ROMASANTA v. MITTON (1987)

We hold, under the circumstances established in this case that the lessee should be relieved from the severe consequences of a slight delay in the timely exercise of an option to renew a long-term commercial lease of real property where the lessor suffered no damage.

At the end of 1974 respondents, the lessees (Mr. and Mrs. Mitton), purchased an assignment of a lease of motel property.   The former lessees had just exercised the first of two ten-year renewal options.   Appellant is the lessor, Mr. Romasanta (Romasanta).

Under the terms of the lease, the Mittons had the option to extend the lease for an additional ten years, commencing March 1, 1985, upon giving 90 days written notice to Romasanta of their intention to exercise the option.   December 1. 1984 was the cut off date to give such notice.   The Mittons had instructed their accountant to timely exercise the option.   He assured the Mittons he would take care of it and that he had flagged his calendar to do so.   Despite reminders from the Mittons, the accountant failed to give notice.

On December 13, 1984, as soon as they discovered the mistake, the Mittons personally delivered written notice to Romasanta, who rejected the notice as late and instituted this suit for unlawful detainer.

The trial court found that the Mittons devoted most of their assets and a great deal of their energy from 1975 to 1985 building up this business.   With Romasanta's knowledge they made extensive, long-term improvements which greatly increased the value of both the property and the business.   In the last two years of the term, the income to Romasanta from this lease increased considerably.   The Mittons transformed a disheveled, unrated motel into a AAA three-star operation.

The trial court also found Romasanta knew the Mittons had obtained long-term financing for these improvements which would extend well beyond the first term.   He knew that the only source of income the Mittons had to pay for these improvements was the income generated from the motel business.

Romasanta also knew the Mittons intended to stay and exercise their option about a year before written notice was due.   Mrs. Mitton told him so in a conversation they had regarding the installation of expensive television sets at that time.   Romasanta understood her remarks to be an indication of an intent to exercise the option and he stated, “yes, I understand.   That's O.K. with me.”   The record reveals the Mittons made many of the substantial improvements during the last year of the lease, after this conversation.   The oral statement, coupled with the Mittons' conduct, gave Romasanta notice of their intent to stay.

In addition, the trial court determined Romasanta, an experienced real estate and tax attorney, drew up the lease and its amendments, including an amendment drafted at the end of the short tenancy of the prior lessees which provided for the forfeiture of all furniture, fixtures and equipment free of liens upon termination.   The Mittons, on the other hand, were relatively inexperienced and unsophisticated.   They relied on Romasanta's legal and general advice repeatedly, even though he never became legal counsel to them.   The relationship between Romasanta and the Mittons was informal and amicable.   Much of their business was transacted orally.

The trial court held their was no damage to Romasanta due to the slight delay in giving written notice.   Aside from the late notice to renew, the Mittons had kept all other covenants and conditions in the lease.

Discussion

Romasanta urges strict adherence to the deadline for giving notice of renewal of this long-term lease.   He claims that two court of appeal decisions, Simons v. Young (1979) 93 Cal.App.3d 170, 155 Cal.Rptr. 460 and Bekins Moving & Storage Co. v. Prudential Ins. Co. (1985) 176 Cal.App.3d 245, 221 Cal.Rptr. 738, are dispositive of this case.   We disagree.   Aside from being factually distinguishable, we find they do not comport with the better-reasoned, majority view in this country, granting equitable relief when, as here, there is only minimal delay in giving notice, the harm to the lessor is slight and the hardship to the lessee is severe.   In neither Simons nor Bekins was there evidence to support a finding of any oral attempt to exercise the options to renew within the time limit and acquiescence in it by the landlord.

The Simons/Bekins view finds solace in the concept of requiring adherence to conditions precedent in the law of option contracts.   Under such law, no relief may be granted a lessee from an inadvertant failure to strictly comply with the condition precedent of providing timely written notice, absent contributing fault on the part of the lessor, even if there is no harm to the lessor and substantial harm to the lessee.   Regardless of the amount or nature of the consideration involved in long-term leases, the Simons/Bekins courts do not view the resultant loss of such leaseholds as an inequitable forfeiture, even in cases of slight delay.   They consider the date for renewal of options sacrosanct.   Relief may be granted only if the lessee shows fraud, surprise, accident or mistake.

In other states courts have recognized that equity jurisprudence should differentiate between options to purchase real or personal property from options to renew long-term commercial leases.  (See, for example, the Connecticut cases:  Xanthakey v. Hayes (1928) 107 Conn. 459, 140 A. 808, 812;  F.B. Fountain Co. v. Stein (1922) 97 Conn. 619, 118 A. 47, Galvin v. Simons (1942) 128 Conn. 616, 25 A.2d 64.)

