Recreational Equip., Inc. v. World Wrapps Northwest, Inc., 66226–1–I.

• Decision Date: 19 December 2011
• Docket Number: No. 66226–1–I.,66226–1–I.
• Citation: 165 Wash.App. 553,266 P.3d 924
• Parties: RECREATIONAL EQUIPMENT, INC., a Washington corporation, Appellant/Cross Respondent, v. WORLD WRAPPS NORTHWEST, INC., a Washington corporation, Respondent/Cross Appellant.
• Court: Washington Court of Appeals

165 Wash.App. 553

266 P.3d 924

RECREATIONAL EQUIPMENT, INC., a Washington corporation, Appellant/Cross Respondent,

v.WORLD WRAPPS NORTHWEST, INC., a Washington corporation, Respondent/Cross Appellant.

No. 66226–1–I.

Court of Appeals of Washington, Division 1.

Dec. 19, 2011.

Jeremy R. Larson, Jeffrey G. Frank, Kathryn C. McCoy, Foster Pepper PLLC, Seattle, WA, for Appellant.

Paul R. Taylor, Jofrey M. McWilliam, Byrnes Keller Cromwell LLP, Seattle, WA, for Respondent.

PUBLISHED IN PART

COX, J.

[165 Wash.App. 555] ¶ 1 Special circumstances may warrant a court granting equitable relief to a lessee who either fails or delays in giving notice to exercise an option in accordance with the written terms of its lease.¹ Here, the trial court properly exercised its discretion in deciding that special circumstances existed to warrant granting a grace period to World Wrapps Northwest, Inc. (World Wrapps), to exercise its option to extend the term of its lease with Recreational Equipment, Inc. (REI). We affirm.

¶ 2 World Wrapps owns and operates several restaurants in the Seattle area. The restaurant at issue in this unlawful detainer action is located in REI's flagship store in downtown Seattle.

¶ 3 The parties entered into the original lease dated May 25, 1995. This lease provided that the original five-year term did not commence until the first day of the first calendar month following the calendar month in which World Wrapps took physical possession of the premises. The trial court found that there was confusion between the parties as to when World Wrapps took physical possession. The trial court also found that the first five-year term of the lease commenced, at the earliest, on September 1, 1996. It is undisputed that the original lease contained options for two five-year extensions. It appears that World Wrapps properly exercised the first option to extend.

¶ 4 In 2005, during the first extended term, World Wrapps and REI began negotiating a Third Amendment to the original lease. The trial court found that World Wrapps wanted to remodel its space at an estimated expense of $250,000. The trial court also found that World Wrapps would not have committed to such an investment without both retaining the right to remain in the premises through the end of the term of the second option period (which would have ended, at the earliest, August 31, 2011) as well as obtaining two additional five-year option periods beyond the end of the second option period.

¶ 5 The trial court found that the Third Amendment, drafted by REI's attorney, incorrectly stated that the term of the lease, as extended, expired on May 25, 2010. This incorrect date required World Wrapps to give REI written notice of its intent to exercise the third option by November 27, 2009, 180 days before the incorrectly stated expiration date of the lease.

¶ 6 Both World Wrapps and REI signed the Third Amendment. World Wrapps did not initially notice that the end of the lease term, as extended, was incorrectly stated as May 25, 2010. The trial court also found that the parties did not intend to modify the termination date of the lease, as extended, from the fall of 2011 to May 25, 2010.

¶ 7 World Wrapps maintains a tickler system for its leases. The system is used to monitor renewal dates, extension dates, and rent increases. That system reflected September 30, 2011, as the termination date of the lease, as extended. World Wrapps never modified its tickler system to reflect the incorrect May 25, 2010, end date. The trial court found that World Wrapps reasonably believed that notice of exercise of the third option to extend was due 180 days before September 30, 2011.

¶ 8 Shortly before November 27, 2009, REI discussed internally that World Wrapps would be required to give notice of exercise of its third option to extend by that date. This discussion was based on the incorrect May 25, 2010, date in the Third Amendment. The trial court found that there was general agreement and belief by REI that World Wrapps did not intend to let the lease lapse by failing to exercise timely the third option. Despite this belief, REI decided not to tell World Wrapps of the impending date and directed its flagship store manager to do the same. REI deliberately waited several weeks after the November 27, 2009, date before notifying World Wrapps that the time to exercise the third option had passed.

¶ 9 On January 8, 2010, REI notified World Wrapps, in writing, that World Wrapps had lost the right to exercise the third option, and that the lease would terminate on May 25, 2010. Six days later, World Wrapps delivered written notice to REI that it was exercising the third option. REI refused to honor this exercise of the option.

