WHEN EXERCISING REAL ESTATE OPTIONS – Strict Compliance is Your Only Option

Options affecting real estate are commonly found in two circumstances: options to purchase real estate and options to extend the term of a lease. A recent decision by the Illinois Appellate Court filed February 28, 2018 in the case of  Michigan Wacker Associates, LLC v. Casdan, 2018 IL App (1st) 171222 concerns an option to extend the term of a lease, but its reasoning is instructive for real estate options generally. Strict compliance is required.

The Option to Extend Lease

In Casdan, the lease had an initial term ending December 31, 2011, but provided for two additional options to extend the lease, stating as follows:

“Tenant shall have the option to extend the term of this Lease for two additional five (5) year periods . . . the First Extension Option (expiring December 31, 2016) . . . and the Second Extension Option, (expiring December 31, 2021). The option to renew shall be exercised with respect to the entire Demised Premises only and shall be exerciseable by Tenant delivering the Extension Notice to Landlord, in the case of the First Extension Option, on or prior to January 1, 2011, and in the case of the Second Extension Option, on or prior to January 1, 2016, in all cases, time being of the essence.”

Required Notice

The lease also contained a provision governing notices that provided, in part, that “Except as otherwise expressly provided in this Lease, any . . . notices . . . or other communications given or required to be given under this Lease . . . shall be deemed sufficiently given or rendered only if in writing . . . sent by registered or certified mail (return receipt requested) addressed to the Landlord at Landlord’s address set forth in this Lease . . .; or to such other address as . . . Landlord . . . may designate as its new address for such purpose by notice given to the other in accordance with the provisions of this Article 27.”

The lease also provided that landlord could waive strict performance of a lease term only by executing a written instrument to that effect and, even then, the waiver of one breach would not result in the waiver of subsequent breaches.

Imprecise Exercise

On November 9, 2010, the tenant, through its attorney, sent a written extension notice to extend the lease term for the First Extension Option via Federal Express rather than via registered mail or certified mail as provided under the express terms of the lease. Landlord did not dispute the notice and treated the notice as having effectively extended the term of the lease to December 31, 2016.

Subsequently, the tenant claims to have effectively exercised the Second Extension Option to extend the term to December 31, 2021. On August 16, 2012, tenant, again through its attorney, emailed landlord raising matters tenant “would like to discuss”, and included the following statement: “We are now in the first of two (2) five (5) year options. Tenant would like to exercise the second option now, so we don’t have to do this again as soon. . .”

There were additional proposals and suggestions in the email that create issues concerning the definiteness of the purported exercise of the Second Extension Option, but for purposes of the court’s ruling in Casdan, it is unnecessary to address that concern.

Claim That Landlord Received Actual Notice

Tenant’s position was that through various conversations and emails occurring prior to January 1, 2016, landlord received actual notice of tenant’s exercise of the Second Extension Option. Before and after January 1, 2016, tenant made clear to landlord that tenant wanted to remain in the Demised Premises, make various leasehold improvements, and renew the lease. Further, because the landlord had accepted notice of exercise of the First Extension Option by means other than as strictly provided under the terms of the lease, landlord could not insist upon strict adherence to the terms of the lease for exercise of the Second Extension Option.

The Trial Court Ruled in Tenant’s Favor

Following a hearing, the trial court entered summary judgment in tenant’s favor, finding that the August 16, 2012 email was a clear and unambiguous exercise of the Second Extension Option.

The Appellate Court Reversed

On appeal, the trial court’s summary judgment ruling was reviewed de novo, with the appellate court noting that “we review the court’s judgment, not its reasoning,” and reversed the trial court’s judgment in favor of tenant.

The Appellate Court’s Reasoning

In explaining its decision, the Casdan court stated as follows (omissions from text are not noted):

Our supreme court’s seminal decision in Dikeman v. Sunday Creek Coal Co., 184 Ill. 546 (1900), remains the leading authority on option matters. The contractually mandated time for performance is generally an essential term of a contract. Unless that term is waived, an option is lost due to untimeliness. Discussing the nature of the option before it, Dikeman stated “[the] agreement was purely a privilege given to the lessee without any corresponding right or privilege of the lessor, and the only stipulation was that the right should be exercised at a certain time.” Id. at 551.

Since Dikeman, courts have generally required strict compliance with options. See T.C.T. Building Partnership v. Tandy Corp. 323 Ill. App. 3d, 114, 115, 119-120 (2001) (treating the method for exercising an option as a condition precedent requiring strict compliance). Strict compliance is dictated not only by precedent, but by the needs of commercial transactions and fairness. Options to cancel or extend commercial leases are invaluable to a lessee, and a lessor generally does not receive consideration for the lessor’s agreement to be bound by an exercise of the option. Thus, a lessor may insist on a writing to further certainty as the lessor foregoes other opportunities to lease the space.

Consequently, actual or oral notice is insufficient to exercise an option where a party has failed to provide timely notice. Furthermore, cases finding actual notice to be sufficient outside the options context have no bearing on notice in option cases.

In addition, tenant does not dispute that it failed to strictly comply with the method of notice prescribed by the lease. Instead, tenant argues that actual notice is a sufficient substitute for the lease requirements and landlord waived strict compliance with the requisite method of notice.

Dikeman and its progeny clearly defeat tenant’s assertion that actual notice is sufficient.

See Casdan, 2018 IL App (1st) 171222, ¶¶ 33-37.

Key Lesson Learned . . .

One of the key lessons to be learned from Michigan Wacker Associates, LLC v. Casdan is that exercising an option – any option – is not a casual undertaking. Strict compliance with the method of exercise specified in the option instrument is essential. It must be specific, certain, and unconditional. It must also be timely, and the method of notice of exercise must strictly adhere to the notice requirements of the option instrument. Even actual notice of an attempted exercise of an option will not suffice if strict compliance with the method of exercise is not observed.

Thanks for listening . . .

Kymn