More On The Exercising an Option While In Default Debate – Supplementary Thoughts

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The August 25 Ruminations posting about the right of a tenant to exercise renewal rights or non-disturbance rights even when it is in default engendered a lot of comment, both in on this Rumination site and in a number of Linked-In Group discussions. So, in a departure from past practice, I offer this “supplementary” posting with a generic form of compromise to “Get The Deal Done.” I’m not advocating one position or another with respect to any negotiation. In my role as an attorney, I represent clients, not myself. Attorneys advocate for their client’s desired outcomes. Attorneys are “who their clients are” when engaged as attorneys, though not in their public or private roles.

Ruminate over this:

If, on the day Tenant sends its Renewal Notice to Landlord, Tenant has not paid all Base Rent and Additional Rent that was then due and payable, Landlord shall have the right to negate the Tenant’s election to extend the then Lease Term by sending Tenant the following notice (“Option Negation Notice”): “On the day you sent your Renewal Notice you were delinquent in the payment of Base Rent or Additional Rent, specifically as listed on the attached schedule. If we do not receive your delinquent payment(s), subject to collection, within ten (10) days after you receive or refuse delivery of this notice, TIME BEING OF THE ESSENCE, your election to extend the then Lease Term shall be negated and shall have no force or effect and the Lease Term shall end as if you had not exercised that option to extend it.” If Tenant was, in fact, delinquent in the payment of any item of Base Rent or Additional Rent listed on the schedule, and Landlord does not receive that or those delinquent payments, in collectable funds, within ten (10) days after the earlier of when Tenant received or refused delivery of the Option Negation Notice, TIME BEING OF THE ESSENCE, Tenant’s election to extend the then Lease Term shall be negated and shall have no force or effect and the Lease Term shall end as if Tenant had not exercised its Leased Term extension option. If Landlord does not send an Option Negation Notice within ten (10) days after the earlier of when it receives or refuses delivery of Tenant’s Renewal Notice, TIME BEING OF THE ESSENCE, Landlord irrevocably waives its right to negate Tenant’s election to extend the Lease Term based on Tenant’s failure, as of the date Tenant sent its Renewal Notice, to have paid all Base Rent and Additional Rent payable through that date.

The sample is wordy, but mostly because it uses generic language in place of what would be defined terms in the renewal provision itself. The concepts in it can be extended to non-monetary defaults and to SNDAs.

Thoughts?

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Comments

  1. Many attorneys are not aware of the legal distinction between the term “renewal” & “extension”
    Do NOT use the term “renewal”.
    Why not/
    Because there is a moment in time when the original term ends & the renewal begins.
    In that moment, all the personal covenants of both the Landlord & the Tenant fall away.
    For example, the Tenant”s right to purchase the Shopping Centre, or relocate, or the Landlord’s radius clause – are “personal” & do not follow the renewal, BUT in an “extension”, everything flows into the extension term.
    Look up the case law & you will find cases that distinguish the two terms.
    Harvey M. Haber, Q.C., J.D.

    • Here is a well earned HUZZAH. You are 120% correct. While it is fine to use “renewal” in the vernacular, leases should speak of extending the Lease Term. Case law in the subordinate nation beneath your home country has also taught this lesson over and over.

  2. This should work, but one suggestion: Instead of giving tenant 10 days to bring account current, consider instead cross-referencing the lease provision that gives tenant a certain # of days to cure past-due rent before a LL can declare a lease default. For example, “If we do not receive your delinquent payment(s), subject to collection, within the time period listed Section ## of this Lease ….”

    I bring this up only because tenant may be on Day 5, 6, 7, etc on the notice-and-cure period for rent default. Sending them an Option Negation Notice with a set 10-day period to pay and retain the option right could imply to tenant that the notice-and-cure clock has restarted. It’s a stretch, but not an unreasonable one.

  3. Elliot Warm says:

    Consistent with what I commented earlier, I think that this is a fair clause for all concerned; the landlord gets its opportunity to have the rent brought current.

    Another way of doing this, more favorable to a landlord (who may forget to send the notice required by the above clause), is to place the onus on the tenant to establish the procedure. That is, if the tenant wants to have protection against the possibility of its option being negated due to a rental deficiency or other default, it can be given the right to include in its renewal notice a requirement that the landlord respond within a defined period as to any asserted default, with the further right of the tenant to cure the default within an additional defined time period. If the tenant is careless, it can suffer the consequences; if not, there is appropriate protection.

  4. Ira, one recurrent problem I see with this drafting is that the triggering of the running of “time clocks“ alternates between when a notice it “sent” vs. when it is received (or delivery refused) by the other party, creating confusion. If on the day Tenant drops its exercise notice into the mailbox, it hadn’t paid rent, how can the Landlord possibly know at that moment that an exercise is coming in the mail? Not until he actually receives (or refuses to receive) it. So to what point in time does the oft-mentioned phrase “TIME BEING OF THE ESSENCE” apply? This disconnect reappears throughout the clause. Very ambiguous. But I think everyone knows that the intent here – although one has to dig at it – is that triggering date is when a notice from one to the other (or a payment by Tenant, subject to the next sentence) is received (or delivery was refused) and I suspect a court might read it that way to make that part work.. However I see another problem – if Tenant’s payment must be received within 10 days “subject to collection” with TIME BEING OF THE ESSENCE, then when does the ‘essential” clock really stop since Tenant’s check may not clear for a few or indeterminate number of days, especially if the Landlord delays in depositing the check? If payment is perfected when the check clears, that would validate the receipt by the 10th day but “essence” still seems to be a moving target. Very sloppy. Anyone else see something that I may have missed? Ira, where do you find these gems?

  5. I think that the proposed language has merit, although I do agree that it can be tightened up a bit. As someone that spent many years as an institutional landlord attorney, the challenge I see is that a lot of landlords don’t want to chase tenants several times a year (or even several times during the lease term) for rent. What this clause does is to allow a potentially long term extension (usually five years) to occur when the tenant catches up in rent as of a particular date. That tenant may be significantly late on a regular basis (which happens more frequently these days), and the landlord may even have had to file suit to get payment one or more times in the past. The tenant may beg, borrow or steal just to come current on that date this one time and exercise their extension option. Many landlords can’t wait until the day that a problem tenant’s lease is over, and they won’t accept this clause because it can lengthen the painful experience that they have had with the tenant for some time. Now that I am primarily a tenant rep, I find myself dealing with a lot of push-back on these clauses. Landlords often want to consider it a default that cannot be remedied if a tenant is late more than three times during the lease term. The outcome often hinges on how badly the landlord needs cashflow in the property and how willing the tenant is to stand their ground and say no to that type of clause.

  6. Nice one, Harvey (and Ira)!

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