Should I Stay or Should I Go?

However, even in light of these general rules, it is still difficult for parties to know when to stay and when to go. For example, what if the lease, separate from the default provision, provides that if a tenant fails to maintain certain required insurance, the lease 'could be terminated.' Can the landlord terminate the lease immediately if the tenant fails to maintain insurance coverage? What would be the effect of this early termination? Would additional notices of default and/or termination be required? Two courts have reached very different conclusions on these issues. This article addresses how these courts arrived at such different results and what landlords and tenants can do to avoid unfavorable results.

On One Hand

In Empire State Building Associates v. Trump Empire State Partners, 245 A.D.2d 225 (N.Y. App. Div. 1997), the landlord sent the tenants a notice of default alleging that tenants had violated provisions of the lease that required compliance with the law by filing false documentation with the state Buildings Department. Id. at 226. The lease provided that the landlord could terminate the lease if the tenants' default was not cured within 60 days after written notification. A separate provision of the lease, however, afforded the landlord the right to terminate the lease in the event of a default that subjected the landlord to criminal liability, and no cure period was provided in that section. Id. at 229. Upon receiving the notice of default, the tenants immediately responded with a letter informing the landlord that they were investigating the purported default. Nevertheless, seven days later, the landlord sent the tenants a notice of termination based on the default. Id. at 226. The tenants obtained a preliminary injunction staying the termination pending further order of the court. Id. at 227.

The landlord argued the lease termination should be effective immediately because the alleged default subjected the landlord to possible criminal liability; the lease provided the landlord with the right to terminate the lease in the event of a default in such a case, and such provision did not contain a cure period. Alternatively, the landlord argued that the grant of injunctive relief was inappropriate because the lease was terminated prior to the tenant's motion for injunctive relief. Id. at 229. The appellate court disagreed and determined that the violation did not expose the landlord to possible criminal liability and the 60-day period was applicable. Moreover, the court held that even if the breach exposed the landlord to criminal liability, the lack of a stated cure period for such a violation in the lease was not fatal to the tenant. Instead, because the lease contained no specific time period in which to cure such a breach, the lease required the tenant to act promptly within a reasonable period of time. This court held seven days was not reasonable. Id. at 228-229. The court further held that because the landlord served the notice of termination before the expiration of the cure period, the notice was 'ineffective;' premature notice could not terminate the lease. Id. The court granted injunctive relief to allow tenants time to cure pursuant to the notice of default. Id. at 230.

On the Other Hand

More recently, however, a Missouri court arrived at a very different conclusion regarding the notice requirements to terminate a lease. In Pescado Loco, L.L.C. v. Chesterfield Center Corp., 229 S.W. 3d 125 (Mo. Ct. App. 2007), the tenant was in arrears for two months' rent when it received a written notice of default from its landlord. The notice of default stated that if the tenant failed 'to cure these defaults in accordance with the terms of the lease,' the landlord would 'pursue each and every legal and equitable remedy to enforce the terms of the lease against you [tenant], including but not limited to, termination of the lease.' The lease provided that an 'event of default' would occur under the lease if the tenant failed to pay monthly rent and such failure continued for a period of five days after receipt of written notice from the landlord of non-payment by the tenant. The lease provided that all notices were deemed duly given on the date that the communication was deposited in the U.S. mail. The lease further provided that the date of the receipt on the certified mail receipt was the commencement date for calculating any time periods associated with the giving of notice under the lease.

The tenant received the described notice of default from the landlord on Nov. 5, 2005. Per the express language of the lease, the tenant had until at least the close of business on Nov. 10, 2005 to pay all past due rent to avoid an event of default under the lease. The tenant notified the landlord on Nov. 8 that it intended to pay all past due rent prior to the expiration of the cure period. On Nov. 9, 2005, the landlord sent the tenant a notice of termination of the lease via certified and regular mail, which tenant received via regular mail on Nov. 10, 2005. The letter stated that, as of that date, the tenant had failed to cure its existing defaults under the lease for failure to pay rent and, accordingly, the landlord elected to terminate the lease effective Nov. 9, 2005.

