We’ve never seen it said this way, but it can’t be an original thought. [After all, there really are very, very few of them.] When it comes to an enforceable agreement (a “contract”), you can’t have it both ways. If you aren’t bound, they aren’t bound. It isn’t an enforceable contract. When it comes to “election” notices, the principle is the same. You can’t have it both ways.
Why did that thought come to us this week? Answer: because two weeks ago we promised to talk about equivocal notices. That led us to ambiguities. To refresh reader’s memories, here’s what we learned constitutes an ambiguity: “Open to more than one interpretation.” That’s not the same as vagueness: “Not clearly or explicitly stated or expressed.” To say this in a different way, when words are vague, they are unclear; when they are ambiguous, each of the two or more meanings will be clear, but it won’t be clear which one was intended.
Is there a practical difference? In the purest sense, yes. When the chosen words are vague, information extrinsic to those “vague” words can help one figure out what was meant. That gives a court and the “warring” parties some latitude. But, when words are ambiguous, you have at least two perfectly acceptable meanings. In such a case, a court will look at extrinsic material to make its choice. If there is no way to figure out what both parties meant to say (as limited by the choices presented), the court quits looking. Then, it tells the parties: “we have no provision to enforce; go enjoy yourselves.”
How do we tie all of these thoughts together and get back on track, i.e., return to the issue of notices? That’s easy. If you send a notice that can be interpreted as wanting to exercise a particular right, while at the same time reserving your “right” to weasel out, your notice will be in grave risk of having no effect at all. If it doesn’t clearly say you are exercising your right, you could be out of luck. What follows is an example as reported in a 2008 unreported New Jersey Appellate Division opinion. [The opinion is HERE.]
A tenant entered into a seven year lease. It gave the tenant an option to extend its term, and the right of first opportunity to purchase the property. One year before the lease’s expiration, the tenant wrote to its landlord expressing its interest in either purchasing the property for a set price, or renewing its lease for another ten years. Ten months later, the landlord responded by sending a proposed contract with a price that differed from the tenant’s offer. The tenant then signed and returned the contract. Two months later, the landlord responded that it did not want to sell the property to the tenant. The tenant sued for specific performance of the contract and for damages. It lost.
The court applied the statute of frauds to the situation, relieving the landlord of an obligation to sell the property because it never signed the contract. Then, it rejected the tenant’s alternate argument that its original letter also said that it would renew the lease (presumably if the landlord wouldn’t sell it the property). That takes us to the point of today’s posting. According to the court, and it is hard to disagree, the tenant’s letter merely expressed a willingness to renew the lease and did not clearly state that it was exercising the extension option.
How does that illustrate the “you can’t have it both ways” rule? Just suppose the landlord wrote to its tenant “two months later” saying, “Thank you for your lease renewal,” and the tenant responded, “What lease renewal, we were only expressing our interest and, in fact, only wanted to explore your willingness to either sell to us or allow us to extend our lease term.” Once someone reserves the option to decide later if it wants to be bound, it can’t expect the other party to be bound.
In 2004, another New Jersey court looked at a right of first refusal notice. [E-mail us at email@example.com for a copy of the opinion.] What happened was that a buyer bought fifteen acres of undeveloped land out of a 23.6 acre parcel. The seller gave it a right of first refusal to purchase the remaining 8.6 acres. The right provided that upon receipt of an offer for the 8.6 acre parcel, the seller would give the buyer thirty days to match it. The buyer’s failure to give an acceptance notice within the thirty days would constitute a refusal to meet the offer.
Eight years later, the 15 acre parcel owner was notified of a $6.5 million offer. The contract between the seller and the new buyer gave the seller the discretionary right to enter into an ancillary joint development venture with the new buyer. If that right was exercised, the seller was to deed the 8.6 acre parcel to a newly formed company jointly owned by both the seller and that potential buyer, with the seller owning 95 percent of the company. The seller’s contribution of the parcel was to be considered as a $6.5 million capital contribution to the company. While the new buyer developed the property, the seller was to receive monthly payments until this capital contribution was repaid.
The 15 acre parcel buyer notified the seller that it was exercising its right of first refusal on the same terms and conditions as the new buyer had offered, BUT reserved the right to seek a judicial order to reform the original 1984 contract under which the 15 acre parcel buyer held its right of first refusal. The seller asserted that this was not an effective exercise of the right or refusal, and the 15 acre buyer sued. It lost.
