United States Postal Service v. Ester
Facts: A tenant enters into a lease for commercial property. The lease contains five renewal options which lengthen the lease a total of 30 years, and an option to purchase the property after the final renewal. To exercise each option, the tenant is to give 90 days’ written notice for the renewals, and one years’ notice for the purchase option. Prior to the end of the original lease term, the owners of the property transfer ownership to the trustees of four family trusts, but do not notify the tenant. The tenant timely submits written notices of exercise for each of the five renewal periods, referencing the names and legal titles of the original owners. The owners accept rent from the tenant during the 30 years which span the five renewal periods. One year prior to the end of the final renewal period, the tenant submits written notice of their exercise of the purchase option. The owners refuse.
Claim: The owners claim the purchase option cannot be exercised as the lease had terminated and the tenant was in breach as of the first renewal option since the tenant failed to strictly comply with the option requirements by misstating the name and legal capacities of the owners on the written notices of exercise.
Counterclaim: The tenant sought to compel the sale of the property, claiming they were not in breach and the notices to renew were properly served since all participants irrefutably continued to perform under the lease as agreed for 30 years after the alleged failure.
Holding: A California appeals court holds the owners need to perform under the purchase option since the tenant was not in breach as they complied with the exercise procedures designated in the original lease, and both the tenant and owners continued to perform under the lease for 30 years after the alleged violation. [United States Postal Service v. Ester (September 9, 2016) _CA4th_]
Editor’s note — When a renewal/extension option agreement specifies the steps to be taken and the time period in which they are to occur, the tenant needs to strictly comply if they intend to exercise the option. [See RPI Form 565 and 566]
In this case the lease only stated that notice needs to be “given in writing to the Lessor.”
Prior to the running of the first option period, the owners of the property transferred their interests to the trustees of four trusts they established for the benefit of their family. The owners did not notify the tenant of the change in ownership to the family trusts, nor did they instruct the tenant to direct correspondence to anyone other the original owners. The tenant accordingly made each of the notices of exercise out to the original owners under their original legal capacities. Thus, according to dubious reasoning of the owners, the first and subsequent exercise attempts were fatal to the continuing viability of the lease, putting the tenant in a 30 year breach and precluding them from exercising their purchase option.
However, despite this innocuous error in the naming of the owners, the court concluded the tenant correctly exercised each of its five options to renew the lease, and thus the lease continued to exist through each of the successive option periods and the tenant was not in breach when they exercised their purchase option.
It’s telling that the purchase price under the option was $300,000, whereas the owners estimated the fair market value (FMV) of the property to be in excess of $20,000,000. Thus, this case is a transparent illustration of rental property owners grasping at trivial procedural irregularities to avoid performance of an unfavorable option.
Related reading: Lease renewals and extension options – a mutual benefit for the landlord and tenant