Thereafter, the tenant provided the landlord a check on Nov. 14, 2005 for all past-due rents to the landlord. The landlord, still claiming the lease was terminated, returned the uncashed rent checks to the tenant on Dec. 12, 2005, and reminded the tenant of the 'preexisting termination of the lease.' Thereafter, the tenant filed a petition for declaratory judgment asserting that the landlord had prematurely and improperly terminated the lease. The landlord filed a counterclaim for declaratory judgment that it had validly terminated the lease and sought an order requiring the tenant to vacate the premises. The landlord argued that because there was no requirement that a notice of termination be given after the expiration of the tenant's cure period, the lease was validly terminated, effective as of the expiration of the cure period. The tenant, in turn, claimed that the landlord had not properly complied with the lease requirements to terminate the lease. The tenant argued that because the lease provided that upon the occurrence of any event of default, the landlord had the 'option' to pursue any one or more of the stipulated remedies, including taking possession, terminating the lease, or filing suit for damages, the lease did not automatically terminate. Instead, it required the landlord to exercise an election of remedy affirmatively after the running of the five-day cure period.

The tenant's argument was supported by an earlier case, Josephson v. National Screen Service, 810 S.W. 2d 708 (Mo. Ct. App. 1991), in which the court had held that, under Missouri law, written notice by the landlord was required to terminate a lease. In that case, the landlord sent the tenant a letter advising the tenant of a default. Id. at 708-09. The landlord subsequently filed a lawsuit against the tenant for unlawful detainer. Id. at 709. The court held that the landlord's notice of default was insufficient to terminate the lease properly. Instead, the court required an 'unequivocal election' by the landlord to terminate the lease. Id. at 709 (citing 49 Am.Jur.2d Landlord and Tenant '1022). The landlord also argued that no notice of default or forfeiture was necessary because, under the lease, the period for notice of forfeiture was not required unless the tenant had designated a bank or trust company to receive the notice, and no such designation had been made. The Josephson court held that although no notice of forfeiture was required under the express terms of the lease, notice of forfeiture was nevertheless required to terminate the lease properly. Forfeiture did not occur as a matter of fact simply upon the happening of the default; the default only entitled the landlord to declare a forfeiture, which its letter did not do. Id. Even though the lease did not contain an express requirement to provide notice of termination, the Josephson court required such notice for termination to be effective.

Despite this precedent, the Pescado Loco trial and appellate courts upheld the landlord's termination of the lease. Unfortunately, the trial court simply granted summary judgment in the landlord's favor, without specifying reasons, and the appellate court affirmed the trial court, without publishing an opinion.

An Anomaly?

The Pescado Loco case appears to be an anomaly in real estate law, as other courts that have analyzed this issue have held that a declaration of termination prior to the expiration of a cure period is ineffective. See, e.g., Mextel, Inc. v. Air-Shields, Inc., Cause No. 01-CV-7308, 2005 U.S. Dist. LEXIS 1281 (E.D. Pa. Jan. 31, 2005) (notice declaring termination in a shorter amount of time than that stipulated in the contract to cure the conditions was ineffective; a second notice of termination after the expiration of the cure period was required); Sauer v. Xerox Corp., 17 F. Supp. 2d 193, 197 (W.D. N.Y. 1998). Nevertheless, the Pescado Loco case is instructive regarding the actions that parties can take to protect their rights. Strict compliance with lease provisions relating to events of default and required notice and cure periods are essential for proper and effective termination of the lease. Landlords also must be cognizant that, even if the lease does not provide for a cure period, often statutory or common law provisions insert a reasonable cure period into the lease. See, e.g., Cal Code Civ Proc '1161 (requiring strict compliance by the landlord of three days' notice for cure period for default in payment of rent); Conn. Gen. Stat. '47a-15 (rental agreement will not terminate if a tenant can and does remedy a breach within a 15-day period; statutory language places an obligation on the landlord to deliver the pretermination notice); see 49 Am.Jur. 2d Landlord and Tenant '200 at 218 (2d ed. 2006) ('The right to exercise an option to terminate a lease on the happening of a contingency accrues when the optionee acquires knowledge of the happening of a contingency. When the agreement is silent as to the time for exercise, an option based on a contingency must be exercised at the time the contingency arises, or within a reasonable time thereafter.'); Empire State Assoc., 245 A.D.2d at 228-29; but see S.L. Motel Enterprises, Inc. v. East Ocean, Inc., 751 S.W.2d 114, 116 (Mo. Ct. App. 1988) (tenants were entitled to a thirty day cure period following notice with respect to various defaults, but no cure period was allowed for a failure to make rental payments).

