by Nadav Ravid and Jennifer Schulz
In Kavin v Frye, decided March 5, 2012, the California Court of Appeals held that three co-tenants to a lease were not bound by the fourth co-tenant’s exercise of an option to renew the lease for three reasons: (1) lack of strict compliance with the terms of the lease and the landlord’s inability to unilaterally waive such requirements, (2) the signing co-tenant’s lack of authority to bind the other co-tenants, and (3) the parties’ course of conduct did not serve as a mutual waiver of the express requirements of the lease. As the second reason alone is sufficient to render the option unenforceable against the co-tenants, we agree with the court’s ultimate conclusion, but we have some disagreements with the court’s reasoning on waivers. Below is a brief summary of the case, followed by some helpful tips to avoid unenforceable options.
Jeffrey Kavin, Inc. (the “Landlord”) entered into a sublease agreement (the “Lease”) with four parties: Andrea Frye, Harold Frye (Andrea’s father), Sescie Karabuykov, and William Morgan (Sescie’s stepfather) (collectively, the “Tenant”). Although the Lease was for Andrea and Sescie’s dress shop, the Brunette Boutique, the Landlord insisted on having Harold and William sign the Lease as co-tenants because Andrea and Sescie were considered credit risks. The Lease provided that the co-tenants were jointly and severally liable for one another, but did not stipulate that any one of the co-tenants had authority to bind the others. The Lease also contained a three-year option to extend the term if the Tenant delivered Landlord written notice six months before the end of the initial term; otherwise the option would automatically expire.
Eventually, Andrea alone was operating Brunette Boutique—Harold and William were never involved in the business, and Sescie no longer worked in the store. Several months after the end of the initial term (i.e. about nine months after the Tenant should have exercised the option pursuant to the Lease), the Landlord requested that Andrea give him a signed writing stating that the option was being exercised. The Landlord dictated “word for word” what Andrea should write in order to exercise the option and instructed her to leave the note undated. When Andrea vacated the premises a few months later, the Landlord sued the Tenant for breaching the Lease.
Strict Compliance and Landlord’s Unilateral Waiver:
The court held that because the Tenant did not strictly comply with the terms of the Lease requiring timely written notice to exercise the option, the option automatically expired. Although the Landlord argued that he waived the requirement of six months’ notice by accepting Andrea’s notice well after the deadline, the court stated that a party to a contract may only waive a contract provision when the provision is solely for that party’s benefit. Here, according to the court, the requirement of timely written notice was not only for the Landlord’s benefit, but also for Harold’s and William’s, as they stood to benefit by avoiding additional liability that would have arisen under the extended term. Thus, the Landlord could not unilaterally waive the Lease requirements for exercising the option.
Despite the court’s conclusion on this issue, we believe it is a well-established leasing principle that requirements in a lease for exercising a tenant’s option are intended exclusively for a landlord’s benefit, and, barring unique circumstances not presented by the facts of this case, landlords should be able to waive them.
Authority to Bind Co-Tenants:
Even if the Landlord could and did waive strict compliance for timely notice, the court found that Andrea did not have authority to bind her co-tenants and therefore they could not be bound by her notice to extend the term. The court rejected the Landlord’s argument that because the co-tenants were jointly and severally liable under the Lease, they were all bound by Andrea’s notice, as joint and several liability does not authorize any one co-tenant to bind another. Instead, the court explained that without the requisite authority, no liability could be established in the first place.
We agree with the court that no co-tenant may bind another without authority to do so. Accordingly, we believe it should follow that even if Andrea had timely exercised the option, her co-tenants would still avoid liability absent authority for Andrea to act on their behalf.
Mutual Waiver by Course of Conduct:
In some instances, courts have held that an option can be exercised through the course of conduct of the parties. Typically, this occurs when the lease lacks explicit instructions for exercising the option, but courts have also found that course of conduct can supersede failure to exercise an option even where a lease does have a written notice requirement (in which event the written notice requirement is deemed waived by the parties). The Kavin court cited a prior case holding that an option was enforceable where the tenant remained in the premises after the term expired and paid an increased rent amount that would have only been due under the option term, which the landlord accepted without protest. In that case, the parties’ course of conduct successfully waived the notice requirements contained in the Lease. In Kavin, however, the Landlord required Andrea to exercise the option in writing, leading the court to conclude that he did not waive the Lease’s requirement of written notice. As a result, even though Andrea remained in the premises and continued to pay rent after the expiration of the initial term, her conduct did not constitute an exercise of the option.
We believe a better rule would recognize that the parties’ course of conduct (Andrea’s staying in the premises and Landlord’s acceptance of her rent payments without protest) should eventually serve as waiver of the express requirements of the Lease. It should make no difference if a landlord seeks to add a belt (written notice after the deadline) to its suspenders (course of conduct). In other words, if Andrea had authority to bind her co-tenants, the fact that the Landlord asked her to belatedly sign the notice should not singlehandedly render the course of conduct waiver invalid. For example, if the option term was for a ten-year period, and Andrea continued to occupy the premises for seven of those ten years, it is hard to imagine that either the Landlord or the Tenant could avoid the remaining three years of the option term simply because the Landlord asked Andrea to sign a written notice a few months after the original deadline.
Regardless of our views, it is important for landlords to ensure that their leases include language to prevent them from losing out on option terms that they would otherwise want to enforce. Landlords should also carefully consider their course of conduct in their attempts to resuscitate an otherwise expired option. With that in mind, below are a few tips for landlords to consider.
Tips to Consider when Dealing with Options
Authority of Co-Tenants.
When a lease has more than one tenant, it should include language that states that any tenant has authority to bind any other joint tenant.
Although not discussed in Kavin, the case raised an issue related to guarantors. It is well established that a guarantor is liable for a lease extension so long as the extension was included in the original lease and the lease’s requirements for exercising that extension are complied with. If, on the other hand, the landlord seeks to waive certain restrictions in the lease (such as a deadline to exercise the option), he or she should not do so without the guarantor’s express consent. Indeed, it is good practice to apply this rule to any amendment to a guaranteed lease, not just one dealing with options. Otherwise, the guarantor would likely be able to avoid liability.
Waiver and Missed Deadlines.
Although it may seem counterintuitive, a landlord whose tenant has missed its deadline to exercise an option should avoid following up with the tenant to exercise the option after the deadline. Kavin suggests that the landlord may be better served by allowing the parties’ course of conduct to preserve the landlord’s waiver argument, rather than following up with the tenant to exercise the option after the deadline and thereby forgoing the argument of waiver by course of conduct.