What’s In A Name When It Comes To Sending An Extension Notice?

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We just looked at a court decision about a lease renewal notice and can’t make up our mind what we think about the result or about the wisdom of the issue having been litigated in the first place. We’ll begin with the story and conclude with the “wisdom” part.

A national retail chain store had an important lease in a big city. The initial lease term was ending, but there was a 5- year extension term available upon the tenant’s sending of proper notice. It seems that the agreed-upon extension term rent was, in the aggregate, $3 million below what the then-market rent would have been. To most of us, that’s “big bucks.” In hindsight, a savvy landlord would regret making such a deal. Some might even be willing to spend some money to thwart or, let’s say, resist, a tenant’s efforts to exercise such an extension option. If, perhaps, there was only an 8-1/3% chance of doing so, would one spend $250,000? That’s 8-1/3% of $3 million. In the Appellate Court of Illinois decision (of August 26, 2019) we just read that is what happened. The landlord spent $125,000 (or so) to cover its successful tenant’s legal fees, and (presumably) a similar amount for its own fees (or, possibly less – we don’t really know). It lost.

As was once very common, and as is now still pretty common, the tenant was one of many tenant-entities owned by (under the umbrella) a national retailer. It may have been a special purpose, single location entity. We don’t know, but that’s not important. It had a top-level parent company and appeared to be under the wing of one of that company’s subsidiaries. The nesting of entities is what created the story behind today’s blog posting. Had the signature block included the actual name of the tenant as it appeared in the lease, there would be a different blog posting today.

A timely lease extension notice was properly sent to and received by, the landlord. There was one wrinkle, and that was the way the notice was signed. It was on the letterhead of the top-level company. It accurately referenced the actual lease. It specifically said that the tenant under the properly-identified lease was exercising the referenced option. It was signed by a person authorized to exercise the option on behalf of the tenant. But, the letter’s signature block named what appears to be the tenant’s direct parent company, not the tenant itself.

It appears that, without any untoward delay, the landlord, by letter to its tenant, rejected the notice as not having been properly given. It pointed out that the notice seemingly had not come from the tenant, but had come from a stranger to the lease. The extension notice must have been sent pretty close to the deadline for sending because such a notice because, when the landlord’s rejection was received, the deadline had already passed.

What’s the framework within which a court works when asked to decide if a tenant has properly and effectively exercised a lease extension option? There isn’t a lot of disagreement across the country and tenants should assume that what the Illinois court wrote in this case describes the “rules.” Here are its words:

A lessee that is seeking to exercise an option to cancel or extend a commercial lease must strictly comply with the terms of that option.

Although strict compliance might seem a harsh rule in some cases, the requirement has great value in promoting security in commercial transactions.

The lessor is entitled to legal certainty regarding the lessee’s intent as the lessor is foregoing other opportunities to lease the space.

A standard of strict compliance is also supported by the fact that the parties to commercial leases are usually sophisticated.

Options to cancel or extend commercial leases are invaluable to a lessee, and a lessor generally does not receive separate consideration for its agreement to be bound by the exercise of the option.

Thus, under the strict compliance standard applicable to leasing options, failure to timely exercise the option is fatal.

In addition, a lessor may insist that the exercise of an option be done in writing.

Where a lease agreement requires written notice for the exercise of a renewal option, neither oral notice nor the lessor’s actual knowledge of the lessee’s intent is sufficient.

This retailer’s lease provided that the “‘Tenant’ could renew the lease by ‘notifying Landlord, in writing, of its election to renew’ within 120 days before the initial lease term expired.” Other than the way such this particular notice was signed, i.e., “who” it came from, the notice complied with all of the notice requirements. It was received in time and the landlord knew which lease and which tenant was intended. It may not have known whether the person signing the notice could have signed (had the authority to sign) for the named tenant, but it found out later that he did have such authority.

So, did the notice comply “with the lease’s requirement that the Tenant notify the landlord of its election to exercise the option.” The landlord called this a “pivotal” requirement.

Here’s something Ruminations didn’t see coming. The court decided that there was no requirement that the notice be signed, only that it be in writing. The lease had other provisions calling for signatures, such as for amendments, but the lease extension option provision said nothing about a “signed” notice. Presumably, the lease’s general provision about notices also lacked such a provision. So, if it could be established that an unsigned option exercise notice came from the tenant, it would have satisfied the lease’s requirements. Thus, why would it matter that the signature block was for the tenant’s parent company? The notice clearly indicated that the “Tenant” was exercising its option and the letter itself was crystal clear about the lease, the name of the tenant, and the exercise.

