Daily Development for
Tuesday, September 23, 1997

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

LANDLORD/TENANT; RENEWAL; EXCERCISE OF OPTION: Hawaii court allows tenants to renew lease on basis of overall equities despite failure to exercise timely renewal option and despite minor breaches of lease.

Aickin v. Ocean View Inv. Co., Inc., 935 P.2d 992 (Haw. 1997).

Plaintiffs leased certain property from the defendant landlord and agreed to expend a minimum of $50,000 to construct a service station. The lease was originally for a ten-year term and included options for lessee to renew for successive five-year terms by so notifying lessor in writing prior to six months before expiration of the current term. Near the end of the initial lease term, but almost four months late, Plaintiff notified the defendant of its intent to renew the lease, but defendant rejected such renewal. Plaintiffs then brought suit, and the trial court denied plaintiff's motion for summary judgment and entered judgment for defendant following a bench trial.

The Hawaii Supreme Court reversed, holding that equity would not allow the landlord to bar the tenant from renewing based upon late renewal notice where the tenant's failure to provide timely notice was merely neglectful rather than "intentional, willful, or grossly negligent," (landlord stipulated as to the character of the tenant's error). The court buttressing this holding by stressing these special facts: the current term had not yet expired when plaintiff gave its notice; defendant had not relied to its detriment on plaintiff's failure timely to renew and would suffer relatively little harm from allowing plaintiff to renew; plaintiff would be significantly harmed by not allowing it to renew, given the substantial amount it had expended in constructing and operating the service station on the property; and the plaintiff's delay in giving its renewal notice was not unreasonably long in light of the initial term of the lease.

Finally, the court rejected the defendant's argument that plaintiff's breaches or defaults of various terms of the lease constituted "material default[s]" so as to precluded renewal. Plaintiffs had never been more than 18 days late in paying rent, while the contract defined "default" as being more than 30 days late; plaintiff's failure to seek written consent from the defendant for subleases of the property were not problematic because defendant knew of the subleases, never provided the 30-day notice of default required by the lease, and never objected until after the renewal notice date had passed; plaintiff's allowing certain state tax liens to attach to the property were cured by the time renewal notice was given by the plaintiff; and plaintiff's failure properly and timely to register the underground storage tanks it had installed did not go to the root or essence of the contract and had not prejudiced defendant.

Comment 1: This is a highly unusual case, and one that any tenant's lawyer will want to keep in the precedent file and wave vigorously when the issue arises for that lawyer's clients (which it most certainly will). Note that the failure to exercise the renewal option was not a minor error of a few days. Tenant was four months late - it gave notice of renewal only two months prior to the end of the term. There is a split in the jurisdictions over whether renewal options must be exercised in an *absolutely* timely manner. Some cases say yes, while others permit equitable circumstances to justify a late exercise. But an exercise this much later than the required time is quite unusual.

Comment 2: The whole purpose of setting exercise deadlines in leases is for the parties to establish by contract what constitutes commercial convenience and adequate time for planning for each party. In short, the parties determined by contract whether there was any detriment to the landlord by a notice to renew only two months prior to end of term. They stipulated that there was such detriment, as a matter of contract. Consequently, if the tenant failed to give the proper notice, the landlord should have been free to view the property as "on the market." The court here takes from the landlord the market value of the property by permitting an extension of a (presumably) below market lease by the tenant. This is in iteself a significant "detriment."

Even if the tenant is renewing at a market rate, the removal of other marketing options from the landlord is also a significant detriment. The landlord might desire to configure the space differently and market it in different ways. The landlord justifiably is entitled to believe that it had these options when the tenant failed to renew. A few days is one matter - but here the failure to exercise the option was significant, and the court should not have "bailed out" the tenant.

Comment 3: It is likely the court was more focussed on the fact that the tenant was "caught leaning" when it already developed the service station and now stood to lose its investment unless it could negotiate a new lease. But the court also should have taken into account that the tenant most likely was the one that chose to write the lease as a succession of renewable terms, rather than one long term.

Comment 4: It is interesting to compare this case to the recent California decision in Ridgely - the DD for 9/17 on prepayment penalties. There the mortgagee missed one month's payment, apparently with the prior knowledge of the bank and without its formal objection, just prior to closing on a resale of the property in which the bank was paid off. The bank was able to demand a prepayment fee of $114,000 because the ability to prepay without penalty was lost if the tenant had been late in a payment. This was a "strict" contract construction. As to the equities - the court said that the borrower was not entitled to believe the bank would not stand rigidly on its contract rights.

Would the court have wept for the landlord if the tenant had not exercised the option, sticking the landlord with a "one use" facility which the tenant, apparently, had concluded was a loser? The editor suspects the court would have said "landlord - you made the deal - now live with it."

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