Lead Opinion
OPINION
{1} In this сase, we are presented with an issue related to commercial leases: will a late notice to the landlord of intent to renew the lease for another term be given effect when the lateness of the notice is due to the tenant’s own negligence? We hold that the late notice was ineffective in the circumstances of this case. Consequently, we reverse.
FACTS AND BACKGROUND
{2} This case concerns commercial property located at 7100 Lomas Boulevard NE in Albuquerque, New Mexico. The property was owned by Walgreen Properties since the 1960s. Initially, Walgreen Properties leased the property to Walgreen of New Mexico, which subleased the property to Walgreen Corporation, which built and operated a discount retail store (Globe Discount City) on the property. The initial term of the lease and sublease was for twenty years, to expire on December 31, 1984, with an option to renew for up to six successive periods of five years each. The lease and sublease also provided that notice of intent to renew for additional five-year terms be given to Walgreen of New Mexico three months before the expiration of the five-year term then in effect.
{3} In 1978, Globe closed its doors and Walgreen Corporation assigned the sublease to K-Mart. When the original term of the lease expired in 1984, K-Mart renewed the lease for three additional terms of five years. In the mid-1990s, the K-Mart store closed. In 1994, United Properties Limited (UPL) bought out K-Mart’s interest in the lease for $700,000. At that time, the rental payments on the lease were $44,640 per year, the term of the lease was due to expire on December 31, 1999, and there were three additional five-year terms remaining. UPL spent over $1,272 million on capital improvements to the property. These capital improvements included remodeling to adapt the property to UPL’s use, landscaping, and bringing the existing facilities up to code, as well as enhancing the existing buildings with additional fixtures. Ultimately, UPL subleased various portions of the property to Casa Chevrolet, Ford Leasing Development, and Pacific Eatery. We refer to these three entities collectively as Subtenants. Together, the Subtenants pay a total of $263,500 a year rent to UPL.
{4} When UPL took over the property, the term of the lease was set to expire on December 31, 1999. Thus, if UPL wished to renew for an additional five-year term, it was required to give written notice of its intent to extend the lease for another five years no later than September 30, 1999. As counsel for Walgreen put it, UPL just “plain plumb forgot” to do that. On November 8, 1999, Walgreen notified UPL that the date for giving written notice of intent to renew had passed. The next day, UPL sent Walgreen of New Mexico a written notice that it elected to extend the sublease for an additional five years. However, on November 22,1999, Walgreen of New Mexico notified UPL that it would not honor the notice and expected UPL and its Subtenants to vacate the premises by December 31,1999.
{5} On December 2, 1999, while the lease was still in effect, UPL filed an action for injunctive and declaratory relief, acknowledging that it failed to send a timely notice and asking that the district court exercise its equitable powers to order Walgreen of New Mexico to extend the lease for another five-year term. The Subtenants also appeared in the case and made arguments to the district court in support of UPL’s requested relief. Ultimately, both sides filed mоtions for summary judgment. UPL argued that strictly enforcing the three-month notice requirement of the lease would be inequitable and result in a forfeiture. Walgreen Properties and Walgreen of New Mexico argued that under New Mexico law the district court was required to strictly enforce the terms of the option to renew the lease. The Subtenants also argued that they would be harmed by strict enforcement of the three-month notice requirement. The district court granted the relief requested by UPL and its Subtenants. Walgreen Properties and Walgreen of New Mexico appealed to this Court. For the sake of clarity, we refer to Walgreen Properties and Walgreen of New Mexico as Landlord and UPL'and its Subtenants as Tenant. STANDARD OF REVIEW
{6} When the facts are not in dispute and the district court enters summary judgment, we review the district court’s application of the law to the facts of the case de novo. Phoenix Indem. Ins. Co. v. Pulis,
{7} Thus, in cases such as this, the proper standard of review may be expressed as follows. The question of whether, on a particular set of facts, the district court is permitted to exercise its equitable powers is a question of law, while the issue of how the district court uses its equitable powers to provide an appropriate remedy is reviewed only for abuse of discretion. See, e.g., Amkco, Co. v. Welborn,
DISCUSSION
{8} The precise issues raised by this case have been the subject of numerous аppellate decisions from across the country. See William B. Johnson, Annotation, Circumstances Excusing Lessee’s Failure to Give Timely Notice of Exercise of Option to Renew or Extend Lease,
[ejquity will not relieve a lessee of the consequences of his failure to give written notice of renewal of the lease within the time required by the provisions of the lease when the failure resulted from the negligence of the lessee unaccompanied by fraud, mistake, accident or surprise and unaffected by the conduct of the lessor.
