Tenant Exercised Extension Options by its Actions

Norris Ave. Prof’l Bldg. P’ship v. Coordinated Health, LLC, 28 N.E.3d 296 (Ind. Ct. App. 2015).

Landlord and Tenant entered into a lease for commercial space in Indiana. The lease provided for an initial term, a first option term and a second option term, with annual rent escalation through the entire term (including the option periods). To exercise an option term, the lease required Tenant to provide written notice to Landlord at least sixty (60) days before the end of the then current term. The lease also contained a nonwaiver provision that stated a waiver (or failure to insist on strict performance) of any term of the lease by a party would not be deemed to constitute a subsequent waiver of that or any other term in the lease. As the end of the initial term approached Tenant did not give the required 60 days’ notice of Tenant’s exercise of the first option term. However, when the initial term expired, Tenant stayed in the space and began paying the escalated rent for the first year of the option term, per the terms of the lease. Similarly, as the end of the first option term approached, Tenant again did not give Landlord notice of Tenant’s exercise of the second option term. When the first option term expired, Tenant remained in the space and began paying the escalated rent for the second option term, per the terms of the lease. At some point during the second option term, Tenant notified Landlord that it was terminating its tenancy and Tenant moved out of the space and stopped paying rent. Landlord filed suit claiming that Tenant breached the lease by improperly terminating the lease, prior to the expiration of the second option term. As damages, Landlord claimed the rent owing through the remainder of the second option term. On appeal, the court focused on whether Tenant, through an affirmative act, had demonstrated its intent to exercise the two option terms and whether Landlord had waived the requirement for Tenant to provide Landlord with 60 days’ written notice. The court found that Tenant’s payment of escalated rents at the beginning of each option term, per the requirements of the lease, demonstrated Tenant’s intent to exercise each of the two options terms, as opposed to Tenant holding over and paying the rent that was in effect at the expiration of the prior term. The court also found that by accepting the increased rent payments, Landlord effectively waived the 60-day prior notice for Tenant to exercise an extension option under the lease. Because Tenant demonstrated its intent to exercise both option terms and Landlord demonstrated its acceptance and waiver of the notice requirement (by accepting the increased rent payments), the court held that Tenant was liable for the rent due for the remainder of the second option term.

Editor’s Note: Legal Corner contains case summaries and analysis of recent court decisions that impact commercial leasing and lease administration. These summaries focus on the leasing issues covered in each case and do not include detailed discussions or analysis of the procedural and peripheral issues in the cases. Note that these cases were included in the Legal Update materials from the 2017 NRTA conference in New Orleans.