Renewal Options and Lapse of Notice

More often than not, commercial lease renewals are reliant on clerical diligence by the tenant. Option notices are commonly required to be delivered in specific formats within designated time periods. Attention to long-term detail is critical, for a failure by a tenant to properly and timely exercise its renewal option may be beneficial to the landlord and catastrophic for the tenant. However, a failure by the tenant to timely deliver valid notice does not always leave the tenant without options. In some jurisdictions, judicial equitable relief may be available to validate the renewal notwithstanding the failure to notify in accordance with the lease.

The Greater Park City Co. Case

The recent, highly publicized case of Greater Park City Co., et al v. United Park City Mines, et al. (2014), Third Judicial District, Summit County, UT, Case No. 120500157, explored this very issue. In this case, a tenant under a long-term lease failed to timely exercise a renewal option due to a clerical error, and sued the landlord, claiming that, notwithstanding its failure to comply strictly with the lease terms, it was entitled to the benefit of the renewal based upon certain long-established equitable principles under Utah law. Ultimately, the tenant was unsuccessful in persuading the court. This article examines Greater Park City and the arguments made by the tenant to the court.

Since 1971, the plaintiff tenant operated Park City Mountain Resort in Park City, UT, on 5,600 acres of land it leased from the defendant landlord. The original lease entitled the tenant to develop and operate a full-service ski resort on the land, which would ultimately include ski lifts and other critical facilities. The initial term of the lease was 20 years, but it included three options to renew, in each instance for 20 years (i.e., if all three options were taken, the lease would run through 2051). To exercise the options validly, the tenant was required to deliver written notice to the landlord not later than 60 days prior to the expiration of the applicable term.

In 1991, the tenant validly exercised the first renewal option. During the initial term and first extension term, the tenant completed nearly $100 million in capital improvements to the land, including ski runs, lodges and restaurants. Park City blossomed into one of the most popular ski resorts in North America. In the years preceding the second renewal date, the tenant contemplated further improvements and expansion of the resort.

However, in 2011, the tenant failed to timely deliver the renewal notice required to effectuate the second renewal term. The executives and staff of the tenant discovered the lapse immediately prior to the expiration of the first renewal period. Some of these individuals claimed that staffing changes precipitated the mistake, while others claimed that they believed the lease term was subject to an automatic extension. Notwithstanding that the lease had technically expired, the tenant scrambled and sent the landlord a letter attempting to “confirm” that the extension had been exercised, and thereafter continued to pay rent (which the landlord accepted) and perform capital improvements to the land (which the landlord allowed). The landlord did not notify the tenant until very late in 2011 of its position that the lease had not been validly extended (and did not ultimately pursue judicial eviction until March 2014).

In March 2012, the tenant sued the landlord, seeking a judicial declaration that the lease term had been renewed. The tenant alleged, among other things, that even though it failed to comply strictly with the renewal requirements in the lease, it had substantially complied with the terms of the lease with respect to the exercise of the renewal option and that the landlord had either waived its right to assert, or was equitably estopped from asserting, that the lease had expired. In support of its arguments, the tenant focused on two key series of facts: First, the landlord had accepted rent from the tenant after the 2011 expiration date and second, that the landlord had made a series of statements and communications to the tenant and others which, the tenant argued, evidenced an intent to waive strict compliance with the lease. Ultimately, the tenant failed to convince the court, and as a result of the ruling, the landlord proceeded to lease the resort to a competitor of the tenant.

The Court's Ruling

In denying relief to the tenant, the Greater Park City court cited principally the case of Geisdorf v. Doughty, 972 P.2d 67 (Utah 1998) and its progeny. In that case, the plaintiff tenant won a judgment that he had “substantially complied” with the lease renewal and was deemed to have renewed notwithstanding his failure to deliver notice in strict compliance with his lease, which required written notice delivered to the landlord at least four months prior to the expiration of the term. However, the appellate court reversed the trial court and held that excluding special circumstances like waiver or misrepresentation, the exercise of an option must be made strictly in accordance with the lease terms. When the tenant sent a letter confirming his “verbal intention to renew” nearly three months after the option lapsed, he was deemed to have failed to comply with his lease and thus the renewal was nullified. Geisdorf became the law of the land in Utah: Comply strictly with the lease or lose your option.

For any real estate professional experienced in negotiating renewal terms, particularly as or on behalf of a tenant, the Greater Park City facts are sure to induce some discomfort, if not a full-fledged case of cold sweats and nausea. Notwithstanding that the tenant lost, the principles in equity behind its arguments before the court bear discussion. Under what circumstances might a similarly-situated tenant have a chance to convince a court that the renewal should be effective notwithstanding the error? And in what other jurisdictions have tenants prevailed in this regard?