Terminating a Lease Effectively

The cases discussed in this article illustrate that to terminate a lease effectively (perhaps even absent express language to the contrary) a landlord should:

• Provide written notice of the default specifying (with reasonable detail) the nature of the breach; how such default can be cured; the period allowed for the tenant to cure such breach and the effect (or options for the effect) of the failure to cure the default within the stated cure period; and
• Provide affirmative written notice of the landlord's decision to terminate the lease after the expiration of the cure period without cure by the tenant as provided in the lease or statute (or, if none is stated, after a reasonable time period) has passed.

Similarly, the cases demonstrate that to avoid a forfeiture of the lease or other exercise of remedy by the landlord, a tenant should:

• Despite any notices to the contrary, cure any breach prior to the expiration of the cure period; and
• Negotiate in the lease a cure period for every notice of default and require the landlord to provide multiple written notices before the exercise of the remedies of dispossession or lease termination can be exercised, or specifically state that no notice of termination prior to expiration of a cure period is effective.

Conclusion

In sum, when negotiating the relevant default language, the parties should make it clear whether written notice of default and written notice of termination are required, the required means of providing such notice and the effect of failure to provide such notice or if such notice is provided in an incorrect form. Only when these terms are explicitly stated in the lease can a party properly determine if they should stay or if they should go.

The standard commercial lease contains language providing that if a tenant defaults in the performance of an obligation for more than a certain period of time after a landlord gives the tenant written notice of such default, then there is an 'event of default' under the lease, and the landlord is entitled to certain remedies, including dispossession and termination of the lease. The purpose of a 'cure period' provision is to allow the tenant an opportunity to cure a default under the lease before further action can be taken unilaterally by the landlord.

However, what happens if the landlord attempts to terminate the lease before the tenant has cured the default and before the end of the cure period? Is this early notification invalid or does it become effective immediately upon the expiration of the cure period without cure?

Generally, courts treat a contractually provided cure period as mandatory, and any purported termination of a lease prior to the expiration of such cure period makes such termination ineffective. See, e.g., Sauer v. Xerox Corp ., 17 F. Supp. 2d 193, 197 (W.D. N.Y. 1998). Similarly, courts also require landlords to follow the requirements for notice of default and termination strictly because the law disfavors forfeitures. See Josephson v. National Screen Service , 810 S.W. 2d 708, 709 (Mo. Ct. App. 1991) ('The courts, in their abhorrence of forfeitures, search for legal reasons not to enforce them, and hold parties seeking to enforce them to a scrupulous observance of all legal and contractual requirements.'); see also Davis v. Wickline, 135 S.E.2d 812, 814 (Va. 1964).

However, even in light of these general rules, it is still difficult for parties to know when to stay and when to go. For example, what if the lease, separate from the default provision, provides that if a tenant fails to maintain certain required insurance, the lease 'could be terminated.' Can the landlord terminate the lease immediately if the tenant fails to maintain insurance coverage? What would be the effect of this early termination? Would additional notices of default and/or termination be required? Two courts have reached very different conclusions on these issues. This article addresses how these courts arrived at such different results and what landlords and tenants can do to avoid unfavorable results.

On One Hand

In Empire State Building Associates v. Trump Empire State Partners , 245 A.D.2d 225 (N.Y. App. Div. 1997), the landlord sent the tenants a notice of default alleging that tenants had violated provisions of the lease that required compliance with the law by filing false documentation with the state Buildings Department. Id. at 226. The lease provided that the landlord could terminate the lease if the tenants' default was not cured within 60 days after written notification. A separate provision of the lease, however, afforded the landlord the right to terminate the lease in the event of a default that subjected the landlord to criminal liability, and no cure period was provided in that section. Id. at 229. Upon receiving the notice of default, the tenants immediately responded with a letter informing the landlord that they were investigating the purported default. Nevertheless, seven days later, the landlord sent the tenants a notice of termination based on the default. Id. at 226. The tenants obtained a preliminary injunction staying the termination pending further order of the court. Id. at 227.

