely filed notice, it would not honor the requested extension.  Apparently Monro was late because of an error by Monro’s Vice President/Real Estate, who had entered into the computer a 60 day option notice term, rather than 90 days.  (Monro had 615 lease locations to watch over.)

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>Tenant remained in possession without Landlord’s express permission following the end of the term and commenced an appraisal process so that it might exercise a purchase option also contained in the lease.  But Monro ultimately withdrew this offer because it would have been required to buy also adjacent property owned by Landlord in order to satisfy zoning requirements.

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>Thus, about a month after the end of the lease term, Landlord sought to evict Monro from the premises.  The trial court found for the tenant, and refused to evict Monro and found that the lease term had been validly extended. 

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>The trial court ruled that the prior contacts from Monro had, in effect, extended the lease and that, in any event, the untimely notice was effective to extend, based upon equitable principles.  Landlord appealed.

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>On appeal, Held: Reversed.  The appeals court opinion, written by a rarity - an experienced real estate lawyer sitting as an appellate court judge - found that Maryland does not recognize equitable excuses to untimely filing of notices of extension or renewal.  Regardless of whether the Landlord suffered injury from the late exercise, Monro had no right to extend, because it’s entire extension right was defined and limited by the clause in the lease, including the time deadlines.

>
>Citing Friedman on Leases (unfortunately to the old and outdated non-Randolph Edition), the court stated that a landlord need not renew a lease without an express covenant providing for renewal.  The timely notice was a condition precedent for the existence of the extension option provided here.  (The court uses the word “renewal” to describe the option to “extend.”  Many courts do not differentiate these concepts.  See DD for 1/30/04 for a discussion of this distinction and a Massachusetts case that relies upon it.)

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>Tenant first argued that its notice was timely because, under the language pertaining to the option to purchase, the lease was extended while the proposed option to purchase was being worked out.  Note that the lease language indicated that an option to extend had to be noticed 90 days prior to the end of the“primary term or the then current extension.”  As its possession had been extended while it sought to renew the lease, the landlord argued, the notice was more than 90 days prior to the end of that extension.  Obviously, a court inclined to favor tenant in this dispute might have leapt upon this technical distinction to protect the tenant’s interest.  But we had here a hardbitten veteran of the negotiation wars writing the majority opinion, and the opinion stated [correctly] that reading the purchase option extension as extending the time set for notice of renewal was inconsistent with the probable intention of the parties. 

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>Although the court admitted that the lease did not address the precise situation of tenant’s continued possession in connection with a purchase option, it concluded that the parties’ intention was clear that the original term and three five year extensions were the measuring period for the ninety day notice. 

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>The court then turned to the argument that prior communications from Monro had effectively exercised the option to extend.  It suggested that one approach to the problem was to reverse the situation and analyze whether the parties’ likely would agree that, had the landlord been the one attempting to enforce the “renewal” based upon the prior letters and contacts, whether tenant would have been bound.  The trial court had applied the test and concluded that the tenant would have been bound. 

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>The appeals court first indicated that it did not agree that the test applied when the lease set out unequivocally the method of exercise of the extension option.  Further, the appeals court noted, it disagreed as to whether the tenant would have bound to the extension under these facts. [The Editor, again, concurs on this latter point.]

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>Finally, the court turned to the tenant’s argument that general principles of equity dictated finding for tenant where, as here, the landlord suffered little detriment from the lateness of the notice and the tenant suffered the loss of a valuable right.  First, the court distinguished a prior case in which the question had not been exercise of the option itself, but rather the argument that the exercise did not timely include the tenant’s “net worth” analysis as the lease required.  The court found an equitable excuse for the late submission of the financial report.

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>The court, as noticed, distinguished the prior case because it did not deal with the technical requirements for exercise the option itself.  It concluded that the requirement of that case for a net worth statement was a “covenant rather than a condition.” 

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>On the general case of equities, the court first held that there was no inequity arisiing from the Bank’s failure to inform Monro, in connection with its August 8 response to request to provide  notice address, that the option had expired.  Since, at that point, the option in fact had expired, there was no inequity.  The tenant already had lost its rights.

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>As to whether Maryland courts should set aside the late renewal as an equitable relief from forfeiture, the court acknowledged that there was precedent in Maryland for setting aside a lease termination on equitable grounds, but concluded that this analysis was a far cry from the situation where a Tenant does not timely exercise an option to extend.  In the first case, the tenant has a right which it would lose inequitable.  In the second, the tenant in fact has no right unless it provides timely notice.

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>Again, the court cited Friedman for the principle that “a landlord’s lack of loss or harm by reason of the late notice is immaterial.” ) Further, it noted that a number of other states, (citing an ALR entrty) had also refused to let equitable principles support setting aside a lease option termination due to untimely notice.) 

>Comment 1: Although the court is indeed correct when it states that it joining other courts on this point, it should be noted, in fairness, that many courts will provide equitable relief in these cases.  The issue is discussed quite thoroughly in a 25 page entry in Friedman on Leases, Randolph Edition, beginning at page 14-43.   Some jurisdictions, like Maryland, recognize no equitable excuse for late filing of a notice to extend or renew.  Others will be more forgiving, either generally, or at least in the case in which the tenant, in reliance upon the apparent right to extend or renew, has extensively improved the property and would suffer an equitable detriment and the landlord an inequitable windfall if the lease were forfeited prematurely. 

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>Comment 2: The editor likes “hardball law” of course, and is philosophically inclined to side with the majority here. It should be noted that many jurisdictions will view the setting of a specific time deadline, such as 90 days before lease expiration, as, in effect, the statement that “time is of the essence.”  . 

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>It would be an interesting exercise to compare, within a single jurisdiction, the courts’  “time of essence” treatment of land contract closings and their view of lease option enforcement.  One hopes that they two areas would show parallel treatment.

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>Comment 3:   For a case arising in a state that does permit “equitable excuse” to an untimely lease renewal where tenant would forfeit valuable improvements, but denying such relief because the tenant, when it discovered it had failed to timely renew, attempted to forge such a renewal and thus had “unclean hands,” see JGT Corp. v. Andrews, 2000 WL 546347, No.199901395COAR3CV (Tenn. Ct. App., May 5, 2000) (Equitable doctrine of "unclean hands" may bar resort to otherwise available  equitable rights to invoke untimely exercise of renewal option). 

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