California commercial leases and rental agreements often have an option which allows the tenant -lessee the right to extend the term of the lease. Generally, the option language provides a specific method to exercise the option, and if the lessee does not follow the procedure, courts find the option was not exercised. In a recent decision, a tenant did not follow the required procedure, but the landlord waived the procedure, extending the term. However, three other tenants did not request the extension, and were not liable for rent. To avoid these kinds of problems parties to a commercial lease with an option should consult with an experienced Sacramento and El Dorado real estate attorney.
In Kavin v. Frye property was leased to open a dress shop in southern California. Kavin was the lessor. There were four lessees who signed the lease, but only two, Andrea and Sessi, were active in the dress shop. The other tenants (Frye & Morgan) were required to sign on primarily as guarantors of the lease. The agreement contain an option to extend the term. The option had to be exercised in writing no later than six months before the end of the term of the lease; if not done, the option automatically terminated .
The option was not exercised within the time period (and was terminated according to the lease). Meanwhile Sessi had a baby and gave up the dress shop, leaving it all to Andrea. Two weeks after the time to exercise the option passed the land went to the sop and asked Andrea if she wanted to extend. She said yes, so he dictated to her the words she wrote and signed the paper exercising the option. Andrea never discussed exercising the option with any of the other three tenants. Eventually, Andrea could not pay the rent any more, and abandoned the place with over a year left on the extended term. Kavin sued all four lessees for the balance of the rent for the full extended term.
The court found that the other three tenants were not bound to the extended term, and did not owe any rent. The deadline to exercise the option had passed, and the option was automatically terminated. The landlord argued that he had waived the deadline requirement, and so it should be enforceable as to all four. However, the court saw that the deadline also benefitted Frye and Morgan (who essentially guaranteed the lease) because they had signed on for the original term, but would not necessarily want to be on the hook for rent any longer. As the deadline requirement benefitted the other parties, Kavin the lessor could not unilaterally waive it.
The court concluded that, when Kavin had Andrea write out & sign an exercise of option, the lessor was making a new deal with only Andrea. The rest of the tenants were not involved in the new agreement, the old rental agreement was concluded, and only Andrea had to pay rent. This case points out several things common about options- that tenants sometimes do not really read their lease or believe the formal requirements are necessary, landlords sometimes cut corners to keep a tenant in place, and co-tenants really need to pay attention to what is happening with their lease at all times.