Opinion
C.A. No. 05C-04-027.
Submitted: March 31, 2006.
Decided: June 27, 2006.
Stephen P. Ellis, Esquire, Georgetown, DE, attorney for plaintiffs
David Roeberg, Esquire, Wilmington, DE, attorney for defendant Bradley, J.
MEMORANDUM DECISION
This is my decision on the declaratory judgment actions which the parties have brought regarding the interpretation of a lease agreement containing an option to purchase. The parties are John J. Martin and Ellouise H. Martin ("Landlord") and Thomas B. Hopkins ("Tenant").
FACTS
On October 9, 2000, the parties entered into a lease which was effective October 1, 2000. Pertinent portions of the lease, which is captioned "Absolute Net Commercial Lease Agreement" are described or quoted below.
The leased property consists of commercial premises on Route 13 in Seaford, Delaware. The lease term runs from October 1, 2000, to September 30, 2015. The base rent is $4,000.00 per month. The base rent plus all additional sums for which Tenant is obligated are due "on the first day of each calendar month during the term of this Lease." Section. 3.2.1 of Absolute Net Commercial Lease Agreement (hereinafter "Section ____"). "Each Rent payment shall be made promptly when due, without any deduction or set-off, and without demand." Section 3.2.3. This same section mandates the imposition of a late charge and interest penalty commencing "after the fifth day on which such payment is due but unpaid. . . ." The lease specifies that if payment is mailed, it must be mailed so that Landlord receives it by the first day of each calendar month. Section 3.3. This Absolute Net Commercial Lease Agreement ("Lease") requires Tenant to pay, in addition to rent, taxes; assessments; costs of improvements; utility costs; costs of operation and maintenance of all fixtures and equipment, lighting and plumbing; and costs of necessary repairs and maintenance, including major structural repairs. Sections 3.4, 3.5, 7.2, 8.1, and 8.2
The Lease addresses the condition of the premises when the Tenant assumed the Lease as well as improvements to the property. By assuming possession of the premises, "Tenant shall for all purposes of the provisions of this Lease be deemed to have accepted them and to have acknowledged them to be in the condition called for under this Lease." Section 7.1. It is further represented: "Tenant has inspected the demised premises and is accepting the rental unit 'as is'. . . ." Section. 8.2. Any improvements, which Landlord first must approve, are at Tenant's expense and "not on the credit of any structure on the premises, and Tenant shall hold Landlord harmless from any cost incurred on account thereof." Section 7.2.
Section 13 defines "default" and explains the consequences when there is a default.
13.1 If: (a) Tenant shall fail to pay any rent or other sum payable hereunder for a period of 15 days after the same is due, and after five (5) days following notice of such deficiency; . . . then any such event shall constitute an event of default by Tenant. Upon the occurrence of any event of default by Tenant hereunder, Landlord may, at its option and without any further notice or demand, in addition to, and not to the exclusion of, any other rights and remedies given hereunder or by law, do any of the following:
(1) Landlord shall have the right, so long as such default continues, to give notice of termination to Tenant. On the date specified in such notice (which shall not be less than 5 days after receipt thereon) this Lease shall terminate.
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(5) Even though Tenant has materially breached this Lease . . ., this Lease shall continue in effect for so long as Landlord does not terminate this Lease and Landlord may enforce all of its rights and remedies under this Lease, including the right to recover the rental in periodic actions as it becomes due under this Lease. [Emphasis added.]
Section 15 pertains to notices, and states:
Any notice, demand, . . . or other communication or document to be provided under this Lease to a party hereto shall be (a) given in writing and (b) deemed to have been given (i) forty-eight (48) hours after being sent by certified . . . mail . . . to Tenant's notice address. . . .
In Section 17, it is clarified that:
This Lease represents the complete understanding between the parties hereto as to the subject matter hereof and supersedes all prior written or oral negotiations, representations, warranties, statements or agreements between the parties hereto as to the same. * * * Neither party hereto has any right to rely on any other prior or contemporaneous representation made by anyone concerning this Lease which is not set forth in this Lease.