Cases in Favor of the Tenant

The case of Tel-Towne Properties Group v. Toys “R” Us-Delaware, Inc. 630 F.Supp.2d 766 (E.D. Mich. 2007) considered a long-term (31 years) lease with four options of five years each. The lease provided that notice of the tenant's intent to renew was due six months prior to expiration of the then-current lease term. During the term, the parties disagreed as to the definition of the “lease year,” which ultimately led to a dispute about whether or not the renewal exercise was timely. The court determined from both the terms of the lease and from extrinsic evidence that the tenant's interpretation of the term was in error, and thus the notice was found to have been delivered four months late. Nevertheless, the court granted equitable relief in favor of the tenant, finding that because the tenant's delay in renewing was the result of an honest mistake rather than negligence, there was no prejudice to the landlord and an eviction would result in undue hardship to the tenant.

Similarly, in the case of 135 East 57th Street LLC v. Daffy's Inc., 91 A.D.3d 1 (N.Y. 2011), the landlord sued for a declaratory judgment that the tenant's notice of renewal was late and therefore ineffective. The tenant did not give written notice of its intention to renew until four days after the applicable due date. The landlord rejected the notice, claiming it had been fraudulently backdated and otherwise failed to comply with the lease. The tenant subsequently sent an additional renewal notice in the manner prescribed by the lease. The court found that the backdated notice was not prompted by an intent to defraud the landlord and that the delay was due to an honest mistake that did not prejudice the landlord. It noted that the tenant had built up significant goodwill during its occupancy. For these reasons, the court granted equitable relief to the tenant, excusing the late notice and affirming the renewal. Courts in New York generally consider a number of factors when deciding whether or not to grant this type of relief, including improvements made to the leased premises by the tenant, the degree to which the delay was a result of an excusable lapse and the degree to which the landlord was prejudiced by the delay.

Conclusion

Following the court's ruling in the Greater Park City case, the tenant retained control of certain areas of the Park City Mountain Resort. Amidst the prospect of prolonged litigation, Vail Resorts, Inc. purchased the remaining elements of the property for $182.5 million, and the famous ski area remains operational. Despite the outcome, Greater Park City is an enduring reminder to all landlords that a failure by a tenant to strictly comply with the renewal terms in a lease does not always dictate the landlord's repossession of the leased space.

David P. Resnick is a member of this newsletter's Board of Editors. He is a Partner at Robbins, Salomon & Patt, Ltd. in Chicago, concentrating his practice in commercial real estate development and finance. Emily Mannix-Slobig is an Associate at the firm.

More often than not, commercial lease renewals are reliant on clerical diligence by the tenant. Option notices are commonly required to be delivered in specific formats within designated time periods. Attention to long-term detail is critical, for a failure by a tenant to properly and timely exercise its renewal option may be beneficial to the landlord and catastrophic for the tenant. However, a failure by the tenant to timely deliver valid notice does not always leave the tenant without options. In some jurisdictions, judicial equitable relief may be available to validate the renewal notwithstanding the failure to notify in accordance with the lease.

The Greater Park City Co. Case

The recent, highly publicized case of Greater Park City Co., et al v. United Park City Mines, et al. (2014), Third Judicial District, Summit County, UT, Case No. 120500157, explored this very issue. In this case, a tenant under a long-term lease failed to timely exercise a renewal option due to a clerical error, and sued the landlord, claiming that, notwithstanding its failure to comply strictly with the lease terms, it was entitled to the benefit of the renewal based upon certain long-established equitable principles under Utah law. Ultimately, the tenant was unsuccessful in persuading the court. This article examines Greater Park City and the arguments made by the tenant to the court.

Since 1971, the plaintiff tenant operated Park City Mountain Resort in Park City, UT, on 5,600 acres of land it leased from the defendant landlord. The original lease entitled the tenant to develop and operate a full-service ski resort on the land, which would ultimately include ski lifts and other critical facilities. The initial term of the lease was 20 years, but it included three options to renew, in each instance for 20 years (i.e., if all three options were taken, the lease would run through 2051). To exercise the options validly, the tenant was required to deliver written notice to the landlord not later than 60 days prior to the expiration of the applicable term.

In 1991, the tenant validly exercised the first renewal option. During the initial term and first extension term, the tenant completed nearly $100 million in capital improvements to the land, including ski runs, lodges and restaurants. Park City blossomed into one of the most popular ski resorts in North America. In the years preceding the second renewal date, the tenant contemplated further improvements and expansion of the resort.

However, in 2011, the tenant failed to timely deliver the renewal notice required to effectuate the second renewal term. The executives and staff of the tenant discovered the lapse immediately prior to the expiration of the first renewal period. Some of these individuals claimed that staffing changes precipitated the mistake, while others claimed that they believed the lease term was subject to an automatic extension. Notwithstanding that the lease had technically expired, the tenant scrambled and sent the landlord a letter attempting to “confirm” that the extension had been exercised, and thereafter continued to pay rent (which the landlord accepted) and perform capital improvements to the land (which the landlord allowed). The landlord did not notify the tenant until very late in 2011 of its position that the lease had not been validly extended (and did not ultimately pursue judicial eviction until March 2014).

