Reset A A Font size: Print

Court of Appeal, First District, Division 2, California.

PALO ALTO TOWN & COUNTRY VIL. LAGE, INC., Plaintiff, Cross-Defendant and Appellant, v. BBTC CO., Defendant, Cross-Complainant and Respondent.

Civ. 30965.

Decided: October 10, 1973

Mager, Matthews & Neider, San Jose, Thos. F. Stack, San Francisco, for appellant. Nakashima & Boynton, Theodore K. Boynton, San Jose, for respondent.

In this declaratory relief action plaintiff, Palo Alto Town & Country Village, Inc., appeals from the trial court's judgment holding that an option contained in a lease agreement was properly exercised and that the lease agreement between the parties thereby remained in full force and effect.

On November 20, 1964, the parties entered into an agreement whereby appellant leased to respondent certain improved real property in a large shopping center in San Jose, California. The premises were leased for restaurant and bar purposes. The lease provided for an initial term of five years commencing January 1, 1965, which, pursuant to the option provisions of the lease, could be extended at specified increasing rental rates for two successive periods of five years each. In order to exercise the option, respondent-lessee was required to give appellant-lessor written notice not less than six months prior to the expiration of the initial or extended term. The method of transmitting the notice was not specified in the lease, however.

On June 5, 1969, more than six months before the expiration of the initial term and within the required time, respondent prepared and signed a letter exercising the option and deposited the same in the mail, addressed to appellant. Respondent thereafter continued to operate the restaurant in its usual and customary manner, taking out an insurance policy, making substantial long-term investments, and incurring various expenditures for services. On February 13, 1970, approximately one and a half months after the expiration of the original term and eight and a half months after the notice of exercise of the option had been mailed, appellant notified respondent that the lease had expired as of December 31, 1969, and demanded vacation of the premises and delivery of possession on March 31, 1970. This was the first time that respondent learned that appellant claimed to have not actually received the notice exercising the option.

As respondent refused to vacate the premises appellant brought this action to adjudicate the rights and duties of the parties under the lease agreement. The trial court found that the June 5, 1969 letter prepared and signed by respondent was an unconditional and unqualified exercise of the first renewal option provided in paragraph 45 of the lease agreement; that said letter was properly stamped, adequately addressed, and deposited in the United States mail on June 5, 1969; and that as a result the option in the lease agreement was validly exercised by respondent. Consequently, the trial court concluded that the original lease agreement had been extended for an additional five year period and, therefore, respondent had rightfully retained possession of the leased premises.

Since the trial court found it unnecessary to make a finding as to whether or not appellant in fact received the mailed notice, its conclusion that the option was validly exercised, of necessity, rests upon the premise that the exercise of the lease option was effective upon deposit of the notice in the United States mail. Thus, the central issue presented for determination is whether, under applicable law and/or the provisions of the lease agreement, the exercise of option required actual receipt of the notice, as appellant claims, or became complete upon the deposit of the notice in the mail, as respondent asserts.

Time of acceptance. It is well established that the acceptance of an offer to enter into a bilateral contract is effective and deemed communicated as soon as deposited in the regular course of mail (State of California v. Agostini (1956), 139 Cal.App.2d 909, 915, 294 P.2d 769). This rule of general recognition is based on Civil Code1, section 1583, which provides that consent is deemed to be fully communicated between the parties as soon as the party accepting a proposal has put his acceptance in the course of transmission to the proposer.

While admitting that the aforestated rule is applicable to regular bilateral contract, appellant argues that as a matter of concept it cannot apply to an option contract which is not a ‘proposal,’ and the exercise of which is not ‘consent to a proposal’ within the meaning of section 1583, but rather is an already binding contract subject to a condition precedent of exercising the option. In relying on a number of outside authorities (Dynamics Corp. of America v. United States (1968), 389 F.2d 424, 432, 182 Ct.Cl. 62; Starr v. Holck (1947), 318 Mich. 452, 28 N.W.2d 289; Kibler v. Caplis (1905), 140 Mich. 28, 103 N.W. 531; Hoban v. Hudson (1915), 129 Minn. 335, 152 N.W. 723; Gerber v. Equitable Life Assur. Soc. of United States (1954), 1 Ill.App.2d 272, 117 N.E.2d 393; Compania De Astral, S. A. v. Boston Metals Co. (1954), 205 Md. 237, 107 A.2d 357; Corbin on Contracts, § 264; etc.), appellant in addition insists that section 1583 be held inapplicable to an option contract as a matter of legal policy, and urges us to establish a new ‘effective on receipt’ rule in option contracts in California. For reasons which follow, we are unable to accept appellant's suggestion.

