Parties to commercial leases often have opportunities to exercise
rights that they have bargained for in the lease negotiation process.
Those rights may be held by both the landlord or the tenant and
may relate to the termination of the lease, the renewal or extension
of the lease term, the right to expand or contract the premises,
the right to reduce rent, the right to relocate the tenant to
other premises or whatever the needs and creativity of the parties
may have caused them to agree upon. Typically these rights are
important to the operation of the business of the landlord or
the tenant and the lease document requires that the right be exercised
by the giving of a notice in a certain manner and by a certain
date. If the notice is not timely and properly given, the right
may be lost.
Often the lease itself expressly states that if the notice is
not given within the specified time, the right will cease and
terminate or the party benefited by the right will have waived
its rights. Alternatively, the lease may state that time is the
essence of the performance by the parties. Even if the lease is
silent, case law from many jurisdictions requires timely performance
or the exercise of the right will not be effective.
Not only is it important that the notice be given within the prescribed
time limit, the notice must be properly given if it is to comply
with the requirements of the lease. A notice that is not properly
given is not effective at all. As a result, it is as though no
notice was given. To comply with the lease and be effective, the
notice must be sent to the parties at the addresses set forth
in the lease, as those addresses may have changed over the course
of time, and as the parties may have complied with the lease requirements
relating to notice of the changed address. If the lease provides
that the notice must be given in person, by certified mail or
by express courier, such as FedEx, the parties are well advised
to follow the strict requirements of the lease. The strategy should
be to not give any argument to the other side that the notice
was not properly and timely given.
Even if the parties have been dealing with each other at addresses
that are not set out in the lease, and the parties have not in
the past adhered to the niceties of notifying each other pursuant
to the lease requirements, it is best to send the notice of exercise
to the addresses set out in the lease and any prior official notice
of change of address, and to the addresses that the lease administrators
use in day-to-day communication between the landlord and tenant.
In most instances, timely and proper exercise of the rights is
intended, and the parties do not intentionally let the date go
by without deciding to exercise or not to exercise the right.
Unfortunately, negligence and the press of various competing needs
come into play and the key date is sometimes missed.
Is all lost or is there some ability under some circumstances
for the party to effectively exercise its right, albeit late?
As with many legal propositions, the answer is "it depends."
Generally speaking, carelessness is no excuse for the untimely
exercise of renewal right. SDG Macerich Properties, L.P. v.
Stanek Inc., 648 N.W.2d 581 (Iowa 2002). There are situations,
however, where the delay in the exercise results from something
other than a party's negligence. In those situations, a court
may well excuse timely notice and allow the party to exercise
its right, even if the election is made too late. If the court
finds there is excusable fault, or actions by the other party
such as fraud, mistake, misrepresentation, duress or undue influence,
estoppel, waiver or overreaching, the late action may be effective.
U. S. Realty 86 Associates v. Sec. Inv., Ltd., 40 P.3d
586 (Utah 2002).
For example, if the tenant's failure to exercise its rights resulted
from a fire or other casualty and the party took prompt and reasonable
action to advise the other party of its decision, strict adherence
to the lease provisions may be forgiven. If however, the delay
is caused by a simple error, such as relying upon a property manager's
lease summary instead of the lease to determine the date for the
notice of a renewal, the tenant will not be excused from the effect
of a tardy notice.
Additionally, a few courts follow the Connecticut rule expressed
in F. B. Fountain Co. v. Stein, 97 Conn. 619, 118 A.
47 (1922) under which a party may be relieved from the consequences
of its forgetfulness if it can be demonstrated that: (a) the delay
was the result of an honest mistake or oversight and was not intentional,
willful or grossly negligent conduct; (b) the other party has
not changed positions or been damaged as a result of the delay;
(c) the delay in exercising the right was short; and (d) the delay
did not work an unconscionable hardship on the other party.
While there are exceptional cases that have justified a court
in allowing the tenant to renew, even if the notice of renewal
was not timely, such as where the tenant made substantial improvements
in the premises under a short term lease, and told the landlord
that it intended to renew the lease term, tenants are well advised
to not let the possibility of grace from the court cause them
to fail to diligently police their lease data to make sure that
they know when they must exercise their rights and how.
In exercising the rights of the landlord and tenant, the following
practice pointers should be observed.
1. The right should be exercised within the time allotted in the
lease. Of course the section of the lease that grants the right
must be checked to determine when the notice of exercise must
be given. If the exact date is not set out in the lease, the calculation
of the date must be carefully done. Other sections of the lease
must also be reviewed to determine if they have an impact on the
time for the sending of the notice. The notice section of the
lease may provide that notices are effective when sent, when received
or upon the passage of a certain period of time after the notice
was sent? As a result, the notice section may have the effect
of shortening the time period for the giving of the notice. For
example, if the notice section states that the notice is effective
on delivery if personally served, and effective the next business
day if sent by express courier and effective on the third business
day after sending if sent by certified mail, planning is necessary
to determine how the notice is to be given and then provision
made for the time for the notice to be effective so that the notice
is sent in a timely way.
2. The language that is used should be clear and unequivocal.
Do not say that the party "intends" to exercise its
right, thereby implying that something is yet to come before the
right is actually exercised. Straightforwardly state something
like "Tenant hereby exercises the First Extension Right to
extend the term of the lease for the First Extension Period."
Of course, if you use capitalized terms make sure that they are
properly used and if you refer to sections of the lease, double
check to make sure that the correct sections are in fact referenced.
3. The proper party must exercise the right. This is a simple
concept that becomes blurred, especially in major corporations
where property rights may be held in subsidiaries and affiliated
entities. The notice of exercise should be given by the party
with the right and there should be noting left to interpretation.
The notice of exercise should be on the letterhead, if only computer
generated, of the tenant and not its parent, affiliate or subsidiary.
4. If the right is exercised by a third person on behalf of the
party with the right, such as by an attorney or law firm on behalf
of its client, the third party should in fact be authorized to
act on behalf of its client, the notice of exercise should state
that the third party is acting as the duly authorized representative
of the party with the right, and the rights should be unequivocally
exercised.
The application of these simple rules should make the process
of exercising the rights given to the landlord or the tenant in
a lease easy and allow the parties to proceed with confidence
in their positions. Be timely, follow the rules set out in the
lease and do not give unclear messages.
