Exercising An Option – Can You Change Your Mind?

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We agree with most judicial decisions, though there are a very few we think are misguided (read that as “wrong”). But, it isn’t very often at all when we’re not sure what we think. Today, we’ll present one of those, a “slip opinion” about whether a landlord could “withdraw” a notice when the lease didn’t say so – either way.

The lease included a reasonably comprehensive set of provisions designed to allow a landlord to redevelop a multi-tenanted building, one with high-end retailers (and possibly others). The redevelopment, if implemented, would take up to three years before the building could be re-tenanted. The building had to be empty during the redevelopment.

Basically, the lease gave the landlord the right to “suspend” it for up to three years. During the “suspension,” it would be as if there was no lease. When the redevelopment was completed, the lease would spring back into effect, essentially as if time had stopped while the redevelopment was taking place.

The tenant negotiated for certain protections against the “pretextual” suspension of its lease. Here is an edited version of the clause describing how the suspension process could be initiated:

For the purpose of commencing the Development, Owner shall have the option (the “Suspension Option”), from time to time, subject to the terms herein, to suspend the possession of Tenant with respect to all of the Demised Premises (and Tenant’s right to possession thereof) pursuant to the Lease … with such option exercisable by written notice (the “Suspension Notice”) given by Owner to Tenant as hereinafter provided. The Suspension Notice shall (i) identify the effective date of suspension (the “Suspension Date”), which Suspension Date shall not be sooner than three hundred sixty-five (365) days after the giving of the Suspension Notice, (ii) be accompanied by a certification of Owner that Owner (or any predecessor of Owner) has entered into a written lease or other agreement with every other tenant and/or occupant of the Building providing for a termination of such tenant’s or occupant’s occupancy of the Building on or prior to the Suspension Date or has a final non-appealable court order to such effect, and (iii) specify the date (the “Anticipated Reinstatement Date”) …

Before the Suspension Date and before the tenant would actually be required to vacate its space, the landlord was required to post a substantial letter of credit to back up its obligations. It also was required to pay the tenant an amount based on how long the lease was suspended, and deposit the maximum payable into an escrow account at a title insurance company. The tenant did not have to vacate its space until the escrow was funded and all other tenants and occupants of the building had vacated. Essentially, this tenant could be the last to leave.

Five years after these provisions were added to the lease, the landlord sent a proper Suspension Notice. All requirements in the text cited above had been met. Then about 10 months later, the tenant received a “Purported Withdrawal Notice.” It responded by sending a “Rejection Letter,” essentially asserting that, once sent, the Suspension Notice could not be withdrawn. The landlord’s attorneys replied with a letter saying, “Yes it can be withdrawn.” This sent the tenant to court seeking a ruling that the Suspension Notice was irrevocable. Here is how the court summarized the landlord’s position:

[The tenant was wrong because] (i) there is no language in the Lease prohibiting withdrawal of its Suspension Notice, (ii) the Lease contemplates withdrawal of a Suspension Notice because the Lease provides that Owner has the option “from time to time” to suspend [the tenant’s] possession of the demised premises and that language would be meaningless if Owner only had a single irrevocable Suspension Notice, and (iii) Owner can withdraw a termination notice citing [case law rejected by the court as inapplicable].

Before we get to the court’s conclusion, the one we just aren’t sure about, we quote (with delight) some things the court wrote along the way:

[The lease] provides the Owner with the right “from time to time” to issue a Suspension Notice. These words mean exactly what they say and do not mean what they do not say — i.e., “from time to time” necessarily means more than once. They simply cannot be interpreted to confer a single one time only option. [The tenant] urges the court to interpret the words “from time to time” to be synonymous with “at any time” and to read a limitation in the Lease which simply is not expressed. For completeness, [the tenant] also argues that elsewhere the Lease uses, inter alia, the words “the” and “its” as it relates to the Suspension Option, but again, the Lease does not provide any words of limitation limiting the Owner to a single option which is customary and necessary to include in these agreements when such limitation is intended. And, “from time to time,” can only mean more than one time. Put another way, and at the risk of redundancy, the Lease simply does not say that the Owner has a single one time option to suspend [the tenant’s] tenancy and there are no other words of limitation used in the Lease as it relates to the Owner’s Suspension Option or to issue a Suspension Notice. To accept [the tenant’s] interpretation would effectively amount to rewriting Paragraph 4(a) to make a new contract for the parties under the guise of interpreting the writing which the court may not do.

How much clearer it would have been for the tenant to have negotiated for a “one-time” limitation?

