Duncan v. G.E.W., Inc.

• Decision Date: 28 May 1987
• Docket Number: No. 85-1057.,85-1057.
• Citation: 526 A.2d 1358
• Parties: Harry F. DUNCAN, et al., Appellants, v. G.E.W., INC., Appellee.
• Court: D.C. Court of Appeals

Page 1358

526 A.2d 1358

Harry F. DUNCAN, et al., Appellants, v. G.E.W., INC., Appellee.

No. 85-1057.

District of Columbia Court of Appeals.

Argued May 13, 1986.

Decided May 28, 1987.

Bardyl R. Tirana, Washington, D.C., for appellants.

Gerson A. Zweifach, Washington, D.C., for appellee.

Before PRYOR, Chief Judge, and TERRY and STEADMAN, Associate Judges.

TERRY, Associate Judge:

In this case we must decide whether a court of equity may relieve a lessee from the consequences of its failure to give timely notice, as required by the terms of its lease, of its intention to renew the lease. More than just a lease (actually, a series of leases) is involved here. At the heart of this case is the purchase of a chain of restaurants and a series of options to buy the buildings which they occupy, options which cannot be exercised unless the leases are renewed. The trial court granted a declaratory judgment in favor of the lessee, G.E.W., Inc., the effect of which was to prevent a forfeiture of G.E.W.'s lease renewal options, which in turn kept alive the purchase options. The lessors appeal from that judgment, contending that some of the trial court's findings were erroneous and that the lessee should be denied equitable relief because its failure to give timely notice was caused by its own unilateral mistake. On the particular facts of this case, with all the equities on the side of the lessee, we find no error in the trial court's grant of equitable relief; accordingly, we affirm the judgment.

I

In January 1981 appellant LTS Associates (LTS), a partnership consisting of Harry F. Duncan, Robert F. McFadden, and George P. Mathieson, entered into an agreement with appellee G.E.W., Inc., whereby LTS would sell to G.E.W. the assets of Little Tavern Shops, Inc., a chain of sandwich shops in the greater Washington area, for $700,000. Under the agreement, LTS retained an ownership interest in eighteen of the buildings in which the Little Tavern restaurants are located. Fourteen of these properties are involved in this litigation, ten of them in Maryland, two in the District of Columbia, and two in Virginia. Separate leases were executed for the individual properties, but they all contained identical language. In particular, each lease was for a three-year term that expired on January 31, 1984. Each lease also gave G.E.W. two consecutive renewal options and a purchase option. The renewal options, if exercised, would extend the total term of the leases to ten years, but they required three months' advance written notice prior to the expiration of the term. The purchase options could not be exercised after January 31, 1984, unless G.E.W. also elected to exercise its renewal options. Thus G.E.W. was obliged to give notice to LTS in writing on or before October 31, 1983, that it was exercising its option to renew each individual lease; its failure to do so would result in the loss of not only the renewal options but also the purchase options. The present dispute arose when Gerald E. Wedren, the president and chief executive officer of G.E.W., failed to give LTS written notice of G.E.W.'s intention to renew the leases until November 23, 1983, twenty-three days after the deadline.¹

On February 8, 1984, appellants² informed G.E.W. that they deemed the leases to have expired and intended to treat G.E.W. as a holdover tenant operating under a month-to-month lease. G.E.W. immediately filed this suit for a declaratory judgment and other equitable relief. It also sought and obtained a temporary restraining order which prohibited appellants from interfering with G.E.W.'s continued occupancy of the properties until the court could rule on G.E.W.'s motion for a preliminary injunction. The latter motion was granted a month later, pending a trial on the merits of G.E.W.'s complaint for a declaratory judgment.

The evidence at trial traced the history of the Little Tavern Shops. Harry F. Duncan founded Little Tavern Shops, Inc., in 1927, and was its chairman of the board and chief executive officer until January 1981. In 1968, after many years of profitability, the business began to lose its share of the market. Its sales and profits steadily declined and in 1980 the officers of the corporation decided that it was time to sell the business. They retained a broker to aid them in the sale, but G.E.W. was the only prospective purchaser that actually made a written offer of purchase.

