Better Late Than Never, But Maybe Still Not Good Enough: Late Option Exercise Notices

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Despite rumor and gossip to the contrary, most late notices to elect one right or another will not be honored by the courts. To put this another way, notices such as those to extend a lease’s term will most often be subject to the “time being of the essence” rule, even if those words don’t appear in the document. Yes, there are cases to the contrary. Yes, some jurisdictions are more forgiving than others, but don’t count on it.

A lot of us think that courts will give life to late notices under the “so what’s the big deal, the recipient (usually a landlord) wasn’t prejudiced” rule. We don’t know how to say this more clearly, “don’t count on it.” If you send an unequivocal election notice, within the agreed-upon time limits, to the right places, by the agreed-upon method, you don’t “even have to get into it.” Why lose sleep at night?

Why “hope” that the recipient will honor a deficient notice? Why “pray” that a court will bail you out if all else fails? Abide by the advice given in the somewhat racy first single by The S.O.S. Band, “Take Your Time (Do It Right).” Drawing from the cinematic arts for inspiration, Mookie may or may not have done the right thing (and that debate continues), but you certainly can. [Though today’s posting focuses on late notices because that’s the most common “defect” seen by the courts, its musings and lessons easily can be adapted to other notice defects as well.]

We’re not going to outline the arguments that might “save” a late notice because to do so would be incompatible with a prime goal of Ruminations, i.e., to starve our litigator cousins. We do that by tossing ideas into the marketplace that help deals get done, not get broken. Nonetheless, we feel an obligation to explain why “equity,” whatever its broad reach, doesn’t often come to the rescue.

When courts do feel merciful, they almost always take one of two approaches. They find that the notice provisions were ambiguous and that’s why the notice, seemingly defective, was not. Or, they apply some version of the maxim: “equity abhors a forfeiture.” The first explanation suggests that we shouldn’t be writing ambiguous contract provisions unless we like uncertainty. The second needs a little more explanation.

In general, you can only forfeit a vested interest (in this case, one in real property) or possibly a vested (think: bought and paid for) right. Basically, an option is not a vested interest in property. If “lost,” what you “lose” is an opportunity, not something you can (sort of) touch and feel. [Ruminations is trying to make this explanation easy; so, law professors and wanabee (that’s not a Spice Girls reference) law professors, back off. We know this wouldn’t be a passing exam answer.] A few have successfully argued that the agreed-upon rent inherently includes a premium that pays for the “option,” making it a vested right. “Few” means not very many. Perhaps, and here’s a pointer, a lease or other agreement ought to state separate consideration for a lease extension renewal. We have never seen that, but it’s a thought. [OK, here’s a good place for a law professor or two to chime in.]

There is a more logical (and common sense) reason why late option exercise notices fare so poorly. It is that the problem isn’t bilateral. We’ll illustrate that thought with the following scenario. A tenant hasn’t exercised its lease extension option, but its landlord “knew” the tenant was going to renew. Among other things, the tenant was making some improvements that were consistent with staying on. But, when the tenant gave a late notice, the landlord said: “too late, gone, go home, get out of here” or the functional equivalent thereof. Off to court they go. The court says, “Landlord, you knew the tenant was staying. Functionally, that’s the same as your having received the notice pursuant to the lease. Say hello to your tenant; it will be with you for five more years.” That might seem like the right result, BUT what if the tenant didn’t stay? What if it packed up and left at the end of the lease term? Who thinks the landlord could successfully sue for damages on account of a breach of the lease with five years to go? Those who do, make your point of view known by stacking up on the period that ends this sentence.

What are we saying? Yes, courts will sometimes rescue a party who sends a defective election notice. That, however, is a small “sometimes.” Why find out if you’ve won the lottery? Abide by the contract’s (e.g., lease’s) rules.

When it comes to following those rules, there are really two challenges. The easy one is reading the document and finding the rules. Within that challenges is figuring out what do when you know the rules are impossible to follow (e.g., “notices are to be sent by Pony Express) or you know they won’t work any more (e.g., the notice provision is for the original landlord, Attila the Hun). In those cases, you do the best you can to achieve the same purpose. For example, in addition to sending notice to Attila the Hun at his “old” address, you send notices to the current landlord at every address you’ve ever seen on the landlord’s bills or in correspondence between the two of you. Can’t find Pony Express, rent your own pony and deliver it that way.