¶ 10 World Wrapps did not vacate the premises on May 25, 2010. REI commenced this unlawful detainer action on July 1, 2010. It claimed that the lease expired on May 25, 2010, that World Wrapps failed to give timely notice of exercise of the third option, and that REI was entitled to relief under RCW 59.12.030(2) and (3). World Wrapps asserted affirmative defenses and counterclaims.

[165 Wash.App. 558] ¶ 11 In a three-day bench trial, the trial court granted World Wrapps an equitable grace period to exercise the third option and denied its other affirmative defenses and counterclaims. The court also denied all of REI's claims for relief. It then granted, in part, World Wrapps' request for attorney fees and costs.

¶ 12 REI appeals. World Wrapps cross-appeals the amount of attorneys fees the trial court awarded to it as the prevailing party below.

EQUITABLE GRACE PERIOD

¶ 13 REI argues that the trial court abused its discretion in awarding World Wrapps an equitable grace period in which to exercise its third option to extend. We hold that special circumstances existed in this case, and the trial court properly exercised its discretion by granting the grace period.

¶ 14 The general rule is that an option must be timely exercised or it is lost.² Special circumstances may warrant a court granting equitable relief to a lessee who either fails or delays in giving notice to exercise an option to extend in accordance with the written terms of its lease. ³

¶ 15 Unchallenged findings of fact are verities on appeal.⁴ Challenged findings of fact are reviewed under a substantial evidence standard, which requires that there be sufficient evidence in the record to persuade a reasonable person that a finding of fact is true. ⁵ If substantial evidence supports a finding of fact, an appellate court should not substitute its judgment for that of the trial court. ⁶ Questions of law are reviewed de novo.⁷

¶ 16 A trial court has discretion to decide whether equity requires an equitable grace period.⁸ This discretion is to be exercised in light of the particular case's facts and circumstances. ⁹ Because the trial court has broad discretionary authority to fashion equitable remedies, such remedies are reviewed for an abuse of discretion. ¹⁰ An abuse of discretion occurs when the trial court's decision is manifestly unreasonable or is exercised on untenable grounds or for untenable reasons.¹¹

¶ 17 In Wharf Restaurant, Inc. v. Port of Seattle,¹² this court considered the effect of a lessee's failure or delay in giving notice of intent to exercise an option to extend. Generally, “a notice of election to renew a lease conformable to an option therein contained must be definite, unequivocal, unqualified and given strictly in accordance with the terms of the lease.” ¹³ Consistent with this principle, “it is generally recognized that where a lessee has a right of renewal provided it gives the lessor notice by a specified time that it intends to exercise such privilege, the giving of the notice is a condition precedent with which the lessee must comply within the stipulated time ...” ¹⁴ But the existence of “special circumstances” may warrant a court of equity giving relief in limited circumstances.¹⁵

¶ 18 In Wharf, the special circumstances that justified the trial court granting an equitable grace period in that case included:

1. The failure to give notice was purely inadvertent.... It was not the result of intentional, culpable or, ... ‘grossly negligent’ conduct.

2. An inequitable forfeiture would have resulted had equity not intervened....

3. As a result of the [lessee's] failure to give timely notice, the [lessor] did not change its position in any way and was not prejudiced thereby....

4. The lease was for a long term, not a short term....

5. There was no undue delay in the giving of notice by the [lessee].... [[¹⁶

¶ 19 Here, REI does not challenge that World Wrapps established factors 1, 3, and 4: World Wrapps' failure to give notice was purely inadvertent, such failure did not prejudice REI, and the lease was for a long term. But, it does claim that the trial court abused its discretion by deciding that World Wrapps would have suffered an inequitable forfeiture without a grace period and that the delay in the giving of notice was not undue.

Inequitable Forfeiture

¶ 20 REI specifically argues that World Wrapps did not prove that it either would forfeit the type of substantial improvements that are required by Washington law or that its improvements were made specifically with the intent to exercise the third option.¹⁷ We disagree.

[165 Wash.App. 561] ¶ 21 Here, the trial court concluded there would have been an inequitable forfeiture:

[World Wrapps], by contrast, will suffer considerable harm if the exercise is not recognized, It would lose at least a year and four months under the current term (the difference between May 25, 2010, and September or October 1, 2011) as well as the ability to exercise the third and fourth options, which the parties agreed to at the time of the 2006 remodel. It would also lose a gross income stream of between $750,000 and $1 million per year. [World Wrapps] cannot replicate that income in another location, nor does it have the...