Isn’t It Simple To Send A Notice? Apparently Not

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In the six years of our Ruminating in this forum, we’ve written a lot about notices, renewal options, and waivers. We just came across an otherwise insignificant case (other than to the parties themselves) illustrating some of the points we’ve tried to make over the course of this blog’s life.

Our story involves an unremarkable retail lease and a single, also unremarkable, lease amendment extending the original lease term for 20 years and granting the tenant a 5- year extension option thereafter. To exercise the extension option, the tenant was required to give 180 days’ prior irrevocable, written notice. The lease amendment did not specify what the notice had to say and did not give any “rules” for how a written notice needed to be given. Beyond those two substantive items, the lease amendment said that all other terms and conditions of the lease remained as originally set forth in the lease.

Not long after the lease amendment was executed, the tenant sublet the leased space for 10 years followed by three 5- year extension periods. The third extension period reached beyond the 20- year lease term and kind of matched the 5- year extension option period in the amended, underlying lease. The tenant and its subtenant understood in order to make that third 5- year extension period work, the tenant would need to exercise its own lease extension right. So, as the underlying 20- year lease term was nearing its end (as was the second of the subtenant’s second 5- year extension term), the subtenant notified the tenant (its sublandlord) as follows. First, it exercised the last of the three 5- year extension terms and second, it asked the tenant to confirm that the tenant was going to or had exercised its own extension option.

Now, exercising an extension option seems like a pretty simple process. Here, the tenant didn’t have to “remember” to do so. The subtenant “reminded” the tenant that it was time to exercise the extension option. So far, so good.

With more than 180 days left in the lease time (meaning that the tenant was still “in time”), the tenant sent a notice to its landlord. The way it did so was by faxing its landlord a copy of the extension notice it got from the subtenant. That’s all it faxed.

As a follow-up, the tenant “verbally” confirmed that its landlord had received the faxed copy of the subtenant’s letter and, at the same time, verbally advised its landlord that it wanted to exercise its own 5- year extension option. “According to [the tenant], [its landlord] stated that would be ‘fine,’ whereupon [the tenant] asked whether notice by fax would be acceptable.” The landlord responded that a faxed notice would be acceptable.

Though we’ll touch on this in a little while, we all “know” that the lease called for notices to be mailed (and maybe more, but at least by mail). It doesn’t appear that a faxed notice was provided-for in the lease.

Readers, that was a red herring [originally thought to have been a kipper used to throw honds off “the scent.”] This isn’t about whether, under the circumstances, a faxed notice would qualify under the lease.

So, the tenant dutifully sent a faxed message. It was another copy of the letter from its own subtenant, not a statement of its own that it was exercising its own extension option. “Other than [the subtenant’s] correspondence, no other writing was sent, via facsimile, electronic, traditional, register, or certified mail, by [the tenant to its landlord] prior to” the end of 180 day prior notice period.

It wasn’t until about two weeks too late that the tenant first sent its landlord [by email and certified mail] stating its intent to extend the lease term. The landlord responded with: “Too late.” It then entered into a direct lease with the subtenant.

Disappointment might be a mild term to describe the tenant’s reaction. More concretely, it sued its landlord, requesting the court to rule that the extension was valid. The tenant celebrated the outcome. According to the trial court, the lease only called for “timely notice in some form which put [the landlord] on notice of [the tenant’s] intent to exercise [the] option.” It ruled that even a copy of the subtenant’s own extension notice was sufficient.

One hopes that the tenant didn’t buy too much Champagne because the appellate court turned out to be a party pooper.

The disagreement was solely about whether there ever was sufficient notice to extend the lease term. There was no issue as to whether the phone calls and fax messages happened within the proper time frame.

The law in the state where the property was located, like in most jurisdictions, is that a tenant “seeking to exercise an option to cancel or extend a commercial lease must strictly comply with the terms of that option.” Here are a couple of thing this particular appellate court had to say about that principle:

Even though strict compliance might lead to harsh results, it promotes commercial certainty.

Not only is the timeliness of notice to be strictly construed, but also the manner, the method and any other correlating conditions are to be strictly construed.

Yes, the landlord knew about the sublease and the “extra” 5- year extension option in the sublease. But, it wasn’t a party to that sublease. Yes, when it received a copy of the subtenant’s extension notice, it almost certainly knew that the tenant would want to, if not be required to, extend its own lease. And, yes, it seems that it heard its tenant’s oral request to exercise its own extension option. On that point, however, it told the court that when its tenant told it, on the phone, that it wanted to exercise the option, it responded that the tenant needed to do that in writing.