Section 19 addresses "Waiver", and it provides:
Landlord shall not be deemed to have waived the exercise of any right which it holds under this Lease unless such waiver is made expressly and in writing (and no delay or omission by Landlord in exercising any such right shall be deemed a wavier of its future exercise). No such waiver made as to any instance involving the exercise of any such right shall be deemed a waiver as to any other such instance or any other such right. Without limiting the generality of the foregoing, no action taken or not taken by the Landlord under the provisions of this section 19 or any other provision of this Lease (including, by way of example rather than of limitation, the Landlord's acceptance of the payment of rent after the occurrence of any event of default) shall operate as a waiver of any right to be paid a late charge or of any other right or remedy which Landlord would otherwise have against Tenant on account of such event of default under the provisions of this Lease or applicable law (Tenant acknowledging that, in the interest of maintenance of good relations between Landlord and Tenant, there may be instances in which Landlord chooses not immediately to exercise some or all of its rights on the occurrence of an event of default).
In Section 24, details regarding an Option to Purchase are set forth.
Section 24 — Option to Purchase.
In consideration of the payment of all of the rent during the full term of this Lease by Tenant to Landlord without default, Tenant may, at Tenant's option after June 2, 2015 and not before, purchase the demised premises from Landlord for One Dollar ($1.00) on the following terms and conditions:
* * *
24.6 Tenant may not exercise this option at any time after Landlord has terminated this Lease because of any default on the part of Tenant regardless of whether Tenant remains in possession. * * * [Emphasis added.]
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24.8 Prior to settlement, if Tenant shall allow the rent to be in arrears for more than thirty (30) days after the written notice of such delinquency . . . then the Lease Agreement shall be terminated and Tenant's option to purchase shall be void even if Landlord has received Tenant's written notice of Tenant's election to exercise the option. [Emphasis added.]
24.9 The consideration for this option is Tenant's lease of the demised premises at $4,000.00 per month without default until June 1, 2015 including payment of the rent due June 1, 2015, therefore, Tenant may not exercise this option until Tenant has paid the rent due for each of every month until and including June 1, 2015. If, however, Tenant . . . defaults on this Absolute Net Commercial Lease Agreement or the Lease is terminated for any reason then all rent shall be forfeited to Landlord as it is non-refundable. [Emphasis added.]
Tenant, by his own admission, was not paying the rent when due. He maintained he was entitled to offsets because the premises were not suitable for his business purposes and he had to incur expenses to get the property up to par. He advanced this position despite the fact the Lease was an absolute net lease and despite representations in the Lease that he was accepting the premises as is, he was acknowledging the premises to be in the condition called for under this Lease, and he was responsible for payments of all maintenance and repair expenses.
Landlord sent Tenant a notice by certified mail dated April 27, 2001 ("April 27, 2001 Notice"). This April 27, 2001 Notice (sometimes referred to as "Notice") stated in full:
This notice was deemed received April 29, 2001, pursuant to the "Notices" provision contained in Section 15 of the Lease.
Per the terms of our lease with you, this letter is being sent to serve as formal notice that you are in violation of the terms and conditions of the Absolute Net Commercial Lease Agreement that became effective on October 1, 2000.
You have been in arrears on your payments since January 1, 2001. You are now behind for the full month of April. By the terms of the lease, a late charge of $130 per month, (interest is being waived), is now due and payable, along with the April payment as well as the payment for May 1, 2001. Counting the $520 in late charges and two months rent, the total now due to reinstate the lease is $8,520. Because you have broken the lease, the lease will now be on a month-to-month basis and you give up the option to purchase the property for $1.00 at the end of the 15 year term. All other terms and conditions remain the same. This also leaves us with the opportunity to dispose of the property through other means should we decide to do so.