The landlord argued the lease termination should be effective immediately because the alleged default subjected the landlord to possible criminal liability; the lease provided the landlord with the right to terminate the lease in the event of a default in such a case, and such provision did not contain a cure period. Alternatively, the landlord argued that the grant of injunctive relief was inappropriate because the lease was terminated prior to the tenant's motion for injunctive relief. Id. at 229. The appellate court disagreed and determined that the violation did not expose the landlord to possible criminal liability and the 60-day period was applicable. Moreover, the court held that even if the breach exposed the landlord to criminal liability, the lack of a stated cure period for such a violation in the lease was not fatal to the tenant. Instead, because the lease contained no specific time period in which to cure such a breach, the lease required the tenant to act promptly within a reasonable period of time. This court held seven days was not reasonable. Id. at 228-229. The court further held that because the landlord served the notice of termination before the expiration of the cure period, the notice was 'ineffective;' premature notice could not terminate the lease. Id. The court granted injunctive relief to allow tenants time to cure pursuant to the notice of default. Id. at 230.

On the Other Hand

More recently, however, a Missouri court arrived at a very different conclusion regarding the notice requirements to terminate a lease. In Pescado Loco, L.L.C. v. Chesterfield Center Corp. , 229 S.W. 3d 125 (Mo. Ct. App. 2007), the tenant was in arrears for two months' rent when it received a written notice of default from its landlord. The notice of default stated that if the tenant failed 'to cure these defaults in accordance with the terms of the lease,' the landlord would 'pursue each and every legal and equitable remedy to enforce the terms of the lease against you [tenant], including but not limited to, termination of the lease.' The lease provided that an 'event of default' would occur under the lease if the tenant failed to pay monthly rent and such failure continued for a period of five days after receipt of written notice from the landlord of non-payment by the tenant. The lease provided that all notices were deemed duly given on the date that the communication was deposited in the U.S. mail. The lease further provided that the date of the receipt on the certified mail receipt was the commencement date for calculating any time periods associated with the giving of notice under the lease.

The tenant received the described notice of default from the landlord on Nov. 5, 2005. Per the express language of the lease, the tenant had until at least the close of business on Nov. 10, 2005 to pay all past due rent to avoid an event of default under the lease. The tenant notified the landlord on Nov. 8 that it intended to pay all past due rent prior to the expiration of the cure period. On Nov. 9, 2005, the landlord sent the tenant a notice of termination of the lease via certified and regular mail, which tenant received via regular mail on Nov. 10, 2005. The letter stated that, as of that date, the tenant had failed to cure its existing defaults under the lease for failure to pay rent and, accordingly, the landlord elected to terminate the lease effective Nov. 9, 2005.

Thereafter, the tenant provided the landlord a check on Nov. 14, 2005 for all past-due rents to the landlord. The landlord, still claiming the lease was terminated, returned the uncashed rent checks to the tenant on Dec. 12, 2005, and reminded the tenant of the 'preexisting termination of the lease.' Thereafter, the tenant filed a petition for declaratory judgment asserting that the landlord had prematurely and improperly terminated the lease. The landlord filed a counterclaim for declaratory judgment that it had validly terminated the lease and sought an order requiring the tenant to vacate the premises. The landlord argued that because there was no requirement that a notice of termination be given after the expiration of the tenant's cure period, the lease was validly terminated, effective as of the expiration of the cure period. The tenant, in turn, claimed that the landlord had not properly complied with the lease requirements to terminate the lease. The tenant argued that because the lease provided that upon the occurrence of any event of default, the landlord had the 'option' to pursue any one or more of the stipulated remedies, including taking possession, terminating the lease, or filing suit for damages, the lease did not automatically terminate. Instead, it required the landlord to exercise an election of remedy affirmatively after the running of the five-day cure period.

