When Is a Tenant Excused from Failure to Timely Exercise a Renewal Option?

Eighteen years later, in Sy Jack Realty Co. v. Pergament Syosset Corp., 27 NY2d 449, a divided Court of Appeals excused a tenant from failure to timely exercise a lease renewal option when the mails were apparently to blame for the tenant's tardiness. The lease required the tenant to give written notice by March 31, 1969, if the tenant wanted to renew the lease. The tenant mailed a letter exercising its option on March 28, but the landlord never received the letter. Although the court held that, to be effectual, the notice had to be received within the time specified, the court's majority nevertheless held that the Appellate Division had properly exercised its discretion to give the tenant equitable relief from its failure to exercise the option on time, noting that the landlord had suffered no damages or prejudice, and the tenant had not been guilty of any willful act or omission that caused the delay.

Finally, in JNA Realty v. Cross Bay Chelsea, Inc., 42 NY2d 392, a divided court excused a tenant from late exercise of a renewal option, even though the tenant was fully aware of the time limitation and was negligent in failing to renew on time. A restaurant tenant had taken an assignment of a 10-year lease term, under the terms of which the original tenant enjoyed an option to renew for an additional 10 years. As a condition of the assignment, the original tenant was obligated to obtain a modification of the option to renew, so that the new tenant could renew for an additional 24-year term. The landlord agreed, and the new tenant paid the original tenant $40,000 for leasehold fixtures, and spent another $15,000 in improvements. Then five years after the assignment, the tenant failed, out of inadvertence or negligence, to exercise its option to renew by the time specified in the lease. The landlord immediately wrote to the tenant noting that the date had passed, and brought an action to recover possession at the expiration of the initial lease term. A divided Court of Appeals focused on the forfeiture the tenant would suffer ' loss of the $55,000 invested and loss in customer good will ' in holding that equity should intervene to protect the tenant from its failure to exercise the renewal option, so long as there were no prejudice to landlord. The court remanded for a new trial on that issue.

Baygold

In Baygold itself, Baygold's 1976 lease gave it a 10-year term with the option to extend for four additional 10-year periods, provided that Baygold gave notice by certified mail no later than 270 days before expiration of each 10-year term. Baygold immediately subleased to an affiliate, and, before the end of the first term, the subtenant subleased to Orzel, a non-affiliate. In 1985, Baygold renewed the lease for two additional 10-year periods. In 2005, a Baygold representative directed its lawyer to renew the lease for two additional 10-year terms. Although the lawyer prepared the letter, the lawyer could not produce either a certified mail receipt or a return receipt card. In 2007, the landlord contracted to sell the premises to a third party, and informed Baygold that its lease would expire on Sept. 30, 2007. Baygold then brought this action for a declaration of the rights of the parties. Supreme Court held that the lease had not been properly renewed and the Appellate Division affirmed.

A divided Court of Appeals affirmed. In an opinion by Judge Eugene Pigott, the majority assumed that the failure to renew was the result of excusable default, but held nevertheless that Baygold was not entitled to relief because it would not suffer any forfeiture if the lease were not renewed. The court noted that unlike the tenant in JNA Realty, neither Baygold nor its affiliates were in possession at the time the lease renewal was due. The court acknowledged that Baygold would lose its revenue stream from its subtenant if the lease were not renewed, but held that the “forfeiture rule was crafted to protect tenants in possession who made
improvements of a 'substantial character' with an eye to renewing a lease, not to protect the revenue stream of an out-of-possession tenant ' .”

Judge Robert Smith, dissenting for himself and Judge Victoria Graffeo, questioned why it should matter that the subtenant, Orzel, and not the tenant Baygold, had made significant improvements in reliance on the renewal option. The dissenters contended that the forfeiture was just as significant in this case ' Orzel stood to lose several hundred thousand dollars in improvements, and Baygold stood to lose its revenue stream ' as it was in JNA Realty.

Assignments v. Subleases or a Retreat from JNA?

As Judge Smith's dissent implicitly notes, if Baygold had assigned its lease to Orzel for a lump sum payment, and Orzel had then failed to timely exercise the renewal option, the case would have been nearly identical to JNA Realty. Perhaps the court's majority was trying to draw a sharp distinction between the rights of an assignee and the rights of a subtenant. Another possibility, however, is that the majority is signaling unhappiness with the JNA rule, which requires judicial evaluation of each claim to determine whether denying tenant a right to renew would work a forfeiture (and then, judicial evaluation of prejudice to landlord). Which explanation is accurate must await another case.

Stewart E. Sterk, Mack Professor of Law at Benjamin N. Cardozo School of Law, is Editor-in-Chief of this newsletter.

Suppose a lease gives a tenant an option to renew, but requires that the option be exercised by a specified date. What happens when the tenant exercises the option after the specified date? That issue, which has been litigated in a number of cases, recently reached the Court of Appeals in Baygold Associates, Inc. v. Congregation Yetev Lev of Monsey, Inc. (NYLJ 5/4/12, p. 24., col. 1.). In Baygold, a divided court appeared to narrow the equitable exception the court had previously crafted to the common law rule that would bind the tenant to the express language of the lease.

