Can Tenant Exercise Purchase Option Despite Missing Deadline?
Q: A tenant negotiated an option to purchase the space it will be leasing from me at one of my free-standing properties, after it has operated there for a certain number of years. The notice requirements for exercising the purchase option are very clear; however, I’m concerned that if the tenant doesn’t do so in a timely manner, it could create problems for me by trying to revive the opportunity later. If a court agrees and allows it to buy the property, despite its failure to exercise the option according to the lease requirements, it could undermine my ability to sell to another buyer that might be more advantageous. Is it likely that a court would allow a tenant to revive an option like this, having missed the original deadline?
A: This largely depends on why the option wasn’t exercised on time and how long it took for late notice of the intent to exercise to be given to the owner. A recent New York case and past seminal cases highlight in what circumstances courts typically rule in favor of a tenant that has failed to exercise an option, allowing it to take advantage of that opportunity despite its initial mistake.
Case on Point
In the most recent case, which was unfavorable to the tenant, a gas station operator was given the option in its lease to purchase the property after four years of leasing the space. That provision of the lease was very clear as to notice requirements that must be followed, most notably the requirement that the tenant let the owner know of its intent 90 days in advance.
However, an agent for the tenant failed to notify the owner of the tenant’s wish to purchase the property in the necessary time frame. The tenant later found out that the agent hadn’t secured the right to purchase the property and asked the owner to honor the option anyway. The owner declined. The lease term ended, but the tenant stayed in its space, paying rent on a month-to-month basis. Eleven months later, the owner asked a trial court for a declaratory judgment that the option was, essentially, dead. The trial court agreed. The tenant sued the owner, attempting to have the option remain alive with the ability to exercise it.
The trial court ruled in favor of the owner and the tenant appealed. A New York appeals court determined that it would be unfair to the owner to allow the tenant to exercise the option at such a late date.
Facts of Case Don’t Support Tenant’s Argument
The appeals court noted that, the ultimate issue was whether equity should allow the tenant to exercise the expired option to purchase the property. It cited a significant past case, which held that “equity will intervene to relieve a tenant or mortgagor who, due to inadvertence or neglect, fails to timely exercise an option if the default will cause it to suffer a substantial forfeiture and there is no prejudice to the landlord or seller.”
Here, at baseline, the owner was inconvenienced. It was unable to offer the property for sale to another buyer during the tenant’s holdover. And the tenant had waited an inexplicably long time to attempt to revive the option. The tenant’s stated reason for its agent missing the deadline was that the agent was dealing with multiple personal problems and focused on those to the detriment of his job.
The tenant also claimed that it entered into the lease in the first place because of the option to purchase, that it undertook extensive improvements in the amount of approximately $150,000 in anticipation of becoming the purchaser, and that it was still in the process of expending money.
But the court noted that for being so concerned about purchasing the property, the tenant had entrusted an agent who it knew was having personal issues to exercise the option—and, more importantly, it couldn’t explain why 11 months went by before it addressed the situation.
Past Case Rulings Draw Distinction
While the trial court judge found that in order to validly exercise an option to purchase real property “one must strictly adhere to the terms and conditions of the option agreement,” the appeals court cited past cases that gave a tenant some leeway.
In those cases, where a court was less strict, the court’s central concerns were the length of the tenant’s delay and the reason for it. “The courts are much more likely to excuse a shorter delay caused by an innocuous reason,” said the appeals court. Nearly all cases where equitable relief was granted involved a delay of less than six weeks, and the tenant’s failure to exercise the option on time was cured immediately or soon after notice was given by the landlord, it stressed.
Equitable relief is less likely to be granted if the delay exceeds six weeks, although in limited instances, courts have excused a tenant’s delay more than three months, the appeals court explained.
“While there is no actual outer limit, in one seminal case, equitable relief was denied where the delay exceeded eight months and the delay was caused solely by the tenant’s negligence,” the appeals court warned.
There appear to be only two cases where a court excused delays beyond eight months, and then only because of exceptional circumstances where the landlord contributed to the tenant’s delay. In one case, the court excused a tenant’s year-long delay in exercising a purchase option because of an ambiguity in the lease as to the date when the option had to be exercised, causing the tenant to reasonably miscalculate the option deadline. In another case, the court excused a commercial tenant’s 17-month delay after the expiration of the lease to exercise the option due, in part, to the landlord’s role in sowing confusion as to the appropriate deadline. The court found that the landlord contributed to the tenant’s negligence by sending out rent notices and accepting rent at the old rate as opposed to the renewal rate after the lease had expired. After 17 months, the tenant began sending the increased rent amount set forth in the option, which immediately spurred the landlord to send a 30-day notice to terminate. The court allowed the tenant to retroactively exercise the option.
Here, said the appeals court, the tenant’s 11-month delay in providing the landlord with written notice of its intent to exercise the option in writing “far exceeds the outer limit of reasonable delay, particularly since the tenant was put on notice that the option deadline had passed and then still waited another seven months before submitting its written notice.” In practically all cases where the delay was excused, the tenant cured its delay immediately upon learning that it had defaulted.
The court must also assess the reason for the delay. The courts have applied a spectrum ranging from minor inadvertence—that is, “venial inattention”—to substantial negligence to gross negligence. Courts will excuse a short delay resulting from a nominal technical defect or venial inattention, which usually takes the form of exercising the option in a manner different from what’s described in the lease—for example, notice was mailed but never delivered; or notice exercising the option was sent to the landlord, but not the landlord’s attorney as required by the lease.
However, once the tenant fails to exercise the option at all and doesn’t immediately cure the default after learning that the time to exercise the option has expired, the courts will find that substantial negligence defeated any claim for equitable relief, the appeals court explained. Moreover, regardless of the length of the delay, equitable relief will be denied where a tenant’s delay was willful or the result of its own gross negligence.
No Legitimate Reason for Delay
Here, the sole reason for the tenant’s failure to tender written notice of its intent to exercise the option for over 11 months was the agent’s negligence due to supposed family matters. He testified that he “lost track of time” and had “no thoughts” about the option during that time period, but the owner had evidence that the agent had had multiple conversations in person with the owner about purchasing the property and about how the tenant would get the financing to do so. Thus, said the appeals court, it was clear that the agent was fully aware of his responsibility to exercise the option in writing and the lease requirement to be “ready, willing and able” to purchase the property at that time.
It was clear that the tenant didn’t prove that its failure to exercise the option in writing in a timely manner was the result of “inadvertence,” “negligence,” or “honest mistake.” And the delay wasn’t due to some procedural or technical mishap; there was evidence that the agent was aware of the option but failed to cure his default for several more months after getting a written letter from the owner regarding the fact that the option hadn’t been exercised. The appeals court concluded that the tenant’s delay constitutes inexcusable gross negligence and doesn’t warrant the granting of equitable relief. Thus, it affirmed the declaratory judgement that the tenant could no longer exercise the option.
- 25-35 Bridge St. LLC v. Excel Automotive Tech Ctr. Inc., October 2018