Missing a deadline to exercise an option in a lease, even if inadvertent, usually means the option is lost unless a court steps in to override the mistake by implying an equitable grace period. The Washington Supreme Court, in Borton & Sons, Inc. v. Burbank Properties, LLC, has reaffirmed and clarified that one of the key factors for deciding to grant an equitable grace period is whether the tenant made valuable permanent improvements. Absent such a showing, a grace period is not warranted and remains an extraordinary remedy available only in very limited circumstances.
In Borton, Burbank had owned 164 acres of agricultural land, rotating between potatoes and grass seed or timothy hay every two to three years. When Burbank encountered financial difficulties, it sold the land to Borton below market value and entered into a three-year lease, with an option to purchase. The option was to be exercised by registered or certified mail by December 31, 2017. Three days before the deadline, Burbank’s owner drafted a Notice of Exercise of Option, but inadvertently did not mail it until January 4, 2018. Bolton received the notice on January 8 and notified Burbank that it had failed to timely exercise the option to purchase.
In the lawsuit that followed, the trial court ruled that Burbank was entitled to an equitable grace period based on the potential loss of its timothy hay crop and the loss in equity of the property. Division Three of the Court of Appeals reversed, holding that an equitable grace period is available only when substantial improvements are made to the property such that the lessee would suffer an inequitable forfeiture if the grace period were not granted. The appeals court said Burbank had failed to demonstrate that it would suffer an inequitable forfeiture.
The Supreme Court agreed and used the case to reaffirm the principle first set out in a 1979 court of appeals case, Wharf Restaurant, Inc. v. Port of Seattle, and the Court’s own 2008 decision in Pardee v. Jolly.
Wharf outlined a five-factor test to determine whether a lessee is entitled to an equitable grace period to exercise a lease option: 1) the failure to give notice was inadvertent, 2) an inequitable forfeiture would have resulted had equity not intervened, 3) the lessor did not change its position and did not suffer prejudice, 4) the lease was for a long term, not a short term, and 5) there was no undue delay in exercising the option. The crux of the dispute in Borton was the second factor — whether an inequitable forfeiture would have resulted without an equitable remedy — requires valuable permanent improvements.
The Court said that inequitable forfeiture and valuable permanent improvements are not separate factors but one and the same. “Whether an inequitable forfeiture would result depends on whether the lessee made valuable permanent improvements to the property in anticipation of exercising the options.” The Court noted that other cases have upheld equitable grace periods where the tenant had invested approximately $600,000 to remodel and improve the property and where a lessee made substantial improvements costing $250,000 that it would not have made without receiving options to extend. Conversely, there was no equitable forfeiture where a tenant had spent nominal amounts to landscape and build a sales building and those costs had already been amortized over the prior term of the lease. And, in another case, the lessee made no improvements to the property at all and was held not entitled to an equitable grace period.
In the Borton case, the Court said that planting a hay crop was not a valuable permanent improvement because routine farming operations do not constitute a valuable permanent improvement. A concurring opinion by Justice Madsen agreed, but would make an exception for perennial crops or where a farmer plants an orchard or tree farm.
While the Borton decision does not create any new law, it reinforces the rule that only in very limited circumstances will a court grant the extraordinary remedy of an equitable grace period.
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