Unlike options to purchase, the consideration to the lessor in long-term commercial leases is not just the payment of a set fee for the option, but continuing rental payments plus, in many cases, the subsequent ownership of all the improvements made a part of the leased building.  (Xanthakey v. Hayes, supra, 107 Conn. 459, 140 A. at p. 812.)

Many courts have long recognized that mutuality of obligation is not the sine qua non for relief in long-term leases or some options to purchase.   They determined there are overriding considerations in equity.  (F.B. Fountain Co. v. Stein, supra, 97 Conn. 619, 118 A. at p. 49;  De Rutte v. Muldrow (1860) 16 Cal. 505, 512–513;  Cooper v. Pena (1863) 21 Cal. 403, 411–412;  Hall v. Center (1870) 40 Cal. 63, 67–68.)

The consideration to the lessee of a long-term lease with options is not merely the use of the leased premises for the first term, but also the prospective use in renewal terms.   The promise on the part of the lessor to grant renewal, and the prospect that the lessee would avail himself of that right form indivisible parts of the lease contract and represent a substantial consideration integral to the lease.   The lessees' willingness to make extensive, costly improvements is predicated on this consideration.

For these reasons modern equity jurisprudence is loath to strictly enforce the notice requirements in such leases.   Strict enforcement creates a forfeiture, and equity abhors a windfall.   Time is not of the essence here.   As the Fountain court ruled, “[i]n cases of mere neglect in fulfilling a condition precedent of a lease, which does not fall within accident or mistake, equity will relieve when the delay has been slight, the loss to the lessor small, and when not to grant relief would result in such hardship to the tenant as to make it unconscionable to enforce literally the condition precedent of the lease.”   (F.B. Fountain v. Stein, supra, 97 Conn. 619, 118 A. at pp. 49–50.)

Hardship sufficient to invoke equity occurs when the severity of the loss to the lessee is out of all proportion to the gravity of the fault.  (J.N.A. Realty Corp. v. Cross Bay Chelsea, Inc. (1976) 52 A.D.2d 617, 382 N.Y.S. 345, Rev. (1977) 42 N.Y.2d 392, 397 N.Y.S.2d 958, 961–962, 366 N.E.2d 1313, 1317–1318.)   Each case must be considered on its own merits, but typically, as here, the loss of substantial improvements coupled with difficulty in relocating is sufficient to justify equitable relief.  (Xanthakey v. Hayes, supra, 107 Conn. 459, 140 A. at p. 811;  Galvin v. Simons (1942) 128 Conn. 616, 25 A.2d 64;  J.N.A. Realty Corp. v. Cross Bay Chelsea, Inc., supra, 397 N.Y.S.2d at pp. 961–962, 366 N.E.2d at pp. 1317–1318];  Gallagher v. Marconi (N.Y.Dist.Ct.1971) 68 Misc.2d 319, 326 N.Y.S.2d 697, 702, relied on below;  Ward v. Washington Distributors, Inc. (1980) 67 Ohio App.2d 49, 425 N.E.2d 420, 423–425;  Fletcher v. Frisbee (1979) 119 N.H. 555, 404 A.2d 1106, 1109;  Trollen v. City of Wabasha (Minn.1979) 287 N.W.2d 645, 648;  Southern Region Indus. Realty, Inc. v. Chattanooga Warehouse & Cold Storage Co. Inc. (Tenn.App.1980) 612 S.W.2d 162, 165;  Linn Corp. v. LaSalle National Bank (1981) 98 Ill.App.3d 480, 53 Ill.Dec. 885, 888, 424 N.E.2d 676, 679;  Sosanie v. Pernetti Holding Corp. (1971) 115 N.J.Super. 409, 279 A.2d 904, 906;  Wharf Restaurant, Inc. v. Port of Seattle (1979) 24 Wash.App. 601, 605 P.2d 334, 341.)   The Mittons face a severe forfeiture from the loss not only of their capital expenditures in the business, but of the very business itself.

The limits of delay which will be considered “slight” are difficult to define.   A court of equity must consider each case individually, balancing the hardships and the delay in the context of the entire factual picture.   The trial court did so in this case.   When the notice requirement is 90 days a 13 day delay under the circumstances here is slight.   There is no evidence the lessor changed his position in reliance upon the delay, or otherwise, to his detriment.

Since the prospective use of an option to renew a long-term commercial lease is predicated upon and entails substantial consideration integral to the lease, we hold that equity should relieve lessees from the loss of such leases where the delay in giving notice of renewal is slight, the hardship to the lessor is small and the hardship to the lessee is severe.

The judgment is affirmed.

ABBE, Associate Justice.

STONE, P.J., and GILBERT, J., concur.