As you are aware, none of this is beneficial to you. If you want to reinstate the lease agreement, please bring all payments due current by May 10, 2001. If full payment is made by May 5, we will drop the $520 late charges now due. As you are aware, fate has a way of changing the way we operate. Life changes now make it a necessity for us to be able to rely heavily on our rental income. We cannot afford to allow your payments to be behind. We hope that you understand our situation and are able to meet out time frame for you to reinstate our lease. Should you wish to discuss your concerns, please feel free to call us. [Emphasis added.]
Tenant did not cure. Instead, he paid $4,000.00 to Landlord on May 9, 2001. His next payment to Landlord was on June 4, 2001, in the amount of $2,000.00. He continued to be delinquent through March 11, 2005.
In a letter dated March 7, 2005, Landlord's attorney explained the following.
On 04/27/01 the landlords . . . sent you a letter by certified mail return receipt requested. . . . As you know, you were given notice that if you did not bring the lease current, you forfeit the Option to Purchase because of your default. They also offered to waive the late fees if you brought it current by 05/05/01. As you know, you did not bring the rent current. In fact, the rent has never been current since 01/01/01. You continue to get further behind.
Your lease provides that your Option to Purchase shall be void if you allow the rent to be in arrears more than thirty days after written notice of delinquency. On 04/27/01 the landlords . . . sent you written notice of delinquency by certified mail, which Danielle signed for. As you know, you allowed the rent to remain in arrears for more than thirty days after that notice. Therefore, your Option to Purchase became void. Note that even if you bring the rent current at this late date, you cannot reinstate the Option to Purchase, which is void.
Although your Option to Purchase became void, you remain obligated for the rent because of your continued occupancy of the premises. . . . You owed the Martins $37,217.38 as of 01/31/05. This is notice to you, pursuant to Section 13 of the lease agreement, to pay all delinquent rent within five days.
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Since you continue to get further behind, the Martins will waive the $37,217.38 if, and only if, you execute a new lease commencing 04/01/2005 and terminating on 03/31/2010, a copy of which is enclosed.
With a check dated March 11, 2005, Tenant paid the balance due. His attorney also noted in a cover letter dated March 11, 2005, that Tenant disagreed that the Option to Purchase was void.
In a complaint filed on April 21, 2005, Landlord sought declaratory judgments that the Option to Purchase is void and of no further force and effect and that the Lease is terminated.
In his answer, Tenant admitted that he was delinquent in payment of the monthly rent pursuant to the Lease terms after April 27, 2001. However, he disputed that the Lease and the Option to Purchase were terminated on April 27, 2001.
In his Answer and Counterclaims, Tenant argues that Landlord took no action "during the period that Mr. Hopkins was in default under the Lease to terminate or forfeit the Lease pursuant to Section 13.1(1) of the Lease." ¶ 18 of Tenant's Answer and Counterclaims. Tenant further asserts he and Landlord had a course of dealing where he regularly made, and Landlord regularly accepted, delinquent payments. ¶ 19. He also contended that he "at his sole cost and expense installed valuable and substantial improvements to the leased Premises." ¶ 20. He maintained that Landlord gave notice of deficiency on March 7, 2005, and within the time allowed, Tenant paid, and Landlord accepted, the monies due. ¶¶ 22-23. Thus, Landlord waived any right to claim the April 27, 2001 Notice was a termination or forfeiture of the Lease. ¶ 24. The second affirmative defense Tenant asserted was estoppel. Tenant requested the Court deny a declaratory judgment in Landlord's favor that the Lease and the Option to Purchase are void.
Tenant asserted two counterclaims. The one maintaining a lack of jurisdiction because he seeks equitable relief fails. The Court of Chancery dismissed the action for lack of jurisdiction, ruling the questions before it, whether Tenant was in default and whether Landlord properly terminated the lease as a result of the default, were questions of law. Hopkins v. Martin, Del. Ch., C.A. No. 1359-S, Chandler, C. (Sept. 13, 2005), reargu. den., Del. Ch., C.A. No. 1359-S, Chandler, C. (Dec. 1, 2005). The viable counterclaim is the one seeking declaratory judgment that the Lease and the Option to Purchase remain valid and in full force and effect.
In their answer to the Counterclaim, Landlord argues Tenant was estopped from pursuing his counterclaim.