As far as appellant's first argument is concerned, it is well established in California that in the case of an option agreement there are, in reality, two distinct contracts: (1) the option contract and (2) the contract to which the option relates. The option, unlike the underlying agreement which obligates both parties, is a unilateral contract which binds only the optionor, but does not impose upon the optionee any obligation to perform or to enter into the contract. In an option contract the optionor stipulates that for the consideration received he keeps the offer open for a specified or reasonable period of time and upon the optionee's election enters into a contract upon the terms outlined in the option. In essence, the option contract is an irrevocable offer, the acceptance of which creates a binding, bilateral contract. (Warner Bros. Pictures v. Brodel (1948), 31 Cal.2d 766, 711–773, 192 P.2d 949; Caras v. Parker (1957), 149 Cal.App.2d 621, 626, 309 P.2d 104; Auslen v. Johnson (1953), 118 Cal.App.2d 319, 321–322, 257 P.2d 664; 1 Witkin, Summary of Cal.Law (1960), § 51, at pp. 57–58.) Although the option has the special characteristic that, when exercised, it relates back to the time of the giving of the option (Seeburg v. El Royale Corp. (1942), 54 Cal.App.2d 1, 4, 128 P.2d 362), it seems obvious that the only difference between an option and an offer in a bilateral contract is that while the former is an irrevocable, the latter is a revocable, offer. Apart from this there is no real difference, and to the formation of a bilateral, binding contract in both cases the acceptance of the offer is needed.

Appellant's contention that the option is already a binding contract subject to a condition precedent that the option will be exercised, is nothing more than gymnastics is semantics. Since the offeror is bound until and unless he revokes his offer, it can always be said (be it a revocable or irrevocable offer) that there is already a binding contract subject to the condition precedent that the offeree will accept the offer. This playing with words, howerver, does not convert a revocable offer into a binding contract. By the same token it does not transmute an irrevocable offer into a binding bilateral contract either.

It therefore follows that an option contract is a ‘proposal’ and its exercise is ‘consent to a proposal’ within the purview of section 1583. Consequently, as a conceptual matter, section 1583 is applicable to option contracts as well as bilateral contracts.

With regard to appellant's policy argument, we point out that in Dawson v. Goff (1954), 43 Cal.2d 310, 273 P.2d 1, our Supreme Court explicitly held that sections 1582 and 1583 are ‘applicable to acceptance or exercise of an option by an optionee under an option contract as well as to a revokable offer.’ (p. 316, 273 P.2d p. 4.) By so holding, the Supreme Court reaffirmed the longstanding California rule expressed in a number of cases (i. e., Auslen v. Johnson, supra, 118 Cal.App.2d at p. 323, 257 P.2d 664; Morello v. Growers Grape Prod. Assn. (1947), 82 Cal.App.2d 365, 370, 186 P.2d 463; 1 Witkin, Summary of Cal.Law (1960), § 53(c) at p. 60) that the option is effectively exercised at the time when a written acceptance is deposited in the mail (‘effective when posted’ rule).

Appellant's argument that we should deviate from the foregoing established rule is not convincing. Although the ‘effective when posted’ rule may lead to inconvenience and hardship in certain instances (as in the case where, as here, appellant claims that it did not receive the notice of exercising the option), the optionor is by no means defenseless. He is entirely at liberty to draw or negotiate the contract providing for an option in such a way that makes the validity of option dependent on the actual receipt of notice of exercising the option, or in the absence of such provision in the contract, he can make inquiries of the optionee. The individual instances of inequity resulting from the party's own neglect to adequately protect his interests are not and cannot be contemplated by the general rule which, of necessity, is based upon the balancing of the convenience and inconvenience of all the parties. For these reasons we are unwilling to accept appellant's proposition that for a valid exercise of option actual receipt of notice should be required as a matter of legal policy.

