Daily Development for Thursday, September 21, 2000

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

LANDLORD/TENANT; RENEWAL; LATE EXERCISE OF OPTION: Michigan court recognizes equitable concept that harmless delay in renewal of extension option will not result in loss of option.

Market Development Corp. v. Village Green, LC No. B070552 CK (Mich App. 9/12/2000) (unpublished opinion)

Tenant relocated from to a property under lease from another tenant, and took over the existing lease with substantial modifications. Under the terms of the modified lease, the Tenant took over the existing term of the old tenant, which ended in about a year, but had eight extension options of five years each. One of the amendments added by the parties was a "time is of the essence clause."

The lease provided that tenant had to provide notice of option to renew for the first renewal term on January 31 (less than seven months after the lease amendments were executed) . Apparently through its own negligence, tenant did not file notice to renew. On February 4, the landlord sent the tenant notice that the lease would end at the end of the then current term, May 31 of the same year. Tenant received the notice of termination on February 6, and immediately contacted landlord by phone and sent the notice to renew by certified mail, as required in the lease. The formal notice arrived on February 6.

Based upon the authorities discussed by the Michigan case, this case appears to be one of first impression in Michigan. The court does note Michigan authority stating that the terms of an option are to be strictly enforced. It distinguishes these cases because, it claims, equitable intervention was not sought or was not appropriate. In any event, all the prior option cases involved options to purchase, not to renew a lease.

The court then quotes from Benjamin Cardozo, a great champion of equity, in a passage that the court states is "read and accepted today as righteous gospel in most off the courts and law schools of our land."

     "Equity follows the law, but not slavishly nor always. If it did,   there could never be occasion for the enforcement of equitable   doctrine. . .

     True, indeed, it is that accident and mistake will often be   inadequate supply a basis for the granting or withholding of   equitable remedies where the consequences to be corrected might   have been avoided if the victim of the misfortune had ordered his   affairs with reasonable diligence. The restriction, however, is not   obdurate, for always the gravity of the fault must be compared   with the gravity of the hardship. Let the hardship be strong   enough and equity will find a way, though many a formula of   inaction may seem to bar the path." (This was a dissenting   opinion, note, in the famous Graf v. Hope Building Corp., 254   N.E. 884 (N.Y. 1934) where the majority concluded that equity   did not bar the path where a borrower, through negligence, did   not make a mortgage payment on time and the lender   accelerated.)

The court, relying upon an Annotation at 27 ALR4th 266, concludes that it is the majority rule that a late exercise of a renewal option will be excused in equity "under special circumstances."

The court accepts authority indicating that, although "special circumstances" is often stated to be the test, the real test is the balancing of the equities. An often important factor is the fact that the failure to grant relief will result in an unconscionable hardship to the tenant. But the court also appears to stress that there must be some pardonable negligence or other explanation for the delay, and the delay must be slight and without prejudice to the landlord.

In this case, the landlord offered alternative sites to the tenant and contribution toward the moving expenses, but the court still concluded that the tenant would suffer a hardship by moving. It does not matter, said the court, that the injury to the tenant might fall short of an "unconscionable harm," because the court must look at all the factors, and many others in this case weighed in favor of the tenant. The delay was short (but only because the landlord did the tenant the favor of calling attention to the delay), and the landlord suffered no injury from the renewal, as it clearly had not time to reorder its affairs for some different use of the property.

The court also rejects the notion that there must be "excusable mistake or inadvertance" in the failure to file a timely mistake. The failure may be simple negligence, as apparently was the case here, if the other equitable factors predominate in favor of the tenant. Here, the court says that the tenant's failure to file for renewal was "an honest mistake and not mere neglect," whatever that means. It is true that the had a system in place to track its lease renewals, and that it failed to maintain the tracking properly because one of the employees who was involved was on an extended disability leave. But the employee went on leave since August and was terminated in October. The problems here occurred at the end of the next following January.

The landlord also raised several "unclean hands" defenses, one of them involving the alleged wrongful termination of the employee described above. The court found that termination was proper, and in any event unrelated to the issues at hand.

Comment: Not all jurisdictions are this generous, but the rule cited here does seem to be the prevailing one. Did the landlord miss it's chance by "blowing the whistle" too soon here? Probably not. So long as there was no equitable injury to the tenant, an even later renewal probably would have been upheld. It appears that in Michigan, as in many states, the landlord can only be confident that the option has been lost if it actually notifies the tenant of pending loss of the renewal and gives the tenant a reasonable time to exercise.

 Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

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