Ahmed v. Scott,
in cases of mere neglect in fulfilling a condition precedent of a lease, [even if the cases] do not fall within accident or mistake, equity will relieve when the delay has beеn slight, the loss to the lessor small, and when not to grant relief would result in such hardship to the tenant as to make it unconscionable to enforce literally the condition precedent of the lease.
F.B. Fountain Co. v. Stein,
{9} At oral argument, both parties characterized the differences in the cases as reflecting a true split of authority. Although some cases have held that one view or another is the “majority” rule or the “modern” rule, we believe that such characterizations are not particularly helpful. For example, the court in Trollen v. City of Wabasha,
1. General Contract Principles
{10} In Nearburg,
Parties to a contract agree to be bound by its provisions and must accept the burdens of the contract along with the benefits. When a contract was freely entered into by parties negotiating at arm’s length, the duty of the courts is ordinarily to enforce the terms of the contract which the parties made for themselves. Although a contract may be declared void where it is unconscionable and oppressive in its terms, nevertheless, the fact that some of the terms of the agreement resulted in a hard bargain or subjected a party to exposure of substantial risk, does not render a contract unconscionable where it was negotiated at arm’s length, and absent an affirmative showing of mistake, fraud or illegality. A court should thus not interfere with the bargain reached by the parties unless the court concludes that the policy favoring freedom of contract ought to give way to one of the well-defined equitable exceptions, such as uneonscionability, mistake, fraud, or illegality.
(Internal quotation marks and citations omitted.) In Cafeteria Operators v. Coronado-Santa Fe Assocs.,
{11} Although we referred to the obligation to pay “rent” in Winrock Inn,
The grounds upon which a court of equity proceeds [in the case of rent that is tenderеd a few days late together with interest] are, that the rent is the object of the parties, and the forfeiture [of the lease] only an incident intended to secure its payment; that the measure of damages is fixed and certain, and that when the principal and interest are paid the compensation is complete. In respect to other covenants pertaining to leasehold estates, where the elements of fraud, accident, and mistake are wanting, and the measure of compensation is uncertain, equity will not interfere. It allows the forfeiture to be enforced if such is the remedy provided by the contract.
Sheets v. Selden, 74 U.S.(7 Wall) 416, 421-22,
{12} Thus, we decide this case against a long-standing backdrop of New Mexico law enforcing contractual obligations as they are written. In doing so, we point out that there is nothing to construe in this case. As in similar cases from othеr jurisdictions, we note that the lease agreement here was clear as can be, and there is no contention that it is ambiguous. See, e.g., SDG Macerich Props.,
2. Options and the Law Governing Them
{13} Landlord argues that New Mexico law holds that an option must be exercised strictly according to its terms and that the failure to exercise an option does not result in a forfeiture. Indeed, this Court and our Supreme Court have held that when the parties enter into an option contract for the purchase of land, the option must be exercised according to the terms of the contract. Skarda v. Davis,
{14} We recognize that this case could be viewed differently. In Nearburg and most other option cases, the owner of the option had not paid the near $2,000,000 that Tenant has expended here. Further, in this case, as is the case with many commercial ground leases, in order to encourage the tenants to spend significant amounts of money in adapting the property to their purposes, the landlord gave the tenants the right to renew the arrangement for a lengthy period of time. See Jerome D. Whalen, Commercial Ground Leases §§ 1.1 to 1.8 (2d ed.2002); 2 Milton R. Friedman, Friedman on Leases Ch. 14 (4th ed.1997).