This might be a little anti-climactic: the appellate court ruled: “[u]nfortunately for [the tenant], actual, oral notice does not excuse the failure to strictly comply with the terms of the renewal option and notice provision in the contract. … Again, in a commercial setting, strict compliance, not substantial compliance, is required.”

The tenant flailed. It argued that the lease amendment contained everything that was required for it to exercise the extension option; essentially that it replaced the notice requirements in the underlying lease. Basically, it argued that there was “no language in the amendment as to how [the] option must be exercised.” In making that argument, the tenant ignored that the lease amendment also stated that the underlying lease remained as originally written “except as expressly modified herein.” The underlying lease called for irrevocable notice of the tenant’s exercise of the extension option and that notices be sent by prepaid, registered mail. [We feel compelled to remind everyone that registered mail is not certified mail, though we’ve yet seen a court opinion pointing that out or caring about any distinction.]

The tenant argued that a faxed notice was an acceptable alternative to one sent by mail based on the landlord telling it that it could fax one. That appears to be a decent argument on a number of equitable grounds, though the court did not address it. That’s because the real problem was that the tenant never gave “irrevocable” written notice of its exercise of the option. All it ever sent in writing was a copy of what it got from its own subtenant. It also seems that the parties agreed that the tenant’s notice needed to be in writing, even one sent by fax instead of by mail.

Oh yes, the tenant pleaded for an equitable result. It asserted that the landlord knew what was being requested and had orally “accepted” the extension “notice.” It argued it would be unfair to allow the landlord to lull it into believing that the lease term had been extended. And, it claimed hardship. The “spread” between what it would pay under the lease and what it would earn under the sublease over the extended term was about $100,000.

How did the appellate court respond? In its own words:

[The tenant] clearly has suffered lost profits from a good deal, but has shown no other hardship. While we may agree the result seems harsh under the circumstances, we cannot ignore that this is a commercial setting where strict compliance is required.

All of that having been said, Ruminations does not believe this outcome was inevitable. The tenant’s best arguments were equitable. It clearly failed to comply with the terms of its lease and the law is pretty uniform that contractual conditions are to be strictly construed. But, at the end of the day, the landlord knew what the tenant wanted and that the tenant, in a very clumsy way, was trying to exercise its extension option. A good question would be whether the landlord would have been successful had its tenant waited until just before the 5- year extension was to click in, and then told the landlord that it, the tenant, never really ever exercised the option. In our mind, that’s a critical concept and that’s why, under these facts, the tenant should have lost. Our main hesitation in expressing that view is that the tenant, belatedly, did send such a notice to its landlord. So, even if another court may have favored the tenant’s position, why did the outcome have to depend on what one court or another decided?

“We have woven a web, you and I, attached to this world but a separate world of our own invention.” [John Keats]. How much simpler this would all have been had this tenant just, plain, simply, sent a timely notice? That would have been our advice. But, then again, we would have had to have written about something else this week. So, “tenant,” thank you.

[For the very curious, you can read the court’s decision for yourself by clicking: HERE.]

 

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Comments

  1. Many, many more times that I can count in my 42 years negotiating commercial leases I have attempted to alert tenants that the notice requirements in leases are not casual suggestions, but rather contractual requirements, and if they care to preserve their rights, they must strictly follow the letter of the lease. Working daily with advanced degree educated professionals, I am astounded at how ignorant so many are of the importance of educating themselves about contracts into which they enter and the need to be fully aware of the rights and obligations attached thereto.

    Here’s a timely aside that has some timely pertinence: I’ve just been notified by a client in Houston that her dental practice was flooded out after hurricane Harvey (and, by the way, she had no insurance). I informed her that her first step was to immediately engage a real estate attorney (preferably one with the appropriate commercial lease skill set) to review her lease to determine exactly what her rights and obligations are. I also alerted her to a requirement in the Fire and Casualty section that she send written notice to the landlord of any casualty occurring on her premises. She said that she thought that there was no need to do that because the landlord had already called her on the phone, knowing of the casualty, and offering to abate her rent. I encouraged her to make a specific inquiry to her attorney as to whether or not she still needed to follow the letter of the lease and give the landlord written notice of the casualty in spite of his clear knowledge of the event. My instinct is to send the notice, just to make sure that she preserves all of her rights.

  2. It’s hard to believe that the court turned a deaf ear to arguments that (1) LL waived strict compliance when it told tenant no other notice was necessary, or (2) that LL’s statement in response to a direct question constituted a meeting of the minds and an amendment to the Lease, or (3) that LL committed fraud. I support strict compliance but here LL fraudulently induced its tenant to look no further, while LL laid in wait and then when it was too late went straight to the subtenant. So LL benefits by its own fraud. In my opinion, this is bad law, or at the very least unwise and unjust, on the circumstances as presented.

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