In March 2012, the tenant sued the landlord, seeking a judicial declaration that the lease term had been renewed. The tenant alleged, among other things, that even though it failed to comply strictly with the renewal requirements in the lease, it had substantially complied with the terms of the lease with respect to the exercise of the renewal option and that the landlord had either waived its right to assert, or was equitably estopped from asserting, that the lease had expired. In support of its arguments, the tenant focused on two key series of facts: First, the landlord had accepted rent from the tenant after the 2011 expiration date and second, that the landlord had made a series of statements and communications to the tenant and others which, the tenant argued, evidenced an intent to waive strict compliance with the lease. Ultimately, the tenant failed to convince the court, and as a result of the ruling, the landlord proceeded to lease the resort to a competitor of the tenant.

The Court's Ruling

In denying relief to the tenant, the Greater Park City court cited principally the case of Geisdorf v. Doughty , 972 P.2d 67 (Utah 1998) and its progeny. In that case, the plaintiff tenant won a judgment that he had “substantially complied” with the lease renewal and was deemed to have renewed notwithstanding his failure to deliver notice in strict compliance with his lease, which required written notice delivered to the landlord at least four months prior to the expiration of the term. However, the appellate court reversed the trial court and held that excluding special circumstances like waiver or misrepresentation, the exercise of an option must be made strictly in accordance with the lease terms. When the tenant sent a letter confirming his “verbal intention to renew” nearly three months after the option lapsed, he was deemed to have failed to comply with his lease and thus the renewal was nullified. Geisdorf became the law of the land in Utah: Comply strictly with the lease or lose your option.

For any real estate professional experienced in negotiating renewal terms, particularly as or on behalf of a tenant, the Greater Park City facts are sure to induce some discomfort, if not a full-fledged case of cold sweats and nausea. Notwithstanding that the tenant lost, the principles in equity behind its arguments before the court bear discussion. Under what circumstances might a similarly-situated tenant have a chance to convince a court that the renewal should be effective notwithstanding the error? And in what other jurisdictions have tenants prevailed in this regard?

Cases in Favor of the Tenant

The case of Tel-Towne Properties Group v. Toys “R” Us-Delaware, Inc . 630 F.Supp.2d 766 (E.D. Mich. 2007) considered a long-term (31 years) lease with four options of five years each. The lease provided that notice of the tenant's intent to renew was due six months prior to expiration of the then-current lease term. During the term, the parties disagreed as to the definition of the “lease year,” which ultimately led to a dispute about whether or not the renewal exercise was timely. The court determined from both the terms of the lease and from extrinsic evidence that the tenant's interpretation of the term was in error, and thus the notice was found to have been delivered four months late. Nevertheless, the court granted equitable relief in favor of the tenant, finding that because the tenant's delay in renewing was the result of an honest mistake rather than negligence, there was no prejudice to the landlord and an eviction would result in undue hardship to the tenant.

Similarly, in the case of 135 East 57th Street LLC v. Daffy's Inc ., 91 A.D.3d 1 (N.Y. 2011), the landlord sued for a declaratory judgment that the tenant's notice of renewal was late and therefore ineffective. The tenant did not give written notice of its intention to renew until four days after the applicable due date. The landlord rejected the notice, claiming it had been fraudulently backdated and otherwise failed to comply with the lease. The tenant subsequently sent an additional renewal notice in the manner prescribed by the lease. The court found that the backdated notice was not prompted by an intent to defraud the landlord and that the delay was due to an honest mistake that did not prejudice the landlord. It noted that the tenant had built up significant goodwill during its occupancy. For these reasons, the court granted equitable relief to the tenant, excusing the late notice and affirming the renewal. Courts in New York generally consider a number of factors when deciding whether or not to grant this type of relief, including improvements made to the leased premises by the tenant, the degree to which the delay was a result of an excusable lapse and the degree to which the landlord was prejudiced by the delay.

Conclusion

Following the court's ruling in the Greater Park City case, the tenant retained control of certain areas of the Park City Mountain Resort. Amidst the prospect of prolonged litigation, Vail Resorts, Inc. purchased the remaining elements of the property for $182.5 million, and the famous ski area remains operational. Despite the outcome, Greater Park City is an enduring reminder to all landlords that a failure by a tenant to strictly comply with the renewal terms in a lease does not always dictate the landlord's repossession of the leased space.

David P. Resnick is a member of this newsletter's Board of Editors. He is a Partner at Robbins, Salomon & Patt, Ltd. in Chicago, concentrating his practice in commercial real estate development and finance. Emily Mannix-Slobig is an Associate at the firm.