The second challenge is a little trickier because if you don’t overcome it, you won’t get to overcome the first challenge. It is also the dominant source of the most common failure – remembering that the notice is due. Don’t feel badly, even the biggest and most organized companies screw up, expensive programs and systems notwithstanding. So, what’s the answer here? Ruminations thinks “reminder” provisions are appropriate. We’ll explain what that is in a hundred words or so, but for those who don’t need that explanation, we’ll try to rebut the typical objection to such provisions – “it’s not my job to keep track of your rights.” To do so, we’ll use a lease extension (renewal) example.

Basically, if neither the landlord nor its tenant remember that an extension option notice was due by [pick the date], what’s the big deal? The landlord isn’t any worse off just because the tenant has missed the date. It didn’t even know the lease was about to end. What was the landlord doing anyway? Like its tenant, it thought the lease had a lot of life yet. Basically, if the landlord is aware of the date and the tenant isn’t, what’s the big deal asking the tenant if it is going to send a notice by that date? Now, if the landlord knows of the upcoming date and deliberately “hides in the bushes,” we understand its motivation, but we don’t think that’s the way business should be done. When someone falls, even an enemy, you pick them up.

If a lease were to have a “reminder” provision for an extension option, here are two examples of what it might say. They would have to be adapted to match the rest of the lease. If used for other than a lease extension option, more radical surgery would be needed. Also, since few, if any, landlord-form leases “offer” such a provision, it is necessary to “craft” a reminder provision to fit with form’s lease extension language. That often makes these provisions awkward to read.

Tenant is granted the option to extend the term of this Lease for two (2) additional, successive terms of five (5) years each (each, a “Renewal Period”), provided that Tenant gives written notice to Landlord of its exercise of each such option right for each corresponding Renewal Period at least one hundred eighty (180) days before the expiration of the then current Term. Such Renewal Period will be upon the same terms and conditions of this Lease except that the Base Rent for the Leased Premises will be as set forth on the Rent Rider attached Exhibit B. Tenant has no right to extend or renew the Term beyond those two (2) five- (5)- year Renewal Periods. If Tenant does not timely exercise either of its options with regard to the corresponding Renewal Period, then Tenant’s right to extend the Term will immediately and irrevocably terminate. Notwithstanding the foregoing, if Tenant does not notify Landlord of its intention to exercise its option right by the one hundred eightieth (180th) day before the expiration of the then current Term, Landlord must notify Tenant in writing (“Reminder Notice”) that Tenant’s right to exercise such option will be forfeited unless Tenant notifies Landlord in writing within ten (10) business days after Tenant’s receipt of the Reminder Notice that Tenant intends to exercise such option.

– or, more elaborately –

Tenant is granted four (4) successive options to extend the Lease Term for four (4) separate renewal periods of five (5) Lease Years each (each a “Renewal Term” and collectively, the “Renewal Terms”). Each Renewal Term would begin at the expiration of the then current Lease Term. If Tenant desires to exercise one or more of these options, Tenant must give Landlord notice thereof no later than one (1) year before the expiration of the then current Lease Term, TIME BEING OF THE ESSENCE. If Tenant exercises any one or more of these options, the Lease Term will be automatically extended for the corresponding Renewal Term upon the same terms and conditions as were in effect immediately before the beginning of the applicable Renewal Term, except that: (a) Tenant will not have any further options to extend the Lease Term beyond the expiration of the fourth (4th) Renewal Term; and (b) Rent will be that in Section  There is no need to execute any extension or renewal lease. In order to prevent Tenant’s inadvertent failure to exercise any of the extension options within the time specified above, the Lease Term will not expire unless and until Tenant fails to exercise an extension option by the later of: (x) the date that is one (1) year before the date that would otherwise be the expiration of the Lease Term; or (y) fifteen (15) days after receiving a notice from Landlord (“Reminder Notice”) that the extension option in question has not been exercised, TIME FOR SUCH NOTICE BEING OF THE ESSENCE [but the Reminder Notice will be a nullity if it is given prior more than four hundred twenty-five (425) days before the day that would otherwise be the expiration of the Lease Term], or unless and until Tenant gives notice to Landlord that Tenant will not be exercising any remaining extension options, which notice will be irrevocable. If Tenant has not given notice to Landlord that it will not be exercising any remaining extension options, and Landlord fails to give Tenant a Reminder Notice before the sixtieth (60th) day before the day that would otherwise have been the expiration of the Lease Term, the Lease Term will be extended through the sixtieth (60th) day after the date Landlord sends the Reminder Notice to Tenant unless, within fifteen (15) days after Landlord sends such Reminder Notice, Tenant exercises its extension option. If Tenant so exercises its extension option, the effective date of that exercise will be retroactive to what would have been the expiration date of the Lease Term had it not been extended by the sixty (60) day period.