{15} Nonetheless, the fact remains that the option was required to be exercised in a certain way according to the lease agreement signed by the parties. Other cases in the lease-renewal situation have held that there is no forfeiture calling for equitable intervention in circumstances where a lessee has simply neglected to give timely notice, even when there is a large difference between the rent the lessee pays and the rent that could be demanded or when the lessee has expended considerable sums of money on improvements. See Trueman-Aspen Co. v. N. Mill Inv. Corp.,
{16} The way the option was required to be exercised in this case was by “sending] notice thereof to Landlord at least three months prior to the expiration” of the then term of the lease. When option or other contracts contain specific time limitations, time is of the essence. See, e.g., SDG Macerich Props.,
{17} Tenant has argued that instead of applying the law concerning option contracts, we should apply the law concerning real estate contracts. Under real estate contract law, the courts recognize that the buyer has an equitable right to the land such that equity will protect the buyer from unwarranted forfeitures or unfairness that would shock the conscience of the courts. See, e.g., Huekins v. Ritter,
{18} In addition, even in real estate contracts, it is not every apparently large loss that amounts to unfairness that shocks the conscience of the court. For example, in Bishop, in which the rule was established, the court ruled that the tenant’s payments of about one-third of the value of the property over the course of six years could be likened to rent and therefore did not shock the conscience, id. at 343,
3. Equitable Considerations
{19} “Equity jurisdiction has never given the judiciary a roving commission” to do whatever it wishes in the name of fairness or public welfare. In re Adoption of Francisco A,
a. F.B. Fountain Co. Rule
{20} Tenant relies most heavily on Car-X Serv. Sys., Inc. v. Kidd-Heller,
{21} We do not perceive that adoption of the rule relied on by the district court is certain enough to provide the necessary stability and predictability for commercial transactions. A few examрles will demonstrate. The Fountain rule contains three basic elements: (1) that the delay in giving notice be slight, (2) that the loss to the landlord be small, and (3) that the loss to the tenant be so large that it would be unconscionable to enforce the notice provision.
{22} We begin with the length of delay. In Fountain itself, the delay was four days and the notice period was supposed to be thirty days. In our case, the delay was about forty days and the notice period was supposed to be about ninety days. Thus, in our case, the delay was almost half the notice period. In the jurisdiction deciding Fountain, the delay is measured against the notice period to determine whether the delay is slight, and thus Connecticut holds that notice given five and one-half months into a six-month notice provision does not qualify, even if the reason for the late notice is excusable, i.e., terminal illness in the family of the person required to give notice. See Tartaglia v. R.A.C. Corp.,
{23} Another difficult area concerns the second and third elements of the Fountain test, which have to do with the loss to the parties. In our case, Landlord had not сhanged its position to its prejudice, but once the notice was not forthcoming, it had an expectation that the trial court’s ruling frustrated. See W. Tire, Inc.,
{24} Moreover, we believe that adoption of the Fоuntain rule would allow courts to change the basic nature of the parties’ agreements, contrary to what they have bargained for at arm’s length. For example, the lease in this case required Tenant to give notice three months prior to the end of the lease term if Tenant wished to extend the lease to another five-year term. In contrast, Tenant on appeal argues that Landlord has failed to do equity because “[Landlord] was required to provide [Tenant] with notice of the breach [i.e., the failure to give the required notice], demand that [Tenant] cure the breach and provide [Tenant] the opportunity to cure the breach.” There was no breach in this case, and to argue as Tenant does stands the lease provision on its head.
{25} We consider the practical effect of Tenant’s argument in circumstances like those provided for in the lease in this case. Toward the end of the current lease term, a landlord will wonder whether a tenant will renew. The three-month notice provision is designed to allow the landlord sufficient time to seek other tenants. If the landlord waits until the end of the three-month period and the tenant has still not renewed, the cases are uniform in ruling that the landlord can evict the tenant. See, e.g., Duffy v. Casady,
{26} Finally, we note that the facts of several of the cases, alleged to stand for the proposition that the Fountain rule has been adopted in a particular jurisdiction, would call for relief even under the traditional rule. Thus, as was pointed out in Guy Dean’s Lake Shore Marina, Inc. v. Ramey,
b. Tenant’s Other Contentions
{27} Tenant argues that, even if we do not adopt the Fountain rule, the judgment should be affirmed under traditional New Mexico law. It relies on two factors. First, it argues that, under Winrock Inn, the notice provision must be considered at the “heart of the [parties’] bargain” before equity should not step in and that Landlord knew, from prior negotiations, that Tenant was going to exercise all options to renew. See 1996—NMCA-113, ¶ 36,
{28} Winrock Inn does say that, “[i]n the absence of fraud, unconscionability, or other grossly inequitable conduct, New Mexico courts do not have discretion either to relieve parties to a commercial lease of their contractual obligations or to interfere with contractual rights and remedies which go to the heart of the bargain.” Id. (emphasis added). We do not understand how Tenant can claim that the notice period inserted into the lease and which other courts have called a condition precedent indicating that time is of the essence does not go to the heart of the parties’ bargain. Moreover, if there were any doubt about it, the parties’ prior negotiations, far from showing that Landlord knew that Tenant would exercise the options, indicated that Landlord would require Tenant to adhere to the letter of the lease agreement. When Tenant negotiated with Ford Leasing, it negotiated a long-term lease for nineteen years and six months, and it wished Landlord to agree to a subordination agreement that would, among other provisions, relieve it of the obligation of providing notice at the end of each term. Landlord specifically rejected Tenant’s proposal, which left Tenant in the position of having to provide the required notice.