The court continued:

In addition, and putting aside that “from time to time” are words of art, and although not argued in the papers, to the extent [the tenant’s] counsel suggested at oral argument … that the Lease may be ambiguous and that the court should look at the extrinsic evidence of [it’s client’s] affidavit … in interpreting Paragraph 4(a) of the Fourth Amendment, the argument is unavailing. The court notes that the Fourth Amendment is not ambiguous as to whether the Owner was limited to one single Suspension Option and therefore the affidavit should not be considered in interpreting this provision. … But even if the affidavit were considered, [the affiant] simply does not refer to even a single conversation or communication or other interaction with the Owner where it was ever discussed that the Owner agreed to a limitation as to its rights to exercise the Suspension Option, and again, no such limitation appears in the executed Fourth Amendment. Indeed, [the affiant] merely acknowledges that the language is “from time to time” — i.e., as opposed to “at any time” — and suggests that the court should interpret it as imposing a limitation to one single Suspension Option without any limiting language set forth in the Lease to that effect because he does “not believe that Owner would have been interested in making more than one [lease suspension] payment [to the tenant] and post more than one [very large] million letter of credit as required as part of Owner’s exercise of the Suspension Option.”

How much clearer it would have been for the tenant to have negotiated for a “one-time” limitation?

Now, as to the revocability of the Suspension Notice, here’s what happened. The court began its analysis and ruling with the following, cryptic words: “The Fourth Amendment by its express terms does not provide for revocation of the Suspension Notice by the Owner. This is also not without meaning.” [The italics are ours.]

In the court’s view, there was no applicable law that would resolve the question as to whether the Suspension Notice could be withdrawn. The landlord had offered two cases as support for that proposition, but the court rightly rejected those cases as precedent. So, it looked at a substantive argument landlord was making based on language in the lease. The landlord focused on the provision governing when the tenant would have to vacate its space. It argued that exercise of the Suspension Notice required that:

(1) [A] notice is provided to [the tenant] at least 365 days prior to the Suspension Date, containing certain specified details;

(2) On the Suspension Date, the other tenants or occupants have vacated the Building;

(3) At least 20 days prior the Suspension Date, Owner deposits into Escrow the Suspension Payment and [the] Letter of Credit; and

(4) On the Suspension Date, the Escrow Agent pays [the tenant] the Suspension Payment and deliver[s] the Letter of Credit.

It asserted that because items (2), (3), and (4) had not taken place, the preconditions to the exercise of the Suspension Option had not taken place and therefore the Suspension Notice could be withdrawn. The court (rightfully in our mind) rejected this landlord-argument, writing: “Put another way, it is not that the Suspension Option has not been exercised but rather [the tenant] need not vacate because the Suspension Date has not been deemed to have occurred.”

The landlord also argued that “because the Owner has the right to issue a subsequent Suspension Notice, it necessarily follows that the Owner must be permitted to revoke its Suspension Notice.” Here, the court parroted the tenant’s position:

If Owner had sought a withdrawal right, [the tenant] would have either refused or required significant additional provisions regarding such revocation right. Those additional provisions would likely have included terms regarding when the revocation could occur (that is, how far in advance of the proposed Suspension Period), and whether a fee or expense reimbursed would be required.

Now, all of that “analysis” by the court really danced around the core question of whether the Suspension Notice could be withdrawn. The best we can see, here is the court’s entire analysis:

Having failed to negotiate such a reservation of rights, the court declines to impose one in favor of the Owner.

So, Ruminations asks: How much clearer it would have been for the lease to have covered this possibility? These were sophisticated parties. They negotiated precise language. Here is an example. The lease said: “Owner shall pay, or shall cause the Escrow Agent to pay, to Tenant, by unendorsed bank check payable to the direct order of Tenant or by wire transfer of funds to an account designated in writing by Tenant ….” Take note that it couldn’t be an endorsed bank check. It had to be one where the bank was directly obligated to the tenant.] So, why didn’t the lease address the issue? Was it only so that Ruminations could post its mantra: “Say what you mean, and mean what you say”? We don’t think the court even knows we exist. So, that can’t be the reason.

Now, we challenge readers to review the court’s decision for themselves and search for the court’s reasoning as to why the absence of language dealing with revocability meant that the notice was irrevocable. It might be the right result. We’re not sure. It might be fair, but that’s not the standard courts are supposed to use. Certainly, it simplifies the situation for the tenant, though not for the landlord. Don’t think the landlord got what it wanted anyway. The tenant could have waived the preconditions to it actually vacating the space. A more detailed analysis would be needed to figure out the consequences of such a move. So, for those who are curious, click HERE to read the decision. [Keep in mind. This might not be the last court to rule on the issue.] In the meantime, we remain unsure about how we feel about the outcome. We are puzzled why the lease didn’t address the question upfront. Are you?

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Comments

  1. “from time to time” is far different than “one time”. If the intention of the parties was that the landlord would only have a “one-time” right at “any time” to exercise the Suspension Option, it should have so stated. That it did not suggests the following possibilities, among others.

