Is Employee’s Mistake Fatal for Lease?

If you’re expanding your business, you might choose to delegate some tasks, like leasing issues, to employees. But what happens if an employee who’s responsible for keeping track of lease dates and requirements doesn’t exercise one of your options exactly as specified in the particular lease provision? Could you salvage the opportunity with the owner, or would it automatically terminate?

This largely depends on why the option wasn’t exercised on time and how long it took for late notice of the intent to exercise to be given to the owner. If there’s no legitimate reason for the delay, a court will probably not give you a second chance.

A recent New York case is a perfect example. There, the sole reason for the tenant’s failure to tender written notice of its intent to exercise the option for over 11 months was its employee’s negligence due to supposed family matters. He testified that he “lost track of time” and had “no thoughts” about the option during that time period. But the owner had evidence that the employee had had multiple conversations in person with the owner about purchasing the property and also about how the tenant would get the financing to do so. Thus, said the appeals court—which heard the case after an owner-favorable trial court ruling that the tenant appealed—it was clear that the employee was fully aware of his responsibility to exercise the option in writing and the lease requirement to be “ready, willing and able” to purchase the property at that time.

The tenant couldn’t prove that its failure to exercise the option in writing in a timely manner was the result of “inadvertence,” “negligence,” or “honest mistake.” And the delay wasn’t due to some procedural or technical mishap; there was evidence that the agent was aware of the option but failed to cure his default for several more months after getting a written letter from the owner regarding the fact that the option hadn’t been exercised. The appeals court concluded that the tenant’s delay constitutes inexcusable gross negligence and doesn’t warrant the granting of equitable relief. Thus, it affirmed the declaratory judgement that the tenant could no longer exercise the option [25-35 Bridge St. LLC v. Excel Automotive Tech Ctr. Inc., October 2018].

For a more detailed explanation of this case, see “Missing Deadline to Exercise Option Due to Employee’s Error,” available to subscribers here.