{29} As stated earlier in this opinion, relying on the Ahmed case, mistake is one of the traditional exceptions that would allow equity to intervene in a case of late notice. “Mistake, of course, is a fountainhead of equity jurisprudence.” Crown Life Ins. Co. v. Candlewood, Ltd.,
{30} Instead, we believe that the mistake that constitutes the threshold showing allowing equity to intervene is the type of mistake that is defined in the cases specifically addressing whether to hold parties to their freely negotiated bargains:
A mistake within the meaning of equity is a non-negligent but erroneous mental condition, conception, or conviction induced by ignorance, misapprehension, or misunderstanding, resulting in some act or omission done or suffered by one or both parties, without its erroneous character being intended or known at thе time.
[Tenant] does not argue it misunderstood the terms of the contract. It does not contend it was unaware of the notice provision. Rather, the facts before us show [Tenant] failed to exercise its option because of simple forgetfulness. Forgetfulness is not the equivalent of a mistake.
No one can predicate a mistake on his own negligent omission to perform a legal duty.... When one is charged with a duty, and forgets to do it, it may under certain circumstances constitute excusable negligence, but it cannot be held to be a mistake.... Negligently and inadvertently omitting to perform a duty is far different than to omit it through mistake or accident.
SDG Macerick Props.,
CONCLUSION
{31} The SDG Macerick Properties opinion began with the familiar maxim that “[ejquity aids the vigilant.”
We will not use equitable principles to save a party from the circumstances it created.
[Tenant] would have us weigh the equities of each particular case to achieve the most “just” result. However, the decision of which of two profit-seeking parties is more deserving to prevail is not within the province of the courts. [Tenant] has not offered and we have found no justiciable standards announced in other jurisdictions to assist this court in making such an arbitrary decision. No one factor to be considered in such an equitable analysis is sufficiently compelling to require us to aid [Tenant] or any other party where the parties bargained freely to their contract.
To hold otherwise would do nothing more than create instability in business transactions and disregard commercial realities.... Were we to accept [Tenant’s argument, “all contracts would be called into question as meaningless and uncertain, dependent upon the whims of a panacean court or a jury.” Attempting in vain to balance the equities, especially in a situation where as here the record is devoid of any so-called “equities,” will weaken the sanctity and predictability of the written word.
The written words of the contract afford greater certainty of intention, and more accurate compliance with the performance of the terms of the contracts by the parties thereto than do the retrospective, impassive conclusions of a court of equity. A court of equity should not be the first, but the last resort. It is bound by a contract as the parties have made it and has no authority to substitute for it another and different agreement, and should afford relief only where obviously there is fraud, real hardship, oppression, mistake, unconscionable results, and the other grounds of righteousness, justice and morality.
In sum, application of the Fountain rule would result in granting relief for failure to comply with an option provision anytime the “delay is slight, the lessor’s loss is small, and thе lessee would suffer a hardship.” Such a rule would excuse failure to comply with the lease in most cases. This result is directly contrary to our established precedent enforcing strict adherence to contractual time limitations.
SDG Macerich Props.,
{32} In summary, we hold that, under the circumstances of this case in which the notice was quite late when measured against the notice period provided in the lease and when the reason for the late notice is simple neglect, a court may not relieve a party of the bargain it made and must enforce the lease as it was written. Accordingly, the trial court erred in awarding summary judgment to Tenant. The judgment of the district court is reversed.
{33} IT IS SO ORDERED.
Dissenting Opinion
(dissenting).