Neither is a work of art, but how much did you pay for them?

A number of loyal readers have asked, by email, by telephone, and in person, “How do you keep coming up with topics?” Today, we’ll only give away one secret. As lengthy as this posting has turned out to be, we’ve knowingly left a lot on the table. That grist and much of what we’ve left on the table in the past will sustain us for quite a while. So, expect that in a future posting, possibly two weeks hence, you’ll read about how a notice exercising an option, such as renewal right, ought to be unambiguous and unconditional. You might read about the difference between a lease extension and a lease renewal. You’ll also read about how one party, such a landlord, can waive its right to receive a timely notice or how an option can become effectively exercised through acts or acquiescence even if the granting agreement says that the exercise absolutely, no if, ands or buts, must be in a writing endorsed with the seal of the House of Windsor on a Hock Tuesday. And, maybe more.

Of course, if you have a topic over which you’d like to see some ruminating, pop it into a comment using the feature just below.

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Comments

  1. Matt Hobbs says:

    From the landlord’s position, I strongly dislike reminder notice provisions. Renewal options are one-way. If they expire, everyone is in the same negotiation position to reach a market rate deal. I don’t understand the expectation that it should be the landlord’s obligation to manage the tenant’s one-way benefit.

    • Bob Shansky says:

      For the reason Matt points out it may be difficult to get a renewal option and my own success in obtaining a reminder notice has been directly related to the size and importance of the lease to the landlord. One way I try to make it easier to avoid the late notice issue is not to accept an option that have to be exercised in a window, say a thirty day period. The option should have an exercise date no later than a date. Much more manageable from the tenant’s perspective and usually landlord is flexible on this point assuming they having agreed to give a renewal option at all.

  2. Paul Buono says:

    You mentioned that there are “cases to the contrary.” Any you can specifically point out or cite that I could read for comparison? I’m getting into a situation just like this so your article couldn’t have come at a better time. in my situation (where I represent the tenant) the Landlord is potentially using a late notice to his favor because he wants to run the tenants business for his own purposes. The landlord and his attorney have played ball for the past couple months entertaining some options (such as a license agreement rather than a lease) but we believe they are simply acting in bad faith by requesting almost double the existing rent to purposely remove the existing tenant to be able to grab their own business out from under them.

    • Kevin Connolly says:

      My favorite case for granting the tenant a second bite of the apple is JNA Realrty v Cross-Bay Chelsea, which directs trial courts to weigh the gravity of the forfeiture against the gravity of the omission. JNA Realty was decided at a time when Graf v Hope Building Corp (your mortgage is late, I take the house, nyaa nyaa nyaa) was still good law. It was not until the mid-1980’s that any court took note of the anomaly and prospectively overruled Graf, which has still not been overturned by the Court of Appeals.

      • Kevin Connolly says:

        Oh, and on the topic of landlords who go to great lengths to drive the tenant out and take his business, I use Tai On Luck Realty v Cirota, the 70 Bayard Street Pharmacy Case, in which the Appellate Division (the court of last resort in landlord-tenant cases) came down hard in favor of protecting the vestiges of Little Italy against the juggernaut known as Chinatown. Of course it did not last long and 70 Bayard Street has for some time been a Happy Lucky place of joyous business. But Cirota did hang on for ten years after the case.

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