Hindquarter Corp. v. Property Development Corp.

• Decision Date: 23 July 1981
• Docket Number: No. 46959-8,46959-8
• Parties: , 23 A.L.R.4th 897 HINDQUARTER CORPORATION, a Washington Corporation, Respondent, v. PROPERTY DEVELOPMENT CORPORATION, a Washington Corporation, Petitioner, Lloyd Dubois and Jane Doe Dubois, his wife; John B. Beaupre and Jane Doe Beaupre, his wife; and Leland Shepardson and Jane Doe Shepardson, his wife, Respondents.
• Court: Washington Supreme Court

Page 809

95 Wn.2d 809

631 P.2d 923, 23 A.L.R.4th 897

HINDQUARTER CORPORATION, a Washington Corporation, Respondent, v. PROPERTY DEVELOPMENT CORPORATION, a Washington Corporation, Petitioner Lloyd Dubois and Jane Doe Dubois, his wife; John B. Beaupre and Jane Doe Beaupre, his wife; and Leland Shepardson and Jane Doe Shepardson, his wife, Respondents.

No. 46959-8.

Supreme Court of Washington, En Banc.

July 23, 1981.

Skeel, McKevly, Henke, Evenson & Betts, John Roberts, Eric Richter, Seattle, for petitioner.

Allen Lane Carr, Inc., Allen Carr, Seattle, for respondent.

UTTER, Justice.

Hindquarter Corporation sought a declaratory judgment establishing its right to exercise a lease renewal option. The trial court ruled that since Hindquarter had often been late in making its rental payments, Hindquarter's option was unenforceable. Finding that the payment of rent was not a condition precedent to the exercise of the option, the Court of Appeals reversed and remanded the case so that Hindquarter could be awarded damages for the landlord's failure to extend the lease. We reverse the Court of Appeals and affirm in part the judgment of the trial court.

In 1976, Property Development Corporation acquired certain realty, a portion of which was already leased to Hindquarter. The lease was for a term of 5 years commencing in August 1967, with an option for two additional 5-year periods. It required the lessee to perform all obligations promptly and pay rental charges when due.

Shortly after acquiring the realty, Property Development examined Hindquarter's history of delinquent rental payments and informed it that strict and timely performance of the lease obligations would thereafter be required. Subsequent to that letter, there were numerous late payments and 14 checks were returned for insufficient funds.

On July 7, 1977, Hindquarter sent Property Development a letter wherein it attempted to exercise the second 5-year option. The renewal was rejected and Hindquarter was given notice that its lease would terminate on August 29, 1977. As of that date, May rental for that year had not been paid and the August base rental was paid with a check returned for insufficient funds. Also, at the time of the trial, attorney's fees, as provided for in the lease, had not been paid.

At trial, the court dismissed Hindquarter's complaint, due to Hindquarter's uncontested failure to comply with its lease obligations, and granted a judgment for Property Development on its counterclaim for restitution. The trial court reasoned that Hindquarter's renewal right was implicitly and inherently dependent upon the timely payment of its rent.

The Court of Appeals, in an unpublished opinion, reversed the trial court, holding that nothing in the lease indicated that the exercise of the option was dependent upon Hindquarter's payment of rent. It concluded that where the payment of rent is not an express condition precedent to the exercise of an option, rental arrearages will not deprive a lessee of any renewal right.

Hindquarter argues that the renewal option was independent of the obligation to pay rent, because the lease did not specifically require that the tenant be in good standing at the renewal date. In the alternative, it asserts that, if good standing were a condition precedent, the only remedy for nonpayment of rent was contained in section 10.1 of the lease and since that remedy was not used, Hindquarter was never technically in default and hence the landlord in effect waived its right to deny the renewal. Section 10.1 provided:

This lease is made on the condition that if any default by Tenant continues after written notice, in case of failure to pay rent for more than ten (10) days, or in any other case for more than thirty (30) days, and such additional time, if any, as is reasonably necessary to cure the default; ... Landlord may in any of such events immediately, or at any time thereafter, and upon giving the notice required by law, make entry and repossess the leased premises as of the Landlord's former estate, without prejudice to any other remedies Landlord may have ...

