SDG Macerich Properties v. Stanek Inc.

• Decision Date: 17 July 2002
• Docket Number: No. 01-0788.,01-0788.
• Citation: 648 N.W.2d 581
• Parties: SDG MACERICH PROPERTIES, L.P., Appellant, v. STANEK INCORPORATED a/k/a Stanek, Inc., Joseph E. Stanek, and Lawrence Stanek, Appellees.
• Court: Iowa Supreme Court

648 N.W.2d 581

SDG MACERICH PROPERTIES, L.P., Appellant, v. STANEK INCORPORATED a/k/a Stanek, Inc., Joseph E. Stanek, and Lawrence Stanek, Appellees.

No. 01-0788.

Supreme Court of Iowa.

July 17, 2002.

David Wiggins of Wiggins & Anderson, P.C., West Des Moines, for appellant.

John C. Gray of Heidman, Redmond, Fredregill, Patterson, Plaza, Dykstra & Prahl, L.L.P., Sioux City, for appellees.

STREIT, Justice.

Equity aids the vigilant, not those who forget to perform a legal duty. Stanek, Inc. had a twenty-year lease agreement with SDG Macerich Properties, L.P., allowing Stanek to operate a Hardee's franchise on a property near a Sioux City shopping mall. The lease agreement required Stanek to exercise an option to renew the lease by a particular date. Stanek forgot to exercise its option to renew by that date. Stanek argues equitable relief should save it from the consequences of its forgetfulness. Macerich finds refuge in basic contract principles and strict adherence to contractual terms. The district court agreed with Stanek, dismissing Macerich's petition for declaratory judgment and its motion for summary judgment. The court granted Stanek's counterclaim for declaratory judgment and equitable relief. Because we find equity does not relieve a party who simply forgot to timely exercise an option to renew a lease agreement, we reverse and remand.

I. Background and Facts

Macerich is a real estate investment trust that owns approximately fifty-four shopping centers and a number of strip malls—including Southern Hills Mall in Sioux City, Iowa. Its predecessor signed twenty-year leases with a Kentucky Fried Chicken franchisee, a Pizza Hut franchisee, and Stanek, Inc. Stanek leased the demised property to construct and operate a Hardee's franchise. The initial lease terms ran for twenty years. Each lessee had an option to renew at the end of the initial term for an additional four five-year periods. The agreements required the lessees give the landlord written notification, exercising the option to renew the lease, at least twelve months before the lease term expired. Stanek's lease of the Hardee's property required notice of exercising the option to be given by September 30, 1999.

Near the time the twenty-year leases were due to expire, Macerich was in the process of considering whether to expand its shopping center and was negotiating to add a department store to its mall. It needed to expand parking and decided on the portion of its land occupied by KFC, Pizza Hut, and Hardee's restaurants.

Termination of KFC's, Pizza Hut's, and Hardee's leases was looming. Hardee's, Kentucky Fried Chicken, and Pizza Hut did not exercise their options to renew. Kentucky Fried Chicken entered into a two-year certain lease. Pizza Hut's lease expired on December 31, 2000. Macerich, relying on Stanek's failure to renew the Hardee's lease, continued its negotiations with the department store.

In December 1999, a date after the option for renewal expired, Macerich sent Stanek a "Tenant Estoppel Certificate" for Stanek to sign "confirming the commencement and expiration dates of the term."¹ Included in this confirmation certificate "were four remaining option(s) to renew the term of the lease for five years each." On January 20, 2000, Stanek notified Macerich of its intention to exercise its option to renew. This was approximately eight and a half months before the lease was to expire but was three and a half months too late. Macerich refused to allow Stanek to renew the lease because there was no option to renew the lease then existing.

Macerich filed a petition in equity for declaratory judgment and Stanek filed a counter-claim for equitable relief. The district court denied Macerich's motion for summary judgment and dismissed its petition for declaratory judgment. The court also granted Stanek's counterclaim for declaratory judgment and equitable relief. Macerich appealed.

Macerich argues the district court erred in: (1) denying its motion for summary judgment and (2) granting equitable relief for the defendants' forgetfulness and dismissing Macerich's petition for declaratory judgment.