The court figured out that the 15 acre buyer was objecting to the offer’s provision giving the seller the right to convert the “deal” into a joint venture. It then pointed out that the right of first refusal required the 15 acre parcel owner to meet and match the terms of the offer. When the 15 acre parcel owner said: “we will match the offer, BUT only if the right of first refusal is judicially reformed to allow us to restructure the offer so as to be the fee simple owner of the 8.6 acre parcel for $6.5 million,” that was not an unequivocal agreement to accept the terms of the new buyer’s offer.
We’ve seen this same: “We’d like to exercise something that is pretty close to our option right. Let’s just change it a little” kind of notice. The classic form is a lease extension notice that says: “It is our intention to exercise our renewal option, but we would like to discuss lowering the renewal rent.” If there are no discussions or if the discussions go nowhere, the sending tenant might assert that it has actually exercised its option or, if it finds a better rent, might assert that its renewal was “conditioned” on getting a lower rent. Essentially, it wants to “see what happens” before it has to decide. Plain and simple, if the landlord doesn’t want the tenant to continue, the tenant can’t stay. Getting to the bottom line, the notice will be no different than a letter or phone call from the tenant saying that it isn’t exercising its option, but will stay if the rent can be favorably negotiated.
Anytime an election notice is “conditioned” on something extrinsic to the option right, the notice will be ineffective as a matter of law. The parties may “work it out anyway,” but that’s not “giving effect” to the notice.
There is another kind of equivocal notice – the one that doesn’t completely fit within the four corners of the agreed-upon notice.
Consider this case where a large supermarket lost a pretty good location by not sending what its lease required as part of a lease extension notice. [By the way, the replacement (next) supermarket operator was quite an upgrade!] [Again, if you want a copy, e-mail us at firstname.lastname@example.org.]
The supermarket’s lease contained a renewal option contingent upon the tenant furnishing a balance sheet and a written opinion from its independent accountant that the consolidated balance sheet at the time of renewal was not less favorable than the tenant’s consolidated balance sheet at the time of the original lease. The supermarket did not submit the balance sheet or the opinion and the landlord responded by telling the tenant that it could not exercise the option to renew the lease without them. The supermarket offered to provide a letter of credit in lieu of financial statements, but the landlord insisted on strict compliance with the contract’s terms. The supermarket then sought a court ruling that its renewal option should be enforced, because to do otherwise would be a breach of the landlord’s covenant of good faith and fair dealing and a forfeiture of the supermarket’s interest in the lease. The court ruled against the supermarket because, in its view, the agreement expressly made the supermarket’s right to exercise its option conditional on the submission of the required items.
Now, Ruminations wasn’t born yesterday. We know that the supermarket wouldn’t have met the financial strength requirement and had no choice but to try “Plan B,” but the court’s opinion doesn’t even evaluate whether a letter of credit would have been an alternate way to “protect” the landlord. Plain and simple, the notice had to be accompanied with the financial statements and accountant’s opinion, but it didn’t. Suppose the landlord had remained silent when it received the notice. Would the supermarket have been able to “blow off” the extension term by arguing that its notice did not meet the lease’s requirements? If you want it both ways, you may wind up with neither.
Is there a more common example of a notice that doesn’t “enclose” something that the contract required? We think there is, and we think it is where the option holder was required to enclose a check with its notice, but doesn’t do so. We’re not talking about the situation where the option holder doesn’t have the money and couldn’t even find the money. We’re talking about where the option holder wants to hold on to its money “just a little longer” or doesn’t trust the option “giver” with the money. If you are required to send the money, and don’t – you lose. It doesn’t matter if you have the money; it doesn’t matter that you deposited the money with your attorney in what you call “escrow.” In those situations, you lose (unless the option giver doesn’t care, and in such a case it isn’t the option being exercised – it is just a different, but very similar, deal being made).
So, what should an election notice look like? Try something like this: “This letter constitutes our notice, pursuant to Section X of the [Date] Lease between us (as amended on, A, B, and C) for premises at 123 Main Street, Anywhere USA, wherein we are exercising our option to extend the term of that lease by another five years. Enclosed are item M, N, O, and P as required by Section Y of that Lease.” And, send it exactly as the lease or other agreement calls for – to the addresses listed and by the prescribed methods.
Observant readers might note that the core of today’s posting isn’t very different from that posted two weeks ago. Most courts strictly construe option election notices. So, why set yourself up for litigation to “save” your option right when you can carefully negotiate that right, including its notice requirements, and then follow the notice requirement to the letter. Let’s put the litigators out of business. [Litigators, have no fear. It ain’t going to happen.]
Here’s postscript: Thanks for all of the thoughtful comments to last week’s posting. And, thanks for your continuing support.