The landlord's failure to utilize the notice and reentry procedure did not constitute a waiver of any right to deny renewal. The right to declare a forfeiture of the lease and the right to refuse to renew are separate and distinct. Skillman v. Lynch, 74 S.D. 212, 50 N.W.2d 641 (1951); Gadsden Bowling Center, Inc. v. Frank, 249 Ala. 435, 31 So.2d 648 (1947); Borden Mining Co. v. H. & W. A. Hitchins Coal Co., 163 Md. 250, 161 A. 181 (1932). As stated in Borden Mining, at 258, 161 A. 181:

It is quite conceivable that the lessor may have resigned itself to enduring the delinquencies of that term and yet have resolved not to go into another lease, or not to decide the question of renewal until it should arise. It is true that upon a lessor's accepting a later rent he waives his right of re-entry by reason of delinquency in an earlier rent. As it was put in a leading English case on the subject, this is "because it is a contradiction in terms to treat a man as a tenant and then treat him as a trespasser." Finch v. Underwood, 2 Ch.Div. 310, 316. But the lessor does not by that action take any position, or make any waiver, on the future problem of renewal.

This rule was actually incorporated into the lease and agreed to by both parties. Lease provision 10.3 stated:

No consent or waiver, express or implied, by Landlord to or of any breach of any covenant, condition or duty of Tenant shall be construed as a consent or waiver to or of any other breach of the same or any other covenant, condition or duty.

Consistent with that provision, the trial court specifically found that the landlord had not waived any of its rights. Since that finding has not been appealed to us, we are bound by it. Pannell v. Thompson, 91 Wash.2d 591, 589 P.2d 1235 (1979); State Bar Ass'n v. Great Western Union Fed. Sav. & Loan Ass'n, 91 Wash.2d 48, 586 P.2d 870 (1978).

The absence of a waiver distinguishes this case from others involving this issue. In both Henry v. Bruhn & Henry, Inc., 114 Wash. 180, 195 P. 20 (1921), and Spotts v. Westlake Garage Co., 116 Wash. 255, 199 P. 294 (1921), we found that the landlord had waived any right to refuse renewal. We have never, however, specifically determined when, if ever, payment of rent is a condition precedent to the exercise of a renewal option.

In reviewing this case, we are guided by the principles set forth in Toellner v. McGinnis, 55 Wash. 430, 104 P 641 (1909). There we stated:

"Covenants in an agreement will be construed as conditions precedent or as independent agreements, according to the intention of the parties and the good sense of the case, and technical words must give way to such intention. Therefore, in determining how to class covenants, the safest and best course is to ascertain what was the intention of the parties from the instrument they have executed, and then to give the covenants such a construction as will carry this intention into effect. If it appears, on the whole, that any substantial part of the agreement on one side is to be performed only on condition of performance on the other, the court is bound to construe the covenants accordingly, whatever may be the order in which they are placed in the instrument or the manner in which they are expressed."

Toellner, at 437, 104 P. 641, quoting L. Jones Landlord and Tenant § 324 (1906). Applying those principles to this case, we conclude, after reviewing the entire lease and resorting to common sense, that Hindquarter's chronic failure to pay rent made its option unenforceable.

Section 2.2 of the lease provided that

(t)he terms and conditions of this lease during said option periods shall be the same as those in effect at the time of the exercise of said options.

One of the lease's affirmative covenants was that the lessee would promptly pay the rent when due. Section 7.1(a). ¹ Hindquarter had, under the existing term, breached that covenant with such frequency that the lessor could have concluded that notwithstanding Hindquarter's signature to the option, it would not or perhaps could not comply with the rental conditions. The lessee's pattern of conduct indicated at the time of the attempted renewal, that it was in effect not agreeing to the terms of the option. See Gadsden Bowling, at 439, 31 So.2d 648; Jones v. Epstein, 134 Ark. 505, 204 S.W. 217 (1918). Property Development was thus entitled to deny the renewal.

That the parties intended the prompt payment of rent to be a condition precedent to the renewal is also evident in lease section 9.3. It provided:

Landlord covenants that Tenant, on paying the rent and performing Tenant's obligations under this lease, shall peacefully and quietly have, hold and enjoy the leased premises throughout the Lease Term, or until it is terminated as in this lease provided.

This provision conditioned the right to the lease and the premises on performing all the lease obligations, including the prompt payment of rent.

Moreover, the payment of rent is an implied condition for any lease renewal. Nork v. Pacific Coast Medical Enterprises, Inc., 73 Cal.App.3d 410, 140 Cal.Rptr. 734 (1977); Klepper v. Hoover, 21 Cal.App.3d 460, 98 Cal.Rptr. 482 (1971); see Lutterloh v. Patterson, 211 Ark. 814, 202 S.W.2d 767, 769 (1947). In Nork, the lessee argued that its option to renew was an independent covenant and that it could exercise that option even though it had defaulted on its rental payments because the lease did not expressly state otherwise. That is essentially Hindquarter's argument and Nork rejected it, stating that

payment of rent is an implied condition which must be satisfied in addition to other express covenants in the lease before the option can be exercised ...

Nork, at 416, 140 Cal.Rptr. 734.

We agree with the rule followed in California, ² for it would be fundamentally unfair to require a landlord to renew...