Mr. Wedren, who negotiated the purchase agreement on behalf of G.E.W., recognized that purchasing the restaurant chain involved a "tremendous risk," and that substantial improvements would have to be made in order to "turn the company around." Therefore, instead of buying the Little Tavern buildings outright for G.E.W., he insisted upon lease renewal and purchase options in order to minimize the risks associated with the purchase of the business; in his view, much effort and time would be needed to improve the business' reputation and to obtain an adequate return on G.E.W.'s investment. It is not disputed that the options were, as appellant Mathieson testified, "part and parcel of the acquisition agreement."

By April 1983 G.E.W. had begun to make substantial improvements and alterations to the restaurant properties. In June 1983 G.E.W. obtained a $400,000 loan from the National Savings and Trust Bank. The bank was made aware of G.E.W.'s intention to renew the leases, and the loan was to be secured by pledging the leaseholds as collateral. Because the bank insisted that the leases extend through the five-year life of the loan, it required not only G.E.W.'s commitment to renew them but also the lessors' consent to the pledging of the leaseholds. Accordingly, Mr. Wedren obtained the written consent of Mr. Duncan and Mr. Mathieson to the assignment of some of the leaseholds as collateral for the bank loan.

G.E.W. spent the full amount of the loan, along with some of its own capital, on leasehold improvements. It purchased new equipment for heating, plumbing, cooking, and refrigeration. The menus of all the Little Taverns were expanded, and a few of the restaurants were completely remodeled.

The trial court found that appellants "were aware of these improvements and fully expected [G.E.W.] to exercise some of the purchase options." Duncan, Mathieson, and Wedren all worked in the same suite of offices during 1983, Wedren having acceded to a request by Duncan's wife to permit Duncan and Mathieson to use some of G.E.W.'s office space. In fact, Mr. Mathieson testified that his desk was less than fifty feet from Mr. Wedren's office. He also acknowledged that he had seen and spoken with architects and workmen in G.E.W.'s offices and that he knew G.E.W. was making "considerable improvements to all [of the] shops." Mathieson said he "never had any doubt that [Mr. Wedren] would exercise some of the options." Mr. Duncan also testified, "I thought he would renew all of them, based upon the fact that he was building up the properties."

The lease renewal option is found in Article 18 of each lease. It reads as follows:

Section 18.01. Lessor hereby grants to lessee the right, at lessee's option, to extend the term of this lease for two separate and additional terms after the expiration of the initial term hereof, upon the terms (other than length of term) herein specified. The first such additional term, hereinafter referred to as the first renewal term, is the time period indicated [in] Article First, section 1.09 hereof. The second such additional term, hereinafter referred to as the second renewal term, is the time period indicated in Article First, section 1.10 hereof. The second renewal term may be elected only if the lessee has previously elected the first renewal term. Both renewal options are conditioned upon the lessee's not then being in default on any of the provisions and conditions of this lease. These options shall be exercised by written notice given to lessor or delivered or mailed to lessor, at the address at which the rent is then payable, at least three (8) months before the expiration of the initial term hereof or first renewal term hereof The parties hereto agree that a new lease need not be executed upon the exercise of any of these options, but that this lease will remain in full force and effect, changed only as to the matters specified in this article. [Emphasis added.]³

G.E.W. asserted at trial that the lease renewal terms were ambiguous. Mr. Wedren testified that in April of 1981, three months after purchasing the business, he reviewed the leases, including the language in section 18.01. He concluded that the use of the plural, "these options," followed by the disjunctive "or," meant that the remainder of the sentence did not require three months' advance notice unless G.E.W. wished to exercise both options before the end of the initial term. Mr. Wedren believed that if G.E.W. was interested in exercising only the first renewal option, but not both, then the three-month notice requirement did not apply, and G.E.W. could follow the usual landlord-tenant standard of "reasonable notice" — thirty days — by giving notice on December 30, 1983.⁴ Accordingly, knowing that he would consider exercising the options in the future, Mr. Wedren made an entry in his diary at the page for December 15, 1981, which he transferred to the 1982 and then the 1983 diaries, reminding him of what he believed to be the December 30 deadline. Seeing the notation in the diary, he anticipated, would alert him that he had only two weeks in which to submit the notice.⁵

By the spring of 1983, according to Mr. Wedren, G.E.W. had decided to renew all of the leasehold options and fully intended to do so. On November 17, 1983, Mr. Wedren's secretary told him that Mr. Mathieson had informed her that G.E.W. was late in renewing its options and would therefore be evicted. Mr. Wedren immediately advised Mr. Mathieson that he read the leases differently, and that G.E.W. fully...