Instead, in harmony with Dawson and other California cases cited above, we express our adherence to the recognized rule that the option is validly exercised when—absent an agreement to the contrary—the written notice is placed in the mail or otherwise deposited in the course of transmission to the optionor.

Mode of acceptance. As a second line of argument, appellant contends that even if the ‘effective when posted’ rule is accepted, section 1583 is inapplicable to the instant case because the rule laid down in this section is but supplementary to section 1582 which provides that ‘If a proposal prescribes any conditions concerning the communication of its acceptance, the proposer is not bound unless they are conformed to; but in other cases any reasonable and usual mode may be adopted.’ Based upon these provisions, appellant argues that (a) by paragraph 45 of the lease2 the parties agreed that the exercise of the option an actual notice must be given, and in the alternative (b) that respondent's attempt to exercise the option was ineffective because the method of communication chosen was not a reasonable and usual mode of communicating such notice. Neither point is well taken.

(a) Appellant's contention that the lease provided for actual receipt of notice exercising the option is predicated on the assumption that the phrase ‘given’ should be equated with ‘receipt.’ This argument is a non sequitur for at least two reasons.

First: Even if accepted that, as a general rule, the optioned must be strictly held to exact compliance with the terms of the option (Hayward Lumber & Investment Co. v. Construction Products Corp. (1953), 117 Cal.App.2d 221, 229, 255 P.2d 473), the word ‘give’ cannot by definition be limited to a physical delivery of the thing to be given. This is well illustrated in the present case where another paragraph of the lease explicitly states that notices may be given personally or by depositing the same in the mail (par. 19, see infra). This conclusion is not only a dictate of logic which finds strong support in the provisions of the lease itself, but also buttressed by the pertinent California cases which emphasize that the word ‘given’ or even the stronger word ‘delivered’ and used in option agreements may not be equated with or interpreted to mean ‘receipt’ (Estate of Crossman (1964), 231 Cal.App.2d 370, 373, 41 Cal.Rptr. 800; Morello v. Growers Grape Prod. Assn., supra).

Second: As indicated before, in the case at bench we are not constrained to rely solely on paragraph 45 of the lease in order to decipher the meaning of giving notice. To the contrary, additional provisions in the lease shed further light on what the parties intended by using the phrase ‘giving notice’ in paragraph 45. Thus, paragraph 19 provides in explicit terms that ‘All notices to be given to Lessee may be given in writing personally or by depositing the same in the United States mail, postage prepaid, and addressed to Lessee at said premises, whether or not Lessee has departed from, abandoned or vacated the premises.’ (Emphasis added.)

It is well recognized that in construing an instrument the court should accord it such an interpretation which is reasonable (§ 1643) and which gives effect to the intent of the parties as may be interpreted from the entire agreement (Addiego v. Hill (1965), 238 Cal.App.2d 842, 846, 48 Cal.Rptr. 240). The words used in a certain sense in one part of an instrument are deemed to have been used in the same sense in another (Caminetti v. Pac. Mutual L. Ins. Co. (1943), 22 Cal.2d 344, 358, 139 P.2d 908). Moreover, a contract susceptible of two constructions should be given an interpretation which is most equitable and which will not give one party an unconscionable advantage over the other (Brawner v. Wilson (1954), 126 Cal.App.2d 381, 271 P.2d 937; Southern Surety Co. v. Bank of Lassen County (1931), 118 Cal.App. 149, 4 P.2d 952).

These principles make it unquestionable that paragraph 45 must be construed together with paragraph 19 in order to determine the meaning of ‘giving’ notice in the option proviso of the lease. When so construed, the conclusion is compelled that the parties defining the notice requirement in paragraph 45 either intended that notices to the lessor be given the same way as to the lessee or the provisions of paragraph 45 are at best ambiguous. In either case it is more than obvious that actual receipt of notice was not contemplated by the parties.

