One of the first lessons a property owner learns is to always have the tenant sign a written lease. Having a written lease, the property owner believes, avoids ambiguities and provides both sides with an understanding of their rights and responsibilities. Unfortunately for property owners, there are times when even the clearest provisions of the lease are not worth the paper they are written on. In particular, this can occur when a tenant seeks to renew his or her lease.
Under New Jersey law, equity will permit a tenant’s technical noncompliance with the exercise of an option to renew a lease when: (1) "substantial harm would result to the tenants if forced to relocate"; (2) "the landlord did not change position in reliance on the tenants’ delay"; (3) the tenant’s "failure to give timely notice was based upon an honest mistake of fact in that they had forgotten the date of the deadline"; (4) "the delay was slight"; and (5) "the loss to [the landlord was] insignificant." Below is a discussion of the circumstance where a property owner may not be able to enforce a written lease against his/her tenant, and how counsel can advise property owners to avoid this pitfall.
The Goodyear-Sosanie Standard
In New Jersey, the two most popular cases surrounding these issues are Sosanie v. Pernetti Holding Corp., 115 N.J. Super. 409 (Ch. Div. 1971); and Goodyear Tire & Rubber Co. v. Kin Properties, 276 N.J. Super. 96 (App. Div. 1994). Each of these cases is addressed in turn.
In Sosanie, the plaintiff-tenant operated a retail store. The business operated at the same location for over 10 years. In January 1970, the landlord sold the property to the defendant. The lease contained an option to renew, which was to be exercised six months before the expiration of the lease. The tenant did not exercise the option before the stated deadline of Dec. 1, 1970. Thirty-nine days after the notice was required, the landlord informed the tenant of the landlord’s intention to expand his own business at the property. This reminded the tenant of its failure to exercise the option.
One or two days later, the tenant sent a letter of renewal. The tenant contended that if it was forced to vacate the premises an "unjust and inequitable forfeiture" would result. The tenant also contended that the landlord "sat back and surreptitiously waited until the notice deadline had passed, whereupon he pounced upon the unsuspecting … [tenants] and administered the coup de grâce with a notice to vacate."
The Sosanie court held that the tenant would be permitted to exercise its option, notwithstanding that the formal exercise of the option was not timely under the strict terms of the lease. The court explained that, although the "general rule" in New Jersey is that the exercise of an option contract is "time of the essence," the general rule is modified "in regard to renewal options, at least as they apply to a landlord-tenant relationship."
The Sosanie court found that substantial harm would result to the tenants if forced to relocate and that the landlord did not change position in reliance on the tenants’ delay. The court determined that "[i]t can hardly be disputed that their failure to give timely notice was based upon an honest mistake of fact in that they had forgotten the date of the deadline. In any event, the delay was slight and the loss to defendant insignificant." Therefore the court determined that the enforced forfeiture of the lease would be "inequitable and unconscionable" and that "special circumstances" justified enforcement of the renewal option "even though said option was not exercised precisely according to governing terms."
A decade after the Chancery Division’s decision in Sosanie, the Appellate Division in Goodyear Tire & Rubber Co. v. Kin Properties, adopted the standard set out in Sosanie. In Goodyear, the tenant brought an action against the landlord to enforce a lease option renewal, which the tenant had exercised prematurely. The landlord refused to honor the tenant’s exercise of the option on the ground that it was not in strict compliance with the option provision in the lease. The trial court held that the tenant’s technically noncompliant exercise of the option was fully enforceable on equitable grounds. The Appellate Division affirmed.
In holding that the tenant’s exercise of the option was enforceable, the Appellate Division in Goodyear examined carefully — and adopted — the equitable factors identified in the Chancery Division’s decision in Sosanie. The Goodyear court held:
In Sosanie v. Pernetti Holding Corp., 115 N.J. Super. 409, 412, (Ch.Div.1971), a lease renewal option was required to be exercised no later than six months prior to the expiration of the lease. After the renewal period expired, the landlord informed the tenants that they must vacate. One or two days later, the tenants sent a letter of renewal. The tenants contended that if they were forced to vacate the premises an "unjust and inequitable forfeiture" would result. They also contended that the landlord "sat back and surreptitiously waited until the notice deadline had passed, whereupon he pounced upon the unsuspecting … [tenants] and administered the coup de grace with a notice to vacate." Id. at 412-13.
Applying the Sosanie standard, the Appellate Division in Goodyear held that:
[The] plaintiff herein would suffer substantial hardship if the lease were not renewed and defendants have not changed their position in reliance on the premature notice and, in fact, concede they had notice of plaintiff’s intent to renew. The principle of special circumstances warranting equitable relief has been recognized by other courts.
Based on the foregoing, the appellate court affirmed the decision of the trial court below that the tenant’s technically noncompliant exercise of the option was fully enforceable on equitable grounds.
In short, under the Goodyear-Sosanie standard, equity will permit a tenant’s technical noncompliance with the exercise of an option to renew a lease when: (1) substantial harm would result to the tenants if forced to relocate; (2) the landlord did not change position in reliance on the tenants’ delay; (3) the tenant’s failure to give timely notice was based upon an "honest mistake of fact" in that they had forgotten the date of the deadline; (4) the delay was "slight"; and (5) the loss to the landlord was "insignificant."
Avoiding the Pitfalls
For a property owner, these words may be hard to swallow. After all, what is the point of a lease renewal term if that part of the agreement can be ignored by the court? However, with special attention to these factors cited by the court, attorneys can instruct their clients how to avoid these pitfalls and ensure that their rights are protected.
Two key aspects of this test, which are within the property owner’s control, are the ability to give notice and the owner’s change in position. While providing notice for renewal might not be specifically required by the lease for a renewal, counsel should provide formal written notice to the tenant in all cases so that the courts will see that the owner is not trying to employ "gotcha" tactics. As can be seen from the circumstances in Goodyear and Sosanie, courts strongly disfavor any conduct that can be considered an attempt to sneak past a renewal deadline without notice. Admittedly, the terms of the lease should be enough to provide notice and alleviate any of these concerns by the court, but taking the additional step of providing separate written notice will not hurt the property owner’s position in any way, and will ensure that lease can be upheld by the court without equitable concerns.
The second step that counsel should advise the property owner to take to avoid these pitfalls is to take immediate action, once the renewal deadline has passed, to re-rent or convert the apartment for another tenant. By the property owner showing reliance on the renewal deadline and expending effort/money based on that deadline, the property owner can persuade the court that he/she will be inequitably harmed by failure to enforce the deadline. These elements will counteract the renter’s equities in failing to meet the renewal deadline and will allow the court to make its determination based on the lease terms in the property owner’s favor.
Armed with these criteria in which a court can refuse to enforce a lease, attorneys counseling their clients will be adequately equipped to defeat this process. Timing is especially critical to avoid a challenge by the tenant to a lease renewal. A knowledgeable attorney is the best resource to help ensure that a lease is enforced. When a tenant tries to avoid the obligations of a written lease, preparation can make all the difference. •