The tenant's argument was supported by an earlier case, Josephson v. National Screen Service , 810 S.W. 2d 708 (Mo. Ct. App. 1991), in which the court had held that, under Missouri law, written notice by the landlord was required to terminate a lease. In that case, the landlord sent the tenant a letter advising the tenant of a default. Id. at 708-09. The landlord subsequently filed a lawsuit against the tenant for unlawful detainer. Id. at 709. The court held that the landlord's notice of default was insufficient to terminate the lease properly. Instead, the court required an 'unequivocal election' by the landlord to terminate the lease. Id. at 709 (citing 49 Am.Jur.2d Landlord and Tenant '1022). The landlord also argued that no notice of default or forfeiture was necessary because, under the lease, the period for notice of forfeiture was not required unless the tenant had designated a bank or trust company to receive the notice, and no such designation had been made. The Josephson court held that although no notice of forfeiture was required under the express terms of the lease, notice of forfeiture was nevertheless required to terminate the lease properly. Forfeiture did not occur as a matter of fact simply upon the happening of the default; the default only entitled the landlord to declare a forfeiture, which its letter did not do. Id. Even though the lease did not contain an express requirement to provide notice of termination, the Josephson court required such notice for termination to be effective.

Despite this precedent, the Pescado Loco trial and appellate courts upheld the landlord's termination of the lease. Unfortunately, the trial court simply granted summary judgment in the landlord's favor, without specifying reasons, and the appellate court affirmed the trial court, without publishing an opinion.

An Anomaly?

The Pescado Loco case appears to be an anomaly in real estate law, as other courts that have analyzed this issue have held that a declaration of termination prior to the expiration of a cure period is ineffective. See, e.g., Mextel, Inc. v. Air-Shields, Inc., Cause No. 01-CV-7308, 2005 U.S. Dist. LEXIS 1281 (E.D. Pa. Jan. 31, 2005) (notice declaring termination in a shorter amount of time than that stipulated in the contract to cure the conditions was ineffective; a second notice of termination after the expiration of the cure period was required); Sauer v. Xerox Corp ., 17 F. Supp. 2d 193, 197 (W.D. N.Y. 1998). Nevertheless, the Pescado Loco case is instructive regarding the actions that parties can take to protect their rights. Strict compliance with lease provisions relating to events of default and required notice and cure periods are essential for proper and effective termination of the lease. Landlords also must be cognizant that, even if the lease does not provide for a cure period, often statutory or common law provisions insert a reasonable cure period into the lease. See, e.g., Cal Code Civ Proc '1161 (requiring strict compliance by the landlord of three days' notice for cure period for default in payment of rent); Conn. Gen. Stat. '47a-15 (rental agreement will not terminate if a tenant can and does remedy a breach within a 15-day period; statutory language places an obligation on the landlord to deliver the pretermination notice); see 49 Am.Jur. 2d Landlord and Tenant '200 at 218 (2d ed. 2006) ('The right to exercise an option to terminate a lease on the happening of a contingency accrues when the optionee acquires knowledge of the happening of a contingency. When the agreement is silent as to the time for exercise, an option based on a contingency must be exercised at the time the contingency arises, or within a reasonable time thereafter.'); Empire State Assoc ., 245 A.D.2d at 228-29; but see S.L. Motel Enterprises, Inc. v. East Ocean, Inc. , 751 S.W.2d 114, 116 (Mo. Ct. App. 1988) (tenants were entitled to a thirty day cure period following notice with respect to various defaults, but no cure period was allowed for a failure to make rental payments).

Terminating a Lease Effectively

The cases discussed in this article illustrate that to terminate a lease effectively (perhaps even absent express language to the contrary) a landlord should:

• Provide written notice of the default specifying (with reasonable detail) the nature of the breach; how such default can be cured; the period allowed for the tenant to cure such breach and the effect (or options for the effect) of the failure to cure the default within the stated cure period; and
• Provide affirmative written notice of the landlord's decision to terminate the lease after the expiration of the cure period without cure by the tenant as provided in the lease or statute (or, if none is stated, after a reasonable time period) has passed.

Similarly, the cases demonstrate that to avoid a forfeiture of the lease or other exercise of remedy by the landlord, a tenant should:

• Despite any notices to the contrary, cure any breach prior to the expiration of the cure period; and
• Negotiate in the lease a cure period for every notice of default and require the landlord to provide multiple written notices before the exercise of the remedies of dispossession or lease termination can be exercised, or specifically state that no notice of termination prior to expiration of a cure period is effective.

Conclusion

In sum, when negotiating the relevant default language, the parties should make it clear whether written notice of default and written notice of termination are required, the required means of providing such notice and the effect of failure to provide such notice or if such notice is provided in an incorrect form. Only when these terms are explicitly stated in the lease can a party properly determine if they should stay or if they should go.