(b) Appellant's alternative contention that giving notice by ordinary mail was not a reasonable and usual mode of communication under the circumstances here presented requires just brief attention. As mentioned before, the agreement between the parties was silent as to how to give notice of exercising the option. In the absence of such provision in the contract, respondent was fully authorized to take recourse to the regular communication by mail3 (§ 1583; King v. Stanley (1948), 32 Cal.2d 584, 588–589, 197 P.2d 321; Parker Co., Inc. v. Exeter Refining Co. (1938), 26 Cal.App.2d 610, 612, 79 P.2d 1114; Wicktor v. County of Los Angeles (1960), 177 Cal.App.2d 390, 406, 2 Cal.Rptr. 352; Dawson v. Goff; State of California v. Agostini; Estate of Crossman; Morello v. Growers Grape Prod. Assn., all supra). In addition, respondent was justified in using the mail as a means of communication for the reason that paragraph 19 of the lease authorized mail communication to the lessee without qualification which, by reasonable interpretation, should be extended to communications to the lessor as well. Moreover, as an established practice, the parties did use ordinary mail as a means of correspondence between them for a rather extended period of time engrossing almost five years.

We conclude that the lease agreement in question failed to specify how the exercise of option was to be communicated to appellant. In the absence of such provisions in the lease, section 1583 became operative, which section both conceptually and as a matter of legal policy is applicable to options as well as to bilateral contracts. Respondent's June 5, 1969 latter constituted an unconditional acceptance of the offer contained in the lease option. By depositing the letter of acceptance in the United States mail, the irrevocable offer contained in the option ripened into a bilateral binding contract between the parties which effectively extended the term of the original lease for another five years.

Anticipatory breach: At oral argument, appellant advanced an argument not specifically raised in the briefs; namely, that respondent had either anticipatorily breached the option contract or had effectively repudiated the exercise thereof.

The basis of this contention is contained in appellant's trial exhibit 17, a memorandum dated June 10, 1969, pertaining to a phone conversation between appellant's president, Mr, Williams (the author of the memo) and Mr. Thatcher, an officer of respondent.

Appellant's contention cannot be sustained for several reasons. First, even a cursory reading of the memorandum discloses that Mr. Williams did not consider Mr. Thatcher's remarks as constituting any anticipatory breach.4

Secondly, the weight and credibility of the evidence is exclusively a matter for determination by the trier of fact. Since the court explicitly found that respondent effectively exercised the option, the clear implication is that the court did not find either an anticipatory breach or a repudiation to have occurred. This implication is bolstered by the comments of the trial judge who, after reading appellant's brief on the subject, adhered to his earlier ruling that the option had been validly exercised.

Finally, although appellant orally requested findings of fact and conclusions of law and volunteered to prepare them, the court directed respondent's counsel to do so. The record does not disclose any written objections or proposed counterfindings by appellant (see Cal.Rules of Court, rule 232(d)). Therefore, this court must infer the logical and reasonable findings in support of the judgment (Brown v. World Church (1969), 272 Cal.App.2d 684, 692, 77 Cal.Rptr. 669).

The judgment is affirmed.


FN1. Unless otherwise indicated, all references hereinafter will be to the California Civil Code..  FN1. Unless otherwise indicated, all references hereinafter will be to the California Civil Code.

2.  Paragraph 45 of the lease provides in pertinent part that ‘Lessee may, by giving not less than six months prior notice in writing to Lessor, extend this lease for an additional five years.’ (Emphasis added.)

3.  As noted by respondent at oral argument, deposit in the mail is recognized as an effective and determinative act with respect to such crucial matters as service of legal notices, some of which initiate jurisdictional time limits (Meskell v. Culver City Unified School Dist. (1970), 12 Cal.App.3d 815, 824, 96 Cal.Rptr. 773).

4.  The specific reference to the option is as follows: ‘He is still complaining about The Loft and is threatening to sell both Sunny-vale and San Jose. He said he would keep San Jose for another five years if we would knock $1,000 a month off the rent. Other wise, he would close it up or sell it.‘I suggested we cross that bridge when we get to it and get Sunnyvale open.’

KANE, Associate Justice.

TAYLOR, P. J., and ROUSE, J., concur.