Tenant thereafter filed a motion for judgment on the pleadings. In his motion, Tenant asks the Court to rule in his favor on Landlord's claim for declaratory judgment that the Lease has terminated and the Option to Purchase is void and of no further force and effect. He argues that the April 27, 2001 Notice did not terminate the Lease because Landlord did not give Tenant a notice of deficiency prior to the April 27, 2001 Notice, which is a required condition precedent to a notice of termination.
Landlord opposes the motion for judgment on the pleadings and has filed a motion for summary judgment. Landlord argues that the April 27, 2001 Notice was sufficient and even if Landlord chose not to exercise the right to terminate the lease in accordance with Section 13, the admitted rental delinquencies and default voided the Option to Purchase as set forth in Section 24 of the Lease.
DISCUSSION
As the Superior Court explained in Weiner v. Selective Way Insurance Company, 793 A.2d 434, 439 (Del.Super.Ct. 2002):
Delaware's Declaratory Judgment Act provides a means for securing judicial relief in an expeditious and comprehensive manner. The Act is entitled to a liberal application. 10 Del. C. § 6502 provides in pertinent part:
Any person interested under a . . . written contract . . . may have determined any question of construction or validity arising under the . . . contract . . . and obtain a declaration of rights, status or other legal relations thereunder.
Additionally, four elements are required to consider a controversy suitable for declaratory judgment: 1) the controversy must involve a claim of right or other legal interest of the party seeking declaratory relief; 2) the claim of right or other legal interest must be asserted against one who has an interest in contesting the claim; 3) the conflicting interests must be real and adverse; and 4) the issue must be ripe for judicial determination. [All footnotes and citations omitted.]
There is no dispute that this matter is subject to declaratory relief.
The parties have submitted matters outside of the pleadings, thereby turning any motion for judgment on the pleadings into one for summary judgment. Super. Ct. Civ. R. 12(c).
In Super. Ct. Civ. R. 12(c), it is provided in pertinent part:
If, on a motion for judgment on the pleadings, matters outside the pleadings are presented to and not excluded by the Court, the motion shall be treated as one for summary judgment and disposed of as provided in Rule 56. . . .
Summary judgment may be granted only when no material issues of fact exist, and the moving party bears the burden of establishing the non-existence of material issues of fact. Moore v. Sizemore, 405 A.2d 679, 680 (Del. 1979). Once the moving party meets its burden, then the burden shifts to the non-moving party to establish the existence of material issues of fact. Id. at 681. Where the moving party produces an affidavit or other evidence sufficient under Superior Court Civil Rule 56 in support of its motion and the burden shifts, then the non-moving party may not rest on its own pleadings but must provide evidence showing a genuine issue of material fact for trial. Super. Ct. Civ. R. 56(e); Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). If, after discovery, the non-moving party cannot make a sufficient showing of the existence of an essential element of his or her case, then summary judgment must be granted. Burkhart v. Davies, 602 A.2d 56, 59 (Del. 1991), cert. den., 112 S. Ct. 1946 (1992); Celotex Corp. v. Catrett, supra. If, however, material issues of fact exist or if the Court determines that it does not have sufficient facts to enable it to apply the law to the facts before it, then summary judgment is inappropriate.Ebersole v. Lowengrub, 180 A.2d 467, 470 (Del. 1962).
General contract principles govern this commercial lease. 25 Del. C. § 5101(b). Unless ambiguities exist, the Court looks only at the terms of the lease. In Seaford Associates Limited Partnerhsip v. Subway Real Estate Corp., Del. Ch., C.A. No. 2248-S, Lamb, V.C. (May 29, 2003) at 4, the Court of Chancery, quoting from U.S. West, Inc. v. Time Warner, Inc., 1996 Del. Ch. LEXIS 55, 1996 WL 307445 at * 7 (Del.Ch. 1996), sets forth the general law regarding contract construction:
In § 5101(b) of Delaware's Landlord-Tenant Code, 25 Del. C., it is provided:
Any rental agreement for a commercial rental unit is excluded from this Code. All legal rights, remedies and obligations under any agreement for the rental of any commercial rental unit shall be governed by general contract principles; and only Chapter 57 of Title 25 and Part IV of Title 25 shall have any application to commercial rental agreements.