[By way of digression, regular readers will notice that this case provides additional evidence that if one sprinkles certain words or concepts throughout an agreement, such as a lease, placing words like “reasonable” in some places and not others, a court is free to assume that doing so has real meaning. If a modifying or qualifying word or set of words is added for “emphasis” in one provision, then a court might rule that it was intentionally not applicable elsewhere. A good example is where the phrase “will not be unreasonably denied, delayed or conditioned” is added in some places where a party’s consent is called for, but not in others. The implication can be that where these added words do not appear, the party whose consent is needed may be unreasonable, may delay such consent, and may place conditions on its consent even if the “general” law would dictate otherwise. We’ve written at greater length about this. One such example can be seen by clicking: HERE.]

At the outset of today’s blog posting, Ruminations pondered whether it made economic sense for this landlord to resist the tenant’s attempt to extend the lease’s term when it knew that is exactly what the notice said. Was it “wise” to take the risk of paying double attorney’s fees? It knew that the entity’s name in the signature block was a mistake. It recognized that the notice was signed by someone with whom it had previously corresponded. Was it, therefore, a wise risk? Was it “fair play?” We’ll leave it for each reader to decide for herself or himself. To aid readers in forming their own opinion, we offer an earlier blog posting that can be read by clicking HERE.

Ruminations “thinks” the court got it right. Our “gut” feeling corresponds with the following from the court’s decision:

While it is true that a technicality can sometimes result in a forfeiture as a result of the strict compliance standard applied to options in commercial leases, the technicality here is not material to the terms required by the lease for effectively exercising the option. Not only was the misstatement referencing [the parent company] immaterial to the terms of the lease renewal provision, it was immaterial [the landlord. The landlord’s representative] was asked at his deposition whether, when he received the letter, he “understood that [the actual tenant] was attempting to exercise the option, not [its parent company].” [He] responded “correct.” The questioning continued, “But you thought that in doing so, [the actual tenant] had screwed up and so, based on that, you could claim their attempt was invalid?” “Correct,” [he] answered. Even at the oral argument in this court, [the landlord] admitted that it was “trying to take advantage of a mistake.” Although [the landlord] has built a reasonable legal position on what amounts to “gotcha,” its position is untenable when it comes to settling the parties’ legal rights.

As we read this court’s decision, we wondered what the court would have decided had the situation had been “flipped,” i.e., had the tenant been denying the exercise’s validity. And, guess what, the court addressed this close to the end of its analysis. It asked itself, “Would we hold [the tenant] to the renewed lease term?” Its answer was, “Yes.” We only wish it had explained its reasoning. Instead, it merely wrote that looking at this situation from that angle was “[h]elpful to our resolution.”

Even though the landlord came up with the “short straw” in this case, the tenant’s failure to use its own name in the signature block exposed it to the risk of losing a $3 million “bargain.” So, there’s a lesson for everyone here. “For want of a shoe, the horse was lost. … For want of a battle, the kingdom was lost. And all for the want of a horseshoe nail.” –Benjamin Franklin.

[For those who want to read the court’s decision for themselves, that can be done by clicking: HERE.]

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Comments

  1. This story just reinforces that the devil is always in the details and, when ignored, they imperil the ignorant. Legal technicalities represent a dual-edged sword, at any given time, conferring an asset upon one while burdening the other with a liability. Where you stand depends on where you sit.

    I’m sure that regular readers of Ruminations have seen or heard every iteration of reasoning for denying the legitimacy of a renewal notice presumably served exactly in the manner prescribed in the lease. That the court deemed an actual signature unnecessary is somewhat of a surprise to me, given the attention commonly paid by both sides to whether or not signatories to a lease contract have legal execution authority. In this case, it’s clear that the waters are not because, while the letterhead signature block did not name the actual tenant, the individual who signed the notice was legally authorized to do so. Given the information about this case provided by Ruminations today, if one is asked to opine about whether or not the landlord made a wise investment in its attempt to delegitimize the renewal notice, the answer is very simple. We don’t have enough information in order to render a worthy opinion.

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