II. Scope of Review

Our review of an action for declaratory relief is determined by the manner in which the action was tried to the district court. Walsh v. Nelson, 622 N.W.2d 499, 502 (Iowa 2001). This case concerns whether or not it is appropriate to grant equitable relief. As such, our review is de novo. Johnson v. Kaster, 637 N.W.2d 174, 177 (Iowa 2001). We must examine the facts as well as the law and decide the issues anew. Id. In doing so, we give weight to the district court's findings of fact, but we are not bound by these findings. Id.

As to the court's denial of Macerich's motion for summary judgment, our review is for correction of errors at law. Channon v. United Parcel Serv., Inc., 629 N.W.2d 835, 857 (Iowa 2001) (citation omitted). Summary judgment is proper if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Iowa R. Civ. P. 1.981(3) (2002).

III. The Merits

This case presents an issue of first impression in Iowa. We must determine whether equitable relief is available when a party, as the result of forgetfulness, untimely exercises its right of a lease renewal option. Macerich points to our consistent adherence to principles of strict contractual time limitations recognizing "time is of the essence." J.C. White v. RCA Serv. Co., 234 N.W.2d 153, 154 (Iowa 1975). Macerich argues it is entitled to possession of the lease property when the lease expires because Stanek failed to timely exercise its renewal option. In so arguing, Macerich cites numerous other jurisdictions that have required strict compliance with notice provisions in option contracts and have not granted equitable relief.

The district court concluded it was proper to apply equitable principles to grant relief in the case before us. In granting relief, the district court applied the Fountain test announced by the Connecticut Supreme Court eighty years ago in F.B. Fountain Co. v. Stein, 97 Conn. 619, 118 A. 47, 50 (1922). The court concluded whether equity is available to relieve a party's forgetfulness is determined by: (1) whether the lessee's conduct was the result of an honest mistake or oversight and not intentional, willful, or grossly negligent conduct; (2) whether the lessor has changed positions or been damaged by the delay; (3) the extent of the delay; and (4) whether the delay would work an unconscionable hardship on the lessee.

Applying the above test, the district court concluded Stanek's delay was the result of an oversight or mistake. The court found the three and a half month delay was not unreasonably long, and during this time period Macerich did not take any specific action regarding its plans for expansion. The court found the delay in notice did not prejudice Macerich. Weighing the above factors, the court concluded failure to give equitable relief would result in undue hardship on Stanek.

We are called upon to determine whether the renewal option provision of a lease agreement must be strictly enforced when a party simply forgot to exercise its option. Before we turn to the main issue, we briefly address two issues raised by Stanek in its attempt to justify equitable relief under the circumstances before us.

A. Option Contracts and Substantial Performance

First, Stanek contends it is appropriate to extend the principles of equity into the arena of option provisions solely in land contracts. An option is merely an offer that cannot be revoked until a certain date. 3 Corbin on Contracts § 11.2, at 466 (1996). Similarly, once this time period passes, an option holder may no longer accept the offer. Id. § 11.8, at 534. During the life of an option, it is the holder who has the power of acceptance. Id. § 11.8, at 515. Stanek contends that somehow, through equitable principles, the offer must stay open beyond the agreed upon time only for land contracts. However, the optionee has no power of acceptance after this critical date. Without articulating the reason why, Stanek contends the offer should remain open for land contracts whereas in all other areas of contract law the offer would end. This contention is wholly without merit. The principles applicable to option provisions in land contracts are the same as those for all other contracts. There is no reason to treat the two differently.

Stanek also appears to argue strict construction of the notice provision is inappropriate because Stanek substantially performed its duties under the lease agreement. Substantial performance is that which, "despite deviations from the contract requirements, provides the important and essential benefits of the contract to the promisee." 17B C.J.S. Contracts § 589, at 279 (1999); see, e.g., Johnson v. Dodgen, 451 N.W.2d 168 (Iowa 1990)

. The doctrine is intended to protect the right of compensation of those who have performed in all material and substantive particulars, and it excuses contractual deviations or deficiencies which do not severely impair the purpose underlying a contractual provision. 17B C.J.S. § 589, at 278.

The defense of substantial performance is not a valid principle to ameliorate against our clear rules of contract construction. Here, Stanek did not fulfill the conditions agreed upon for the time for performance. The notice of intent to exercise the renewal option is a condition precedent to irrevocability and the formation of contractual obligations. See 3 Corbin on Contracts § 11.8, at 517 (1996). It is not sufficient that after realizing the time for performance had passed, Stanek acted as quickly as possible. It is not enough that it notified Macerich of its intent to exercise the option three and a half months too late....