Life in general presents many options, some of which are found in commercial leases. Tenant options to extend the lease term, expand the tenant’s space, or purchase the leased premises are common, but usually the option rights are conditioned upon there being no tenant default.
However, the U.S. Court of Appeals for the First Circuit recently held that a technical default did not nullify a purchase option.
In December 2012, the court decided Bachorz v. Miller-Forslund, in which the plaintiff tenant had leased an auto-repair shop on the defendant landlord’s property in Springfield, with an option to purchase the premises for $175,000 provided that the tenant was not in default under the lease. The lease prohibited subleases without the landlord’s written consent, and contained a boilerplate covenant requiring the tenant to comply with applicable laws. The lease also stated that its terms and conditions could not be modified or waived except in writing.
The tenant sublet the premises without the landlord’s written consent, but the landlord acquiesced. When the landlord died and his daughter succeeded him as executrix, trouble followed. The tenant tried to exercise the purchase option, but the executrix refused to recognize it, claiming that the option was unenforceable because the tenant had sublet the premises without written consent, and had violated applicable laws by performing work without a permit, failing to plant shrubs as a buffer, not paying excise tax and improperly filing a permit application. Although not mentioned in the court’s decision, the value of the property may have exceeded the $175,000 option price.
The Court of Appeals disagreed with the executrix. It held that the landlord’s acquiescence to the subleases amounted to consent, even though not in writing, and noted that lease provisions can be orally waived, even if the lease contains specific language to the contrary. The court also found that the tenant’s violations of applicable law did not nullify the tenant’s option, because such violations, although technical lease defaults, were not significant or prejudicial, and did not “go to the heart” of the lease agreement.
The court noted that during oral argument, the executrix’s attorney had conceded that the tenant’s defaults were “perhaps trivial.” For these reasons, the court upheld the tenant’s purchase option.
The court’s opinion recognized that while major defaults can nullify a lease option, inconsequential and minor ones do not. Presumably, a tenant’s failure to pay rent is a major default that would nullify an option. However, in Bachorz, the tenant’s option survived technical violations of applicable law. The lesson here is that if a landlord wants to void a tenant’s option because of a default, the landlord must prove that the default caused significant and material damage to the landlord. Otherwise, a perceptive judge might uphold the option, believing that the landlord is seizing upon an inconsequential and technical breach as a pretext to exit a bad deal.
Christopher R. Vaccaro is an attorney in Stoneham. Email: cvaccaro@verizon.net
