Landlord Says No Quiero Taco Bell

In a recent unpublished case, Southwest Fuel Mgmt., Inc. v. AMPAK-I Enters., No. B314590, 2022 Cal. App. LEXIS 10110 (Cal. Ct. App. Dec. 19, 2022), the California Court of Appeal, Second Appellate District, rejected a tenant’s notice to extend the term of its ten-year lease because, among other reasons, the notice was issued two weeks late.

The tenant, AMPAK-I Enterprises, Inc., operated a Taco Bell at the property and had an option to extend the term of the lease for five years so long as the tenant issued a notice to extend the term by no later than July 6, 2019, three months prior to the expiration date of the lease.  On May 19, 2019, prior to the deadline, the tenant emailed the landlord stating, “I will need some time to meet with you and go through with the Options and the New Construction. Please let me know when we can meet.” Then, on July 20, 2019 (two weeks after the deadline), the tenant sent the landlord another email exercising its option.

After the initial term expired, the tenant continued to send the landlord its monthly rent; however, the landlord never cashed those checks.  Then, on May 5, 2020, the landlord sent a notice to the tenant stating that because the tenant failed to exercise its option, the term of the lease had converted to a month-to-month tenancy, and the landlord was issuing a 30 day notice to terminate the tenancy.  A few months later, when the tenant refused to vacate, the landlord filed an eviction action. 

At trial, the tenant argued that it properly exercised its extension on time and, regardless, the landlord waived its right to evict the tenant because it had “accepted” (even though it did not cash) the rent checks after the lease purportedly expired.  The trial court rejected both of these arguments.

The Court of Appeal analyzed each of the arguments in reverse order addressing the waiver argument first. The court explained that the landlord did not “accept” the rent checks and therefore did not waive its rights because the landlord notified the tenant of its intent to terminate the lease through its May 5th notice and the landlord never cashed the checks.  Therefore, there was no acceptance.  Further, the lease included a non-waiver provision specifically stating that the acceptance of rent shall not serve as a waiver.

The court then addressed the tenant’s extension notices and rejected their validity on multiple grounds including procedural and substantive reasons.  As for the substantive reasons, the court first explained that the lease allowed for various methods to deliver notices such as regular or registered mail, but did not include email notices.  The court stated, “Courts are strict in holding an optionee to exact compliance with the terms of the option.”  Consequently, tenant’s email notices were invalid.  The court then explained that even if email notices were valid, the result would not change.

Tenant’s May 19th notice (before the deadline) did not meet the requirement of a valid notice.  The court explained, “To avail himself of an option of renewal given by a lease, a tenant must apprise the lessor in unequivocal terms of his unqualified intention to exercise his option in the precise terms permitted by the lease.” (emphasis in the original).  The May 19th notice did not meet these requirements.  As to the tenant’s July 20th notice, it was clearly outside of the deadline and therefore invalid.

This case is an important reminder to tenants of the courts’ insistence on strict compliance with the notice requirements of a lease in connection with exercising extension options.

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