"The primary rule of construction is this: where the parties have created an unambiguous integrated written statement of their contact, the language of that contract ( not as subjectively understood by either party but) as understood by a hypothetical reasonable third party will control." [Emphasis added by Chancery Court.]
Generally, the law does not favor a forfeiture. Clements v. Castle Mortgage Service Company, 382 A.2d 1367, 1370 (Del.Ch. 1977); The Old Time Petroleum Company v. Turcol, 156 A. 501, 505 (Del.Ch. 1931). For a condition to effect a forfeiture, it must be unambiguous. The Old Time Petroleum Company v. Turcol,supra.
The first step here is to examine the lease and determine what it says regarding the Option to Purchase and a termination of the lease.
I examine the Option to Purchase aspect first.
The Lease emphasizes the importance of Tenant paying his rent on time. To not have been in default is the consideration for the Option to Purchase. Section 24 of the Lease clearly states that a condition precedent to exercising the option is that Tenant not ever to have been in default. The lease defines "default" in Section 13.1:
In Section 24, it is provided:
In consideration of the payment of all of the rent during the full term of this Lease by Tenant to Landlord without default, Tenant may, at Tenant's option after June 2, 2015 and not before, purchase the demised premises from Landlord for One Dollar ($1.00). . . . [Emphasis added.]
In Section 24.9, it is provided:
The consideration for this option is Tenant's lease of the demised premises at $4,000.00 per month without default until June 1, 2015 including payment of the rent due June 1, 2015, therefore, Tenant may not exercise this option until Tenant has paid the rent due for each of every month until and including June 1, 2015. If, however, Tenant . . . defaults on this Absolute Net Commercial Lease Agreement . . . then all rent shall be forfeited to Landlord as it is non-refundable. [Emphasis added.]
If: (a) Tenant shall fail to pay any rent or other sum payable hereunder for a period of 15 days after the same is due, and after five (5) days following notice of such deficiency; . . . then any such event shall constitute an event of default by Tenant. [Emphasis added.]
Thus, if the Landlord gives five (5) days notice of a deficiency and the Tenant does not cure, then there is a default. Once there is a default, Tenant no longer may exercise the Option to Purchase. Seaford Associates Limited Partnership v. Subway Real Estate Corp., Del. Ch., C.A. No. 2248, Lamb, V.C. (May 21, 2003), rearg. den., Lamb, V.C. (May 29, 2003).
Although the April 27, 2001 Notice informs Tenant that he owes the April rent, there are numerous problems with the Notice. The statements Tenant had broken the lease, he had given up the Option to Purchase, and he may reinstate the lease by bringing current all payments due create ambiguity and confusion for anyone reading the Notice. The statement, at this stage, that Tenant had given up the Option to Purchase is flatly wrong. That statement also renders questionable the explanation that the Lease may be "reinstated" by payment of the amounts due. The Notice also incorrectly represents the May rent and fees thereon as being late and consequently, it inappropriately includes the May rent and the May late fees in the calculation of the amount due.
Despite these glaring errors in the April 27, 2001 Notice, the parties did not address whether it was a legally sufficient notice of deficiency. The Court, however, must address this question because there can be no "default" if no notice of deficiency is provided.
No point exists to require the parties to submit briefing on this issue. The errors, to repeat, are obvious. The Court has researched the legal issues and has located the relevant law. Requiring further briefing only will delay the decision unnecessarily.
