Does 'Equitable Relief' Excuse Lateness of Tenants' Option to Renew?
Q My lease with a tenant in my shopping center gives it an option to renew for an additional 10-year term. Under the lease, the tenant must exercise its option by sending a letter by certified mail to me by a certain date. When I hadn't heard from the tenant by that date, I assumed that it wanted to move out of the space at the end of the lease term, and I made efforts to find a replacement tenant.
But a month after the tenant's renewal option had expired, it sent a letter to me attempting to exercise the option. I informed the tenant that the option was no longer valid and I'd be replacing it with a new tenant at the end of its current lease term. The tenant, a national chain, is threatening to holdover the space at the end of its term and is now suing me. I can't afford to go through costly litigation that will interfere with my being able to get a viable tenant into the space. There's clear evidence that the tenant didn't properly exercise its option, so I'm planning to ask a trial court for a judgment in my favor without a trial. Am I likely to prevail, given that the tenant is clearly wrong?
A Not necessarily. Even though the tenant objectively missed its chance to renew the lease, the trial court might not rule in your favor without a trial, and you may have to go through litigation to settle the issue. Courts generally expect tenants to comply with the precise language of a lease. But in some cases, they are forgiving of tenants that don't comply with lease terms if they determine that the tenants are entitled to “equitable relief.”
As a rule, when a contract requires written notice to be given within a specified time, the notice is ineffective unless it's received within that time. But courts in a few past cases have applied an exception to the rule “on equitable grounds” where a forfeiture would result from the tenant's “neglect or inadvertence.” For a tenant to be equitably relieved from its failure to exercise an option in its lease to renew or purchase its space, the tenant must meet three requirements: (1) the tenant in good faith made substantial improvements to the premises and would otherwise suffer a forfeiture; (2) the tenant's delay was the result of an excusable default; and (3) the owner wasn't prejudiced by the delay.
Case in Point
The facts of a recent, widely-publicized New York City lawsuit are similar to your situation. In that case, the trial court's ruling excused the lateness of a retail tenant's notice to the owner of its intent to renew a lease. After a series of appeals, a New York appellate court upheld the decision in favor of the tenant.
The main issue in the case was whether excusing the tenant's lateness was proper given that, after arguing that it should be allowed to stay in the space because it had made substantial improvements in anticipation of continuing to operate there, the tenant couldn't show any evidence that it had made the supposed improvements.
The tenant, a national discount clothing retailer, had operated its store at 135 East 57th Street in Manhattan since Nov. 7, 1994. The term of the lease expired on Jan. 31, 2011, but gave the tenant the option of two five-year renewal terms, the first of which was to be exercised no later than Jan. 31, 2010. But due to an administrative oversight, the tenant didn't give written notice of its intention to renew until Feb. 4, 2010, when it emailed and faxed a letter dated Jan. 30, 2010. The owner rejected the late attempt to exercise the renewal option in a letter dated Feb. 5, 2010, in which it commented that the purported renewal letter had been “fraudulently backdated” and in any event wasn't sent in the manner required by the lease. The tenant then sent its renewal letter in the manner prescribed by the lease on Feb. 9, 2010.
The owner started eviction proceedings, alleging that the tenant had failed to renew the lease on time, that the renewal option was terminated as a result, and that the lease would expire on Jan. 31, 2011. The court found that the tenant was entitled to equitable relief, and issued a declaration excusing the lateness of its exercise of its renewal option.
On appeal, the owner contended that the tenant hadn't established the requirements for a grant of that type of relief. But the appeals court noted that the four-day delay in providing the one-year's notice required by the lease didn't prejudice the owner.
The court also pointed out that while the owner characterized the backdating of the renewal letter as fraudulent conduct, the trial court's rejection of that assessment was correct. Although the tenant's renewal letter, prepared on Feb. 4, 2010, was incorrectly dated Jan. 30, 2010, it was noteworthy that the tenant never claimed that its exercise of its renewal option was timely, based on the date of the letter; in fact, the option renewal letter was emailed with a cover page dated Feb. 4, 2010, and the fax cover sheet was time-stamped Feb. 4, 2010. Moreover, the corporate controller who prepared the letter provided a credible explanation for the administrative error. The appeals court agreed with the trial court's conclusion that the misdating wasn't prompted by either bad faith or an intent to defraud, and that the four-day delay was an honest mistake.
But the tenant also had to establish evidence showing that it would be affected by the type of forfeiture for which equitable relief is appropriate—that is, an investment in the space that it would lose if it weren't allowed to extend the lease. The appeals court stated that “equity may intervene where a tenant in possession of premises under an existing lease neglects to timely exercise a renewal option, because ‘he might suffer forfeiture if he has made valuable improvements on the property.’” The tenant's improvements to this space had been made so long ago that the tenant had already reaped the benefit of their cost. Nevertheless, some courts have authorized equitable relief against untimely renewal where there was no indication that substantial physical improvements had been made and would be forfeited, but “to preserve the tenant's interest in a long-standing location for a retail business because this is an important part of the goodwill of that enterprise, and thus the tenant stands to lose a substantial and valuable asset.”
The appeals court in this case applied that reasoning. The tenant testified that the 57th Street store in particular had become highly successful and popular, that the company had searched for alternative space into which to relocate that store and hadn't identified any prospects, and that even if it found a viable site, it would require several months to open the new store. So, although there was evidence that the national tenant had widespread name recognition unrelated to any particular store location, the evidence was sufficient to support a finding that its 57th Street store in particular had garnered substantial goodwill in that location. That goodwill was “a valuable asset that would be damaged by its ouster from the premises,” the appeals court said [135 East 57th Street LLC v. Daffy's Inc., November 2011].
Lesson Learned
When assessing whether you should allow the tenant to renew its lease retroactively, consider whether you're able to establish that you were prejudiced in any way by the breach and whether the loss of the store's location would negate the tenant's goodwill to the degree that a court could decide that enforcing the lease's time restraint for renewal would result in a forfeiture that warrants equitable relief.