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Court: Tenants must give timely notice

Friday, March 10, 2006

Here’s a mistake that’s easy to imagine making, no matter how organized your office may be:

Your company’s lease for its principal place of business, which it signed almost 10 years ago, is up for renewal. Company management wants to remain in the space indefinitely and believes it has made that clear to the landlord in informal discussions over the past month.

Company management is unaware, however, that the lease, negotiated by former executives who have long since moved on, requires the company to provide the landlord with a formal written notice expressing its desire to renew the lease 90 days before the end of the term.

No one in the office is familiar with the renewal notice requirement, and the deadline for the renewal notice passes. A few weeks later, the company receives notice from the landlord asserting that the company has forfeited its right to extend the lease and must vacate the premises upon lease expiration.

Will a tenant in such a position find recourse in state court? Not according to the Maryland Court of Special Appeals’ January ruling in Chesapeake Bank of Maryland v. Monro Muffler⁄Brake Inc. The ruling made clear that missing a renewal notice deadline puts a Maryland tenant at risk of forfeiting its renewal rights, which could mean having to negotiate a new lease with higher rent or other unfavorable terms, or even having to relocate.

In Chesapeake Bank, the tenant, an automobile repair shop, had failed to deliver a renewal notice to its landlord prior to the deadline required by its lease. Following expiration of the lease’s original term, the landlord asserted that the lease was terminated. The tenant disputed this, and the parties litigated the matter.

The Court of Special Appeals rejected the tenant’s claim that it had adequately notified the landlord of its plans to renew its lease in an informal letter. Because the letter did not specifically reference the tenant’s option to extend its lease, the court ruled, it did not satisfy the tenant’s obligations.

The case demonstrates that implicit notices of renewal — such as informal conversations, letters or e-mails — may not suffice to preserve renewal rights.

The case also suggests that new tenants consider building protections against forfeiture of renewal rights into their lease. When negotiating a lease, a tenant may, for instance, insist on a provision that requires the landlord to send a reminder to the tenant before renewal rights may be forfeited.

In the absence of such a provision, which landlords are not typically willing to agree to, tenants can take steps to protect themselves.

Advance planning and ‘‘organizational memory” are key, as lease terms can often last five to 10 years, and a tenant’s facilities management personnel often change during that time.

One way to avoid missing a renewal notice deadline is to have an abstract of the lease’s key provisions prepared immediately after the lease is executed and before it is filed away. The lease abstract can then be used as a reference by various people in the organization. It can be included, for example, in the tenant’s office procedure manual or business plan, and copies can be provided to outside professionals who serve the tenant. .

Copies of the lease abstract may also be provided to outside professionals, such as accountants or lawyers. Another approach is for key dates to be calendared by multiple individuals.

Redundancy is necessary. Individuals are fallible, and the stakes are high, especially for tenants such as retailers associated with a specific location. This is an obligation you can’t let slip through the cracks.

Benjamin L. Polakoff, a lawyer with Shapiro Sher Guinot & Sandler in Baltimore, concentrates in commercial real estate and banking law. He can be reached at blp@shapirosher.com.