In Michigan Wacker Associates, LLC v. Casdan, Inc. (Ill. App. Ct. 2018) 100 N.E.3d 596, the Illinois Appellate Court analyzed a dispute over whether a tenant had properly exercised its option to extend the term of its lease via an email stating that it “would like to exercise the second option now.” The landlord argued that the tenant did not validly exercise the option because it failed to satisfy the lease notice requirements and failed to use unequivocal language in exercising the option. The trial court ruled for the tenant, and the landlord appealed.
In 2001, Michigan Wacker Associates, as landlord (“Landlord”), and Bella! Bacino’s, as tenant (“Bella”), executed a lease for restaurant space in Chicago, Illinois. The initial term was 10 years and was set to expire on December 31, 2011. The lease provided Bella with two 5-year option terms; in order to exercise each option, Bella had to deliver an “Extension Notice” to Landlord on or before January 1, 2011, for the first option term, and on or before January 1, 2016, for the second option term. The lease provided that “any notices” must be “in writing, . . . sent by registered or certified mail (return receipt requested) addressed to Landlord at Landlord’s address.” The lease also had standard language stating that Landlord could only be deemed to have waived strict performance of any lease obligation by executing a written instrument to that effect and that Landlord’s waiver of one breach would not result in waiver of any subsequent breaches.
On November 9, 2010, Bella sent Landlord a letter via Federal Express giving notice that Bella was exercising its option for the first option term. Landlord did not dispute that Bella effectively exercised the first option, despite Bella’s failure to use registered or certified mail as required by the lease. In 2012, Bella sent an email to Landlord listing several issues that Bella “would like to discuss” and “would like to resolve.” Among those issues, Bella stated that “Tenant would like to exercise the second option now” (emphasis added) to avoid a prolonged negotiation over the rent for that term. Bella said, “it may be better to simply convert both options to a ten (10) year extension term” because it would “better enable amortization of Landlord’s contribution to improvements.” On top of that, Bella further added it “would also like to add a five (5) year option at the end of the lease.” Landlord expressly rejected at least some of Bella’s requests contained in the email and the issue did not crop up again until 2016, when Landlord started to show the space to other tenants. At that time, Bella informed Landlord that it wanted to remain in the space and that it believed it had exercised its option. Landlord informed Bella that it was mistaken and that its right to exercise the second option had expired.
Bella contended that its 2012 email was sufficient notice to properly exercise its second option term, arguing that Landlord did not previously insist on formal notice as required under the Lease. Plus, Landlord knew of Bella’s intent to exercise the option and did not tell Bella that its email notice was invalid. Landlord disagreed and explained that it viewed the email as an informal proposal, rather than an official exercise, as it was a part of a larger list of things that Bella “would like to discuss” and “would like to resolve.” Landlord also added that it had no duty to inform Bella that its exercise of the option was invalid.
The Illinois Appellate Court, appealing to both precedent and the “needs of commercial transactions and fairness,” stated that strict compliance is generally necessary to exercise a lease extension option. The court explained that options like the one at issue here are invaluable to tenants, but landlords generally do not receive consideration for their agreement to be bound by options, and therefore landlords can insist that an option be exercised in writing to provide certainty in exchange for giving up other opportunities to lease their space. It also noted that parties to commercial leases are usually sophisticated, offering more support to the requirement of strict compliance (note, California is also a strict compliance state). As a result, the court held that “actual or oral notice is insufficient to exercise an option where a party has failed to provide timely written notice.” The court pointed to multiple cases in support of this conclusion, defeating Bella’s argument that actual notice is sufficient regardless of the technical requirements of the lease.
The court then added that even if Landlord waived strict compliance with the notice requirements under the lease, Bella’s email would still be insufficient. The law requires that acceptance of an offer must be specific, certain and unconditional, and the court did not find Bella’s email to meet any of those conditions. The court placed great weight on both Bella’s “would like to discuss” and “would like to resolve” statements and the fact that the email included a list of many other issues that were separate and distinct from the option—these led the court to find that the email failed to unequivocally exercise Bella’s second option because any landlord reading the email would view it as a “comprehensive solution” to all outstanding issues and would not be reasonably expected to understand that Bella’s exercise of its option existed independently of the other issues. Consequently, the court reversed the trial court’s decision and ruled in favor of Landlord.
The lesson to be learned is that a tenant choosing to exercise its option must do so in strict compliance with the notice requirements under the lease and must do so using clear and unconditional language.