Under the common law, if a forfeiture was sought due to nonpayment of rent, it was required that the precise amount of rent owed be demanded on the day it was owed. Henderson v. Carbondale Coal and Coke Company, 140 U.S. 25, 33 (1891);Connor v. Bradley, 42 U.S. 211, 217 (1843). However, where the statutory law has replaced the common law regarding an aspect of the landlord tenant relationship, then the statutory law governs,id., or where the parties agree to the procedure to follow if there is a late payment of rent, then the lease provisions govern, Henderson v. Carbondale Coal and Coke Company, 140 U.S. at 38; Gordon v. Williams, 986 S.W.2d 470, 473 (Mo.App. 1998);Passive Investors, Inc. v. International Merchandising and Printing Company, 646 S.W.2d 870, 871 (Mo.App. 1982). Delaware's statutory law states that contract law governs a commercial lease. 25 Del. C. § 5101(b). The Lease itself sets forth the procedure regarding notice of a deficiency in paying rent. It requires that a notice of deficiency be provided fifteen days after the rent is late and it provides Tenant a five day period to cure after receiving the notice (which is deemed to be forty-eight hours after it is sent by certified mail). Section 13.1.
The reasonableness of a notice normally is a question of fact.Henry v. Nissan Motors Acceptance Corporation, Del. Super., C.A. No. 98A-02-023, Quillen, J. (Oct. 21, 1998) at 7. However, in certain circumstances, the notice may be deemed unreasonable as a matter of law. See Wilmington Trust Company v. Conner, 415 A.2d 773, 776 (Del. 1980) (examining the "reasonableness" aspect of a notice of deficiency in the redemption context).
The purposes of the notice of deficiency are to provide Tenant with information on the amount owed and to provide him the opportunity to cure in order to avoid losing the right to exercise the Option to Purchase and/or a termination of the lease. East Fordham Road Real Estate Corp. v. 260 E. Fordham Store, Inc., 2001 N.Y. Misc. LEXIS 580. Should the notice be contrary to these purposes, then the notice is not reasonable as a matter of law. See Wilmington Trust Company v. Conner,supra.
In this Notice, the amount claimed to be due was for April and May, 2001. At that time, the May rent was not past due. Thus, the amount claimed to be due was substantially overstated. Besides incorrectly containing the information on the May rent and late fee, the Notice also was erroneous because it stated Tenant had lost his Option to Renew. That wrong information was contrary to the purpose of the deficiency notice, which was to provide Tenant with an opportunity to cure before he lost the Option to Purchase. Thus, as a matter of law, I conclude the Notice was unreasonable and consequently, invalid.
Because the notice was not valid, no "default," as defined by the lease, ever occurred.
I will clarify, because Tenant raises the issue, that this April 27, 2001 Notice did not terminate the Lease. The Lease required as a condition precedent that a default be in effect before a termination notice even can be sent. Section 13.1(1). This is a two-step process. Arlen Realty, Inc. v. Dozier, 393 So.2d 489 (Ala.Civ.App. 1980), cert. den., 393 So.2d 492 (Ala. 1981). The April 27, 2001 Notice could not also constitute a termination notice.
Landlord does not argue the April 27, 2001 Notice constituted a termination of the Lease. Landlord clearly recognizes that the Lease precludes such an argument.
Section 13.1(1) provides:
Landlord shall have the right, so long as such default continues, to give notice of termination to Tenant. On the date specified in such notice (which shall not be less than 5 days after receipt thereon) this Lease shall terminate.
The Option to Purchase was not rendered invalid nor was the Lease terminated by virtue of Section 24.8. I will assume, without deciding, that this provision applies to a situation other than where Tenant has exercised the Option to Purchase. The provision's condition precedent is that a valid notice of delinquency be provided. Since one never was provided, the condition precedent was not met, and Section 24.8 does not come into play.
In Section 24.8, it is provided:
Prior to settlement, if Tenant shall allow the rent to be in arrears for more than thirty (30) days after the written notice of such delinquency . . . then the Lease Agreement shall be terminated and Tenant's option to purchase shall be void even if Landlord has received Tenant's written notice of Tenant's election to exercise the option. [Emphasis added.]
I conclude for the foregoing reasons that the Lease never has been terminated nor has the Option to Purchase been rendered invalid. I, accordingly, grant judgment in favor of Tenant and against Landlord.
IT IS SO ORDERED.