Prior Case Law

In three prior cases, the Court of Appeals has afforded tenant relief from its failure to timely exercise a lease renewal option. In Jones v. Gianferante , 305 NY 135, the court confronted an ambiguous lease provision. After an initial 10-year term, the lease provided that tenant was “to have the option at the expiration of this lease to renew the said lease in the following manner: The option is to extend for an additional period of ten years and is to be exercised annually thereafter by giving notice on or before the first day of September of each succeeding year.” (emphasis supplied). The question was whether the first renewal had to be exercised by Sept. 1, or only succeeding renewal option. In light to the ambiguity in the lease, the court excused tenant from failure to exercise the option by Sept. 1. Noting that the landlord had suffered no prejudice from the brief delay, and noting that the hardship tenant would endure if not permitted to renew, a unanimous Court of Appeals affirmed the Appellate Division's dismissal of the landlord's summary possession proceeding.

Eighteen years later, in Sy Jack Realty Co. v. Pergament Syosset Corp. , 27 NY2d 449, a divided Court of Appeals excused a tenant from failure to timely exercise a lease renewal option when the mails were apparently to blame for the tenant's tardiness. The lease required the tenant to give written notice by March 31, 1969, if the tenant wanted to renew the lease. The tenant mailed a letter exercising its option on March 28, but the landlord never received the letter. Although the court held that, to be effectual, the notice had to be received within the time specified, the court's majority nevertheless held that the Appellate Division had properly exercised its discretion to give the tenant equitable relief from its failure to exercise the option on time, noting that the landlord had suffered no damages or prejudice, and the tenant had not been guilty of any willful act or omission that caused the delay.

Finally, in JNA Realty v. Cross Bay Chelsea, Inc. , 42 NY2d 392, a divided court excused a tenant from late exercise of a renewal option, even though the tenant was fully aware of the time limitation and was negligent in failing to renew on time. A restaurant tenant had taken an assignment of a 10-year lease term, under the terms of which the original tenant enjoyed an option to renew for an additional 10 years. As a condition of the assignment, the original tenant was obligated to obtain a modification of the option to renew, so that the new tenant could renew for an additional 24-year term. The landlord agreed, and the new tenant paid the original tenant $40,000 for leasehold fixtures, and spent another $15,000 in improvements. Then five years after the assignment, the tenant failed, out of inadvertence or negligence, to exercise its option to renew by the time specified in the lease. The landlord immediately wrote to the tenant noting that the date had passed, and brought an action to recover possession at the expiration of the initial lease term. A divided Court of Appeals focused on the forfeiture the tenant would suffer ' loss of the $55,000 invested and loss in customer good will ' in holding that equity should intervene to protect the tenant from its failure to exercise the renewal option, so long as there were no prejudice to landlord. The court remanded for a new trial on that issue.

Baygold

In Baygold itself, Baygold's 1976 lease gave it a 10-year term with the option to extend for four additional 10-year periods, provided that Baygold gave notice by certified mail no later than 270 days before expiration of each 10-year term. Baygold immediately subleased to an affiliate, and, before the end of the first term, the subtenant subleased to Orzel, a non-affiliate. In 1985, Baygold renewed the lease for two additional 10-year periods. In 2005, a Baygold representative directed its lawyer to renew the lease for two additional 10-year terms. Although the lawyer prepared the letter, the lawyer could not produce either a certified mail receipt or a return receipt card. In 2007, the landlord contracted to sell the premises to a third party, and informed Baygold that its lease would expire on Sept. 30, 2007. Baygold then brought this action for a declaration of the rights of the parties. Supreme Court held that the lease had not been properly renewed and the Appellate Division affirmed.

A divided Court of Appeals affirmed. In an opinion by Judge Eugene Pigott, the majority assumed that the failure to renew was the result of excusable default, but held nevertheless that Baygold was not entitled to relief because it would not suffer any forfeiture if the lease were not renewed. The court noted that unlike the tenant in JNA Realty, neither Baygold nor its affiliates were in possession at the time the lease renewal was due. The court acknowledged that Baygold would lose its revenue stream from its subtenant if the lease were not renewed, but held that the “forfeiture rule was crafted to protect tenants in possession who made
improvements of a 'substantial character' with an eye to renewing a lease, not to protect the revenue stream of an out-of-possession tenant ' .”

Judge Robert Smith, dissenting for himself and Judge Victoria Graffeo, questioned why it should matter that the subtenant, Orzel, and not the tenant Baygold, had made significant improvements in reliance on the renewal option. The dissenters contended that the forfeiture was just as significant in this case ' Orzel stood to lose several hundred thousand dollars in improvements, and Baygold stood to lose its revenue stream ' as it was in JNA Realty.

Assignments v. Subleases or a Retreat from JNA?

As Judge Smith's dissent implicitly notes, if Baygold had assigned its lease to Orzel for a lump sum payment, and Orzel had then failed to timely exercise the renewal option, the case would have been nearly identical to JNA Realty. Perhaps the court's majority was trying to draw a sharp distinction between the rights of an assignee and the rights of a subtenant. Another possibility, however, is that the majority is signaling unhappiness with the JNA rule, which requires judicial evaluation of each claim to determine whether denying tenant a right to renew would work a forfeiture (and then, judicial evaluation of prejudice to landlord). Which explanation is accurate must await another case.

Stewart E. Sterk, Mack Professor of Law at Benjamin N. Cardozo School of Law, is Editor-in-Chief of this newsletter.