Tenant Must Strictly Comply with Terms of Renewal Option

Facts: A tenant operated a restaurant-bar on the first floor of a commercial building. A company controlled by the president of the tenant's company had sold the entire building to a new owner in a sale-leaseback transaction whereby the owner leased the first floor back to the tenant, allowing it to continue operating its business.

The tenant and owner signed a new lease agreement for the space. Under the lease agreement, the tenant had the option to renew the lease as long as it gave the owner notice of its intent to renew 90 days prior to the end of the lease term.

The tenant failed to provide timely notice of its renewal intent. Instead, it submitted a notice of intent to exercise its option and renew 60 days before the end of the lease term. The owner refused to recognize and honor the late notice and started eviction proceedings that would force the tenant to vacate the space as soon as the lease expired.

The tenant sued the owner. The tenant acknowledged its failure to comply with the 90-day notice provision; however, it asked the court to order the owner to renew the lease, claiming that it would suffer an “unconscionable hardship” if it were not allowed to renew the lease.

The owner asked the trial court for a judgment in its favor without a trial, which the trial court granted after determining that the tenant would not suffer an “unconscionable hardship” if it had to relocate. The tenant appealed.

Decision: The appeals court upheld the trial court's decision.

Reasoning: On appeal, the tenant argued that the trial court should have issued an order obligating the owner to renew its lease. The appeals court explained that, “an option is simply an offer, and the acceptance must be made within the time allowed and in minute compliance with its terms—otherwise the optionee's rights thereunder are lost.” Further, substantial compliance with the terms of an option is insufficient to constitute an acceptance.

The holder of an option, such as the tenant, who asks the court for specific performance—in this case, an order compelling the owner to renew the lease—must show that it has complied with the terms of the option agreement. “Failure to so comply results in loss of the rights under the option,” stressed the appeals court.

The appeals court noted that the language in the lease-option agreement requiring notice to be given 90 days prior to the end of the lease term in order to exercise the renewal option was “clear and unambiguous.” The tenant admitted that it was familiar with the lease-option agreement, but it never explained why it failed to comply with the notice provision on time.

And while the tenant complained that losing over $20,000 in improvements if the owner forced it to move was unconscionable, the agreement itself provided that any remodeling would be at the tenant's own expense—regardless of when or under what circumstances it vacated the space.

• Driftwood Saloon v. Gauthier, September 2010