    1. The landlord knowingly chose the “from time to time” phraseology, anticipating that it might want to retain flexibility to change course after having served the Suspension Option notice; or,
    2. The landlord’s drafting was sloppy, unintentionally opening the door for disagreement while, at the same time, the tenant was sloppy in accepting the “from time to time” phraseology, not recognizing that it might be hit in the face by the door that was left open by that ambiguity.

    So, why didn’t the lease address the revocation question up front? I think both parties were sloppy.

    The landlord asserted that “because items (2), (3), and (4) had not taken place, the preconditions to the exercise of the Suspension Option had not taken place and therefore the Suspension Notice could be withdrawn.” That seems to be a reach to a bridge too far in its attempt to revoke the Suspension Notice. One the one hand, (1), (2), (3) and (4) were ALL preconditions to the anticipated suspension. Were it the landlord’s intentions from day one to carve out an “escape” to set the stage for a revocation of the Suspension Option, this (might) be it. By establishing items (1), (2), (3) and (4) as preconditions to the suspension, it seems that the landlord can rightfully claim that, since all of the conditions had not been met, the “suspension” would not take place and it would have the right to revoke. What the landlord seemingly did not anticipate (again, sloppy) was that the Tenant might (and did) use the same unmet conditions to support it’s claim.

    As for “If Owner had sought a withdrawal right, [the tenant] would have either refused or required significant additional provisions regarding such revocation right.”, presupposes that the Tenant was adept enough at negotiating a sophisticated provision like that without leaving a large pothole in the road (as it did leave). Unfortunately. however, because it naively accepted the “from time to time” phraseology, clearly the Tenant was not so adept. It seems to me that the Tenant’s position is that it wants to have its cake and eat it too by claiming at once that (i) it understood “from time to time” to mean “one time”, but that (ii) it didn’t understand that the Landlord might have an opening for revocation simply by (the Landlord) not assuring that (2), (3) and (4) never came to pass.

    Sloppy. Sloppy. Sloppy.

    I’m not an attorney and there certainly are legal concepts about which I am not knowledgeable. But, in the absence of such additional knowledge, I conclude that the Owner should have been declared the winner and granted the right to revoke.

  2. One could read “from time to time” to mean that Landlord had the right to periodically suspend the Lease for redevelopment. For example, Landlord could suspend in 2008, and again in 2015, and again in 2022, enabling Landlord to redevelop 3 times over the course of the Lease term (which let’s assume extended that long). That’s weird, of course, but that’s how I would interpret “from time to time.” I don’t think the words “from time to time” give Landlord much of a hook on which to hang a right to revoke. They can better be interpreted to allow multiple suspensions over the term of the Lease. They might also be interpreted as lawyerly surplusage in an effort to sound important.

    Given that the parties apparently didn’t think about revocation one way or another, one might ask what “industry standards” would expect about the issue. That’s hard to gauge because the landlord’s suspension right is so odd and unusual in this case. It’s not like there are standard terms and expectations for landlord’s rights to suspend a lease.

    Another way to look at it: If landlord had specifically asked in lease negotiations for a revocation right, how would that negotiation “probably” have turned out? Most likely, Tenant would have rolled its eyes and said: “If you are going to put me to all this trouble, you had better follow through and not revoke.” Or maybe the parties would have negotiated a bit and agreed that Landlord could revoke but would have to compensate Tenant for its trouble and reimburse, e.g., Tenant’s out of pocket costs to try to find an interim location for Tenant’s business. Maybe the court should have tried to figure out how “reasonable” Landlords and Tenants would deal with the revocation issue (if it had been raised), assuming each had ordinary motivations and would agree to whatever an ordinary and typical similar party would agree to in a similar situation. It’s a little like the “reasonable person” test or “fair market value.” In that case, rough justice might say let’s allow Landlord to revoke, but in a way that makes Tenant entirely whole.

    All the above is very interesting, I’m sure, but if I had to decide the case, I would have ruled the same way as the court did. I would have gotten there by saying revocation is a pretty big deal and dramatic; it’s inconsistent with the notion of lease suspension, which is also a pretty big deal and dramatic; and if Landlord wanted to provide for revocation (a process very inconsistent with the suspension process that seemed to be so important to Landlord), Landlord should have said so.

  3. From another legal system perspective, Suspension Notice is like any other expression of intent, and this cannot be withdrawn. It can be withdrawn only on very limited circumstances: the withdrawal reaches the recipient at the time or before the original expression of intent or upon approval of the recipient. It should be very clear (in theory) that Suspension Notice cannot be withdrawn. The court seems correct.

  4. I like Joshua’s interpretation that the landlord’s right to suspend “from time to time” means “periodically suspend” – meaning more than just one time.

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