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Corbin on Contracts

Copyright 2007, Matthew Bender & Company, Inc., a member of the LexisNexis Group.

PART I FORMATION OF CONTRACTS

TOPIC A OFFER AND ACCEPTANCE

Supp. To CHAPTER 2 OFFERS: CREATION AND DURATION OF POWER OF ACCEPTANCE

1-2 Corbin on Contracts Supp. to § 2.15

Supp. to § 2.15 Missed Deadlines in Option Contracts

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(A) The following case cites this section:

(1) Andrews v. Blake, 69 P.3d 7 (Ariz. 2003) . In 1995, Andrews and Blake entered into a one-year lease of Andrews's property. In 1996, they entered into a three-year lease, drafted by Andrews, which granted to Blake an option to purchase the property ''at any time within the calendar year 1999'' for $300,000. Blake agreed to pay significantly increased rent under this lease in consideration for the option. As of January, 1999, both parties were under the mistaken impression that the option would expire at the end of January. The mistake led them to execute an addendum to the lease that purported to extend the option only until October 1, 1999, for which Blake paid an additional $10,000. The addendum contained a new notice provision stating that all notices would be deemed as ''given'' if they were in writing and delivered personally, by commercial delivery service, by courier, or by certified mail. Another clause stated that the option to purchase would terminate if not exercised before October 1, 1999. Blake asserted that he had exercised the option in a letter by regular mail to Andrews dated September 20. Andrews claimed he had not received the letter. On October 13, Andrews sent a letter to Blake stating that the option to purchase had expired. Blake later learned that Andrews had negotiated the sale of the property to another party for a price of $950,000. In December, Andrews offered to sell the land to Blake for $1 million. Blake sought specific performance of the contract to purchase the land pursuant to his option for $300,000.

The trial court held for Blake on equitable principles. The court of appeals reversed since Blake had failed to notify Andrews of the exercise of the option before October 1 in one of the ways set forth in the notice provision. The Supreme Court of Arizona held that the option provision merely required actual receipt of its exercise prior to October 1. Since the notice provision in the contract did not state that notices would be effective only if given by one of the ways set forth, it did not preclude written notice of the exercise of the option by regular mail. The court then recognized the usual rule that exercise of a power of acceptance under an option contract must be received as contrasted with typical offers to which the dispatch (''mailbox'') rule would apply. The court also recognized the rebuttable presumption that a letter properly addressed with proper postage will reach the addressee, but held that denial of receipt rebuts a prima facie case of mailing and creates an issue of fact for the trier of fact. The court directed the trial court to determine whether Andrews had received the September 20 letter from Blake prior to October 1. If it had been received, the court held that Blake was entitled to the property for $300,000. If the letter was not received, however, the inquiry would not end. The trial court had relied on equitable considerations via the Corbin analysis in the treatise at § 2.15, ''Missed Deadlines in Option Contracts,'' which the instant court stated as excusing the late exercise of an option where (a) the delay is slight, (b) the delay has not prejudiced the other party by a change of position (Andrews had not made the contract with the other purchaser before receiving Blake's late notice) and (c) because of the lessee's valuable improvements on the property, the failure to grant relief would result in unconscionable hardship (Blake had improved the property to the extent of $59,000). The court recognized a split of authority in other jurisdictions in relation to the Corbin analysis and rejected its blanket adoption in Arizona. It was adamant in resisting any relief for a party who negligently failed to meet strict notice requirements. It held that equitable relief for a lessee's failure to strictly comply with notice provisions can only be granted when the failure is caused by fraud, duress, incapacity, undue influence, misrepresentation, mistake, estoppel or the lessor's waiver of its right to receive notice. Only if one of these circumstances is shown would the three-part Corbin analysis then apply. The court vacated the court of appeals decision, reversed the trial court's judgment and remanded the case for further proceeding consistent with its opinion.

The opinion is disappointing. The court does not explain why the Corbin analysis would be necessary if a failure to comply strictly with notice provisions was caused by fraud, duress, misrepresentation or other fault by the party insisting on strict compliance. If an option holder did not comply with notice provisions of notice because of fraud, should such a finding not be sufficient alone to excuse a delay? The court also states that Blake had paid a premium under the three-year 1996 renewal for an option that could be exercised at any time during the entire calendar year of 1999. Both parties mistakenly believed that the option had to be exercised by January 31, 1999. The mistake was a basic assumption of the addendum requiring exercise of the option by October 1, 1999, for which Blake paid an additional $10,000. It would have been helpful for the court to indicate why certain issues had not been pursued, i.e., mutual mistake that had a material effect on the agreed exchange, the unenforceability of the addendum due to the lack of any consideration for Blake's promise to (a) pay an additional $10,000 and (b) be relegated to a requirement to exercise the option prior to October 1 when Andrews had a pre-existing duty under the 1999 agreement to allow Blake to exercise the option until the end of that calendar year.

