What California Landlords and Business Tenants Should Know About Renewal Options in Commercial Leases

March 20, 2014

Landlords and business tenants entering into commercial leases in California should be aware of the legal issues surrounding lease renewal options. One of the best ways to do this it to examine two cases that have dealt with California commercial leases with options to extend.

In Ginsberg v. Gamson, 205 CA4th 873 (2012), the tenant and landlord executed a commercial retail lease in April 1996, for a five-year term, with an option to renew for additional five-year periods. After the first five-year term, the tenant renewed for a second term. During that term, a dispute arose over repairs and the tenant sued, alleging breach of the lease and intentional interference with use of the premises.

The landlord filed a cross claim, seeking a declaration that the lease allowed only one renewal. The trial court ruled that the lease gave the tenant the right to unlimited five-year extensions for 99 years. The jury subsequently found in favor of the tenant and awarded the tenant compensatory and punitive damages. The trial court struck the punitive damages award and the landlord appealed the remaining judgment. The court of appeals reversed the trial court’s interpretation of the lease renewal option, concluding that the trial court erred in construing the lease to give the tenant unlimited extensions; however, the court affirmed the order striking down the punitive damages award.

In its ruling, the court of appeals noted that in California, lease provisions giving a tenant the right to perpetual renewals are disfavored; however, if the parties intention to create a perpetual renewal is clear and explicit, courts will enforce such a provision. A “general” covenant to renew, i.e., one which does not contain clear and explicit language, will be construed as providing only one renewal. For example, a renewal provision stating the lease may be renewed from “year to year” or for “successive” periods does not clearly or unambiguously indicate an intent to provide perpetual renewals. In Ginsberg, the option to extend provision provided, in pertinent part, that “Tenant shall have the option to extend the term of the lease for additional five year periods upon the same terms and conditions contained in the lease except as hereafter stated.” The court found this language insufficient: “[Here,] the language of the extension option does not clearly or unequivocally establish that the parties intended to give the tenant unlimited extensions.” The court found that, as written, the lease allowed only one five-year extension, and that the extended period ended in 2006.

In Jeffrey Kavin, Inc. v. Frye, 204 CA4th 35 (2012), the landlord Kavin entered into a commercial retail lease for a dress shop with four individuals (two of the lessees, Frye and Karabuykov, were involved in the dress shop, while the other two were required to sign the lease because Frye and Karabuykov were considered credit risks). The initial term of the lease was for three years and contained a three-year option to extend the term if the tenants delivered to the landlord written notice within six months before the end of the initial term; otherwise the option would automatically expire. The initial term ended on April 30, 2007.

Approximately two weeks after the option period had expired, the landlord advised tenant Frye that the tenants were late in exercising the option to extend. Frye told the landlord they wanted to extend and the landlord dictated to Frye a writing in order to exercise the option, but advised Frye to leave the document undated. When Frye vacated the premises a few months later, the landlord sued all four tenants for breach of the lease.

The trial court ruled in favor of tenants and the appeals court affirmed, finding that because the tenants did not strictly comply with the terms of the lease requiring timely written notice to exercise the option to renew, the option automatically expired. The court rejected the landlord’s contention that he waived the notice requirement, finding that a party to a contract may only waive a contract provision when the provision is solely for that party’s benefit; here, the requirement of timely written notice benefitted the landlord as well as the other tenants, particularly the two tenants guaranteeing the lease. Thus, the landlord could not unilaterally waive the notice requirement. The appeals court also found that even if the renewal option had been timely exercised, Frye did not have the requisite authority to bind her co-tenants.

These two cases point out some of the problems that can arise between parties to commercial leases with options to extend. To avoid these kinds of problems, commercial landlords and tenants should consult with an experienced Sacramento, California commercial lease attorney to ensure that they are fully advised as to the terms of their contracts and obligations. The Law Office of Kristina M. Reed represents commercial landlords and business tenants in commercial lease matters, including negotiating and drafting agreements and handling lease dispute litigation. To discuss California lease laws, or to discuss your commercial lease issue or litigation matter, please contact our office.