Be Timely or Be at Risk

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 to any prior officially noticed change of address, as well as 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 exercise its right effectively, albeit late? As with many legal propositions, the answer is “it depends.”

Generally speaking, carelessness is no excuse for the untimely exercise of a 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.

In addition, 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: 1) the delay was the result of an honest mistake or oversight and was not intentional, willful or grossly negligent conduct; 2) the other party has not changed positions or been damaged as a result of the delay; 3) the delay in exercising the right was short; and 4) the delay did not work an unconscionable hardship on the other party.

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. Nevertheless, tenants are well advised not to let the possibility of grace from the court cause them to fail to police their lease data diligently 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 sending 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 giving 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. Then provision must be made for the time for the notice to be effective so that the notice is sent in a timely manner.

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. State something in unambiguous language, eg, “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. 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 nothing left to interpretation. The notice of exercise, if computer generated, should be on the tenant's letterhead, not that of 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.

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 negotiate. Typically, these rights are important to the operation of the business of the landlord or the tenant, and the lease document requires that a right be exercised by giving 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 it. Alternatively, the lease may state that time is of the essence for 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, ie, adhere to all the requirements in the lease's notice provision, if it is to comply and be effective. A notice that is not properly given is not effective at all. To comply with the lease and be effective, the notice must be sent to the parties at the addresses set forth in the lease. Those addresses may have changed over the course of time, and it is hoped that the parties 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 not to give any argument to the other side that the notice was not given in a proper and timely manner.

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 to any prior officially noticed change of address, as well as 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 exercise its right effectively, albeit late? As with many legal propositions, the answer is “it depends.”

Generally speaking, carelessness is no excuse for the untimely exercise of a 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.

In addition, 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: 1) the delay was the result of an honest mistake or oversight and was not intentional, willful or grossly negligent conduct; 2) the other party has not changed positions or been damaged as a result of the delay; 3) the delay in exercising the right was short; and 4) the delay did not work an unconscionable hardship on the other party.

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. Nevertheless, tenants are well advised not to let the possibility of grace from the court cause them to fail to police their lease data diligently 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 sending 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 giving 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. Then provision must be made for the time for the notice to be effective so that the notice is sent in a timely manner.

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. State something in unambiguous language, eg, “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. 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 nothing left to interpretation. The notice of exercise, if computer generated, should be on the tenant's letterhead, not that of 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.