(2) Thomson Learning, Inc. vs. Olympi Properties, LLC, 850 N.E. 2d 314, 2006 Ill. App. LEXIS 491 (2006) . The tenant leased spaced in an office building pursuant to a lease that granted the tenant an option to cancel prior to the lease's scheduled end in December 2009. If the tenant exercised the cancellation option, the lease would end on August 31, 2005. To cancel, tenant had to pay a cancellation fee and give the landlord written notice of cancellation. The cancellation option required the tenant to perform both of these acts by September 1, 2004. The cancellation option expressly stated that ''time [was] of the essence.'' The tenant, in fact, forwarded the cancellation fee, but there is a factual dispute as to whether the tenant also forwarded notice of cancellation. The tenant however, argued that because it paid the cancellation fee by the required date, and because the landlord actually knew by that date that tenant intended to exercise the cancellation option, the tenant effectively exercised that option. The court rejected this argument on the footing that it wrongfully assumed that something less than strict compliance with the terms of an option to cancel or extend a commercial lease was sufficient to exercise that option. The court explained that a lessee who receives an option to extend or cancel a commercial lease receives something of great value. In addition, the rule requiring strict compliance with the terms of a cancellation option for a commercial lease may seem harsh, but the requirement has great value in promoting security in commercial transactions. The court also concluded that it could not excuse tenant's failure to strictly comply with the cancellation option on equitable grounds. Citing Corbin, the court explained that to be entitled to equitable relief, a lessee that fails to strictly comply with an option must at a minimum establish: (1) the delay in strictly complying was slight; (2) the lessee would suffer undo hardship if strict compliance were not excused; and (3) the lessor would not suffer prejudice if strict compliance were excused. Among other things, tenant failed to allege undo hardship. Further, a question existed as to whether the tenant had ''unclean hands'' which would bar equitable relief when the party seeking such relief is guilty of misconduct in connection with the subject matter of the litigation. The landlord alleged that the tenant lied about sending timely written notice of cancellation. Since matters of intent are generally inappropriate for resolution at the summary judgment stage, the existence of an issue of material fact precluded entry of summary judgment on equitable grounds.

(B) The following case is noteworthy:

Molnar v. Castle Bail Bonds, Inc., 2005 Ohio App. LEXIS 5971 . A lease of real property provided that the lessee had an option to purchase the property on specified terms by providing written notice sent by certified or registered mail to the landlord no later than August 1, 2001. No such notice was received by the deadline. The lessee (defendant Castle) subsequently indicated its intention to exercise the option but the lessor rejected that offer. The plaintiff initiated a forcible entry and detainer action to which the defendant filed a counterclaim seeking specific performance. The trial court held for the plaintiff since the required notice was not given. On appeal the defendant claimed that the trial court's strict construction of the notice requirement caused the defendant to suffer a forfeiture. The defendant was an assignee of the lease from another party to whom the defendant had paid $12,500 for improvements made by the former lessee. Under the lease, however, such improvements were not permissible absent the consent of the lessor which had not been requested or given. The instant court restated the general rule that an option must be exercised in the manner provided for in the contract and it must be exercised on or before the time specified, but it also recognized that a balancing of equities in such a case may excuse strict compliance as where the failure to notify on time results from accident, fraud, surprise or honest mistake and has not prejudiced the lessor. Even in the absence of a lessee's honest mistake, timely notice may be excused where the lessee has made valuable improvements to the leased premises. The court addressed the defendant's argument that it would forfeit the $12,500 it paid the former lessee for valuable improvements. The trial court had found that any improvement made by a lessee were the property of the landlord. The plaintiff had received no benefit from the payment made by the defendant to the former lessee and had no knowledge that such improvements were made in violation of the lease. Thus, the plaintiff was unaware of any inducement to the defendant entering the lease because of the improvements. The instant court agreed with these findings and concluded that the $12,500 payment was not relevant in balancing the equities between the plaintiff and defendant. The defendant also claimed that the trial court should have considered the nature of the defendant's failure to notify properly and on time under the criteria of materiality of breach as found in § 241 of the Restatement (Second) of Contracts. While the court found that the application of these criteria would not change the result in this case, it felt compelled to consider them in arriving at its conclusion, including the defendant's argument that its forfeiture was exacerbated by the fact that the property's market value was greater than the purchase price required by the option. The court quoted from Western Sav. Fund v. Southeastern Pennsylvania Transp. Auth., 285 Pa. Super. 187, 427 A. 2d 175, 180 (1981) : ''Because it is the optionor alone who is bound by the agreement until the date on which it is exercised, we think that fairness militates against demanding more from the optionor than he lawfully agreed to give and instead obliges us to strictly enforce the agreement to insure that neither party is prejudiced by a judicially authorized revision of the agreement.'' The judgment of the trial court was affirmed.