Lost in Additional Space Negotiations

Although landlords frequently offer tenants the right to lease additional space in the same building as it becomes available, this kind of conditional right often leads to confusion, disputes, and litigation. If tenants don't exercise this right in the proper way and in the correct time frame, they may not get the space—even if they want it.

A case in point is Central National Bank in Chicago v. The Fleetwood Realty Corp. 110 Ill. App. 3d 169; 441 N.E. 2d 1244; 65 Ill. Dec. 730 (1982). On May 23, 1972, the parties executed a lease in which the tenant, Central National Bank, rented more than 100,000 square feet on the lower level and the second to fifth floors of the building. Paragraph 3(d) of the lease granted the tenant the option to lease additional space in the building, provided, in part:

    Not less than 240 days prior to the expiration of any lease of space in the building not included in this [l]ease...the landlord shall serve notice on the tenant of the termination of such [l]ease and the tenant shall have the option to lease the space covered by the [l]ease so expiring by serving notice on the landlord, within 30 days after the date of landlord's said notice to tenant, of tenant's election to exercise such option…Notwithstanding the foregoing, any similar such option granted to any other tenant in the building shall be superior to the option granted to tenant hereunder in respect of any space which is closer to or equidistant to such other tenant's major leasehold interest (measured vertically and horizontally) than it is to tenant's major leasehold interest at the time.

The tenant's right to lease additional space was appraised at about $3 million. However, the landlord could not successfully conclude otherwise profitable negotiations to sell the building with that kind of tenant's right in effect.

On January 23, 1980, the managing agent sent a letter to the tenant stating that four spaces of specified square footage on the 11th, 15th, and 16th floors would be available at specified times during 1980. The letter described the spaces by square footage on each floor, included the date of lease expiration, and required a response within 30 days.

On February 21, 1980, Central National Bank notified the managing agent by certified mail of "its intention to exercise its rights under paragraph 3(d) of the [l]ease, subject to inspection by the [b]ank" of the option spaces. Two witnesses testifying for the tenant stated that, after receiving the notice of option space availability, they went to the building to identify the spaces, but were unable to do so from a visual inspection of the floors and a limited inquiry of the existing tenants.

Believing it had accepted the option spaces, the tenant twice requested by certified mail in March that the managing agent execute its leases for the option spaces offered in the January 23, 1980, letter. The managing agent did not comply. Two days later, the landlord signed a lease with another party for the spaces.

When the case went to trial, the court found that the tenant's exercise of its option was valid and effective, and that the lease of the option spaces dated March 20, 1980, to another tenant was void and of no effect.

The landlord strongly disagreed and appealed, contending that the tenant did not exercise its option for the spaces in a proper and timely manner, claiming that under paragraph 3(d) of the tenant lease, the tenant had 30 days after the notice to exercise its option or until February 22, 1980; and, the tenant's February 21, 1980, letter to the managing agent purporting to "exercise its rights under [p]aragraph 3(d) of the lease, subject to inspection by the [b]ank" was invalid and ineffective because it was conditional.

The Illinois Supreme Court concurred, saying that to be valid, an acceptance must meet and correspond to the terms of the offer exactly. Any qualification or condition that is added to the acceptance will invalidate it. The tenant's letter attempting to exercise its option contained a provision that made the acceptance "subject to" its "inspection" of the space. This language added a condition to the parties' duty to perform; it did not constitute a promise to perform.

Nor did the tenant's acceptance indicate the time period in which it would make its "inspection" or "identification," or when it would accept or decline the space. In the latter instance, the lessor could not claim that the tenant accepted the offer unconditionally, because the tenant explicitly based its acceptance upon its approval from inspection or identification.

If the tenant found the offer unclear or that it insufficiently identified the space, the tenant could have demanded further clarification or identification within 30 days of the option as part of its contract rights under the lease. But the tenant did nothing with regard to inspecting or identifying the option space beyond a visit made by two of its officers to the floors on which the space was available. There they questioned existing tenants—not the lessor—about the space.

Nor did the tenant advise the landlord that the offer of option space was so unclear or deficient as to be in violation of the contract terms. Thus, its effort to clarify the offer by qualifying its acceptance upon its inspection or identification had to be deemed conditional and thus ineffective. The tenant attached considerable significance to its March 6, 1980, letter to the managing agent, to whom the tenant unequivocally confirmed the exercise of its option. The court also rejected this argument on the basis that it was conditional and untimely.

The implications of this decision are clear: Pay strict attention to notice deadlines and the form of notice given. Substantial and valuable rights may be lost if care is not taken to exercise options at the right time and in the right manner.

Hanon W. Russell, CCIM, JD

Hanon W. Russell, CCIM, JD, is a partner in the firm of Cantor, Floman, Russell, Gross, Kelly, & Amendola, P.C., located in Orange, Connecticut. Russell can be reached by phone at (203) 795-1211 or by e-mail at hwr@chesscafe.com. The discussion of legal issues involved in this column is for informational purposes only. Results may vary depending on state laws and particular facts.