Daily Development for Wednesday, October 29, 2008
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri

LANDLORD/TENANT; TERMINATION OPTIONS; LATE NOTICE: Late notice of lease termination will not be excused because of sloppiness in providing notice to the property address. 
Genesco v. N. LaSalle Partners, 889 N.E. 2d 769 (Ill. App. 2008)

LaSalle was a subtenant under a three and a half year sublease with Credit Suisse of certain retail space.  At the time of entering into the sublease, LaSalle also entered into a six year lease (the “Future Lease”) with Associates, the prime landlord of the building, that commenced following the termination of the Credit Suisse sublease, on February 28, 2008.  Obviously, the lease term under the Future Lease  with Associates began substantially later than the time of execution of the lease.  LaSalle was apparently intending to “lock in” what it thought to be valuable space, and guessing that the rent would be at or below market when the lease took effect.

The Future Lease provided that LaSalle could terminate the lease before the term started by paying $30,000 termination fee and by giving written notice to “Landlord” on or prior to February 28, 2007.  The notice was to include a $7500 “first installment” of the termination fee.  Although the sublease defined Credit Suisse as “Landlord,” and identified Associates as “Overlandlord,” there was no such definition in the Future Lease (not surprising - since the only parties were Tenant LaSalle and Landlord Associates.)  (Genesco later took over Associates’ position here, but its presence is irrelevant to the analysis or outcome.)  Time was stated to be of the essence.

As February, 2007, drew near, LaSalle apparently realized that the base rent of the Future Lease would be over market, and attempted to renegotiate the base rent, telling Associate’s agent that if there could be no renegotiation, it would terminate.  The negotiations were unsuccessful, and LaSalle’s agent notified Associate’s agent by telephone that LaSalle would exercise its termination option. 

Here’s where things got messed up: The Future Lease had a specific and detailed notice provision, that stated that notices were to be address to Landlord at the specified address of its agent, and that notice would be deemed given, whether or not received, on the date delivered by an overnight courier service or two days following the date when deposited in the United States Mail . . . “*properly addressed.*”  (Oops).

On February 27, 2007,    apparently looking at the sublease, LaSalle’s agent sent mailed notice of termination, with the required check, to Credit Suisse, with copies of the notice to Associates.  Of course, sending notice to Credit Suisse, which was merely the sublandlord, did not satisfy the notice provision.   Further, the address it used for Associates was “suite 200,” instead of the correct “Suite 2000" as set forth in the notice provision in the Future Lease.   Associates’ agent didn’t get the copy of the notice.  Note that, in any event, the mailing was too late to meet the notice requirement, even if it had been sent to the correct party and properly addressed.

On March 7, LaSalle’s agent got the check back from Credit Suisse and attempted to set things right, but garbled things again and sent the check and notice to the wrong address, notwithstanding the fact that the notice address in the Future Lease hadn’t changed. Ultimately, Associates returned the check. 

There was no evidence that Landlord had changed its position in the few weeks it took to get the notice to the right party, and of course actual notice of intent to exercise the termination provision was provided prior to the expiration time by phone call.  Nevertheless, the trial court awarded summary judgment to Associates (now Genesco) disallowing the untimely termination.  The appeals court here affirmed.

The situation, as viewed by the court, is similar to that in the seminal 1900 case of Dikeman v. Sunday Creek Coal Co.”  That case admitted that there is a limited role for equity to set aside the result compelled by the legal analysis of the instruments - which result would be that tenant has no rights except through strict compliance with the lease.  But Dikeman limited the role of equity to circumstances in which there was a strong equitable excuse for non compliance: “[Tenant} lost its legal right by failing to comply with the condition precedent, and we do not see how equity can relieve against mere forgetfulness.”

A later case, Thomson Learning, Inc., set a test that focussed more on the degree of hardship resulting from the tenant’s loss if its expected right, rather than adequacy of the excuse:

“To be entitled to equitable relief, a lessee that fails to strictly comply with an option to cancel or extend a commercial lease must at a minimum establish: (1) the delay in strictly complying was slight; (2) the lessee would suffer undue hardship if strict compliance were not excused; and (3) the lessor would not suffer hardship if strict compliance were excused.”  (Citing Corbin)

Although the appeals court spent a great deal of space discussing whether the tenant’s error here was “justly excused,” and in fact argued  that the Thomson case was incorrect in embracing the Corbin test it did go on to consider the factors emphasized in Thomson - whether undue injury would result. 

Both the trial court and appeals court took into account the fact that the damages to LaSalle for being forced to carry out its six year lease were, in the view of the court, lower than the $1 million gross rents contended by LaSalle.  LaSalle could sublet or assign and mitigate its loss.  If LaSalle in fact did not pay the rent, it noted, the landlord certainly would mitigate its damages. The rest of the opinion more or less assumes that the injury to the tenant is irrelevant if the tenant misses the notice requirement, so it should be noted that the court did address this consideration even while denying the relevance of it.  It concluded that the damages tenant would suffer would be no more than “ordinary business losses” from making a bad business decision.

A concurring opinion by Judge Theiss notes that the majority opinion is a bit schizophrenic in failing to choose between the focus on the degree of excuse and the hardship of the result as the primary consideration here.  The concurrence notes that Williston on Contracts suggests a test that takes both the adequacy of the excuse and the degree of forfeiture into account.  “Late exercise of an option may be excused where: (1) the failure is caused by inadvertance or oversight; (2) the other party has not substantially changed position in reliance on the failure; (3) the application of the general rule that time is of the esse3nce would work an unconscionable result or a forfeiture.”

The concurrence characterized Dikeman as holding that only fraud, accident or non negligent mistake would justify setting aside the consequences of an untimely exercise of an option.  It maintained that, in essence, this element of Dikeman has been overruled by subsequent cases granting relief in cases that fall short of that level of excuse.  It maintains that appellate courts in Illinois have applied the Williston three part test set forth above. 

The court further maintains that where the failure to exercise timely has resulted from factors completely outside the control of the exercising party, hardship need not be shown.  Remember, this is the concurrence.

Comment 1: So we are left with a somewhat muddled analysis, but one that seems to conclude that both the degree of excuse and the degree of hardship will be relevant in Illinois, but that the “fair excuse” test will be somewhat strictly maintained, at least where extraordinary losses cannot be shown to result. 

Comment 2: There are other jurisdictions that are more strict on option exercise, viewing it as a condition for a right, and concluding that there is no “good faith and fair dealing” requirement where the right simply was not brought into being by satisfaction of the conditions in the contract.  But we have cases finding otherwise.  Perhaps the most colorful was Brunswick Hills Racquet Club, Inc. v. Route 18 Shopping Center Assoc., 2005 N.J. Lexis 7 (1/ 25/05) (the DIRT DD for 2/4/05), where the Supreme Court of New Jersey discussed good faith and fair dealing principles in finding that tenant's failure to provide a proper formal exercise of an option to purchase was excused  where landlord stalled and mislead tenant until after option deadline had passed without telling tenant that it expected a lump sum price for lease renewal simultaneous with notice of exercise of tenant's option.  Tenant had provided the necessary notice, but had anticipated paying the option price at a later
 closing. [Note that the potential forfeiture in Brunswick  was much greater than in the instant case.]

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