LEASE RENEWAL OPTIONS REQUIRE EXACT COMPLIANCE. RIGHT?

            Robert and Dorothy Pitz owned a 320-acre farm. In 1988, M/M Pitz agreed to lease six acres to US Cell Corporation for a cell tower. US Cell then constructed a 380-foot tall cell tower on the farmland.

            The lease term commenced November 14, 1988.

            Rent was $20,000 for the total 30-year lease term, payable in one sum not later than January 5, 1989. That equates to $666.67 per year. A whopping $55.55 per month.

            The Lease contained a renewal option for 30 more years. To exercise it, US Cell was required to send notice at least 60 days before term expiration and pay $20,000 “at the exercise of the option,” as increased by CPI.

            In 2009 M/M Pitz transferred ownership of the farm to their son, William Pitz, and his spouse Lynn. US Cell was not advised of the conveyance, although the Deed was recorded.

            US Cell sent a certified letter of lease renewal exercise to Robert and Dorothy Pitz on September 1, 2017 – more than one year before the September 14, 2018 deadline. US Cell’s letter contained IRS Form W-9 and a direct deposit form.

There was no rent payment accompanying the letter. Instead, the letter advised that “Once we have these documents [W-9 and deposit form], we will be able to disburse the option rental payment to you.”

No response was made to US Cell’s letter. So on October 29, US Cell sent to Will and Lynn a check for $41,439, less income tax withholding, intended to represent advance rent for the 30-year option term.

Will and Lynn returned the payment with an explanation that the payment was not tendered at the time of renewal exercise. As required by the Lease. And therefore the renewal term was not properly exercised.

Will and Lynn filed a lawsuit for declaratory judgment on June 19, 2019, asking for a determination that the option had not been properly exercised since payment was not timely made. The district court concluded that US Cell had indeed properly exercised the renewal option because rental payment was not a condition precedent.

Will and Lynn appealed. The court of appeals affirmed. So Will and Lynn further appealed to the Court of Last Resort.

The Supreme Court commenced its analysis by stating that renewal option exercise must strictly comply with all conditions precedent. The Court dug out a case from civil war years to support the conclusion that both notice and payment are required to effectively renewal a lease.

 Then, the Court used the phrase “On the other hand” to signify a sea-shift change in ideology. Not finding a hard notice-and-payment provision as found in other contracts, the Court viewed the option-to-renew provision in isolation – not connected to the obligation-to-pay-rent sentence. The Supreme Court, struggling with precedent to support the position it wanted to reach, turned to cases from North Dakota and Illinois.

Deciding that there is “less absurdity than might appear at first blush,” US Cell is evidently allowed to send notice of lease renewal without tendering the prepaid rent, even though both are clearly required by the Lease.

US Cell wins, again; Will and Lynn lose. Again.

See Pitz v. US Cellular Operating Company; Case No. 22-0038; Supreme Court of Iowa; April 21, 2023: https://cases.justia.com/iowa/supreme-court/2023-22-0038.pdf?ts=1682085886.

             Questions / Issues:

1. Maybe I am the one that is in isolation, but this is not the result I had anticipated. In most States, renewal options are strictly construed and deviation is now allowed. This option required both notice and payment. Only one of the two conditions was satisfied.
   

2. Note that Lease Section 3.2 contained the option renewal verbiage; Section 4.2 stated the new rent requirement. Would merely reordering the provisions have saved the intent of the parties? What if the timing for renewal (60 days), method of renewal (written notice), and rent obligation (prepaid for the term; old rent + CPI) were all combined in Section 3.2 – would that have saved it from this disastrous result? Or was this Supreme Court intent on forging new law to give other tenants and lessees some breathing room, unless or until fixed by the Iowa legislature?

 

                                                                                    Stuart A. Lautin, Esq.*

* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law, Texas Board of Legal Specialization

Licensed in the States of Texas and New York

  

Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.