{34} While I agree with the majority that our task in this case is to decide which line of cases best reflect the law and policy of New Mexico, I respectfully dissent. I believe that equity should be allowed tо intervene because this case involves a possible forfeiture. The majority opinion decides as a matter of law that equity cannot be considered in cases where a tenant forgets to timely send a notice of lease renewal. This holding is based on three points: (1) courts may not rewrite obligations that the parties bargain for themselves; (2) in the absence of well-defined equitable exceptions, equity should not intervene; and (3) instability and uncertainty would ensue if we adopted the Fountain rule. There is New Mexico law to support these general propositions, but not in cases such as this where forfeiture is a possible result. New Mexico law is clear: equity abhors forfeiture. Stamm,
{35} As early as 1922 our Supreme Court, in recognizing the harshness of forfeiture, held that equity could intervene to relieve a tenant of commercial property from “forfeiting” the lease simply because the tenant was late in paying one month’s rent. N.M. Motor Corp.,
{36} In Nearburg, the Court described forfeiture as follows:
The Restatement uses the term forfeiture to mean the denial of compensation to an obligee because of the non-occurrence of a condition after the obligee has relied substantially on the expectation of the bargained-for exchange, either by preparation or performance. [Restatement (Second) of Contracts § 227 cmt. b (1981) ]. “When it is said that courts do not favor forfeitures, the meaning is that they do not like to see a party to a contract getting something for nothing.” 3A Arthur Linton Corbin, Corbin on Contracts § 748, at 465 (1960).
{37} Citing to Bishop,
the modern view that valuable contractual rights should not be surrendered or forfeitures suffered by a slight delay in performance unless such intention clearly appears from the contract or where specific enforcement [upon the seller] will work injustice after a delayed tender. As we observed in Martinez v. Martinez,101 N.M. 88 , 92,678 P.2d 1163 , 1167 (1984)], the courts’ disapproval of forfeitures is longstanding; we are not compelled in every case to enforce a real estate contract when fairness and legal principles dictate that we should not. A forfeiture declaration is essentially an equitable remedy. It therefore makes perfectly good sense to apply equitable principles in determining whether a vendor under an installment land sale contract will be permitted to declаre a forfeiture.
Yu v. Paperchase P’ship,
{38} I disagree that application of the factors in Fountain or its progeny will introduce excessive instability or insecurity into commercial transactions. This type of arrangement or series of transactions has become increasingly common as a method of developing commercial property. See generally Whalen, supra §§ 1.1 to 1.8; 2 Friedman, supra Ch. 14. The holding in Fountain is more consistent with commercial realities and will provide increased stability for those who wish to develop commercial property, with no unexpected losses to the owners of the land on which the development takes place. Normally, when leased premises have been developed and are sublet, landlords expect the lease to be renewed. In those cases, the failure to tender a timely notice is unexpected and in some cases a surprise. It may also result in a windfall for the landlord.
{39}- In this case, Tenant asked for an equitable remedy, which was to require Landlord to treat the untimely notice as effective. Landlord did not want the district court to take equity into account. Landlord’s attorney argued to the district court that “one way or another someone is going to get the short end of the stick, whether it is [Landlord] or [Tenant], that’s the reality.”
{40} It is clear from the record that the district court did in fact consider all the equities as set out in Fountain before granting relief and that the equities were heavily in favor of Tenant in this ease. First, it was undisputed that Tenant did not intentionally fail to give timely notice. Second, while the notice of a desire to extend the lease was not given in a timely fashion, it was still given, and indeed suit was filed, before that term of the lease expired. The majority points to the difficulty in applying a rule involving “slight” delay. According to Fountain, the delay is measured against the notice. In this case, the tenant was late about forty days out of the ninety-day notice period. The majority is concerned that because the word “slight” is open to interpretation, the parties have nothing concrete to rely on. Each case turns on its own facts. I believe a district court is certainly capable of evaluating the delay as it did in this case. I cannot say that the district court was wrong in considering this particular delay slight, especially when balanced with the other factors.
{41} Third, the district court considered the substantial hardship to Tenant which in this case is tantamount to forfeiture. Even the majority recоgnizes the $2,000,000 investment made by Tenant but expresses its concern about the value of the recoupment and difficulty in following known standards. Again, each case turns on its particular facts and I believe that district courts are capable of sorting it all out.
{42} Fourth, the district court considered the extent to which Landlord’s interests would be prejudiced by granting the requested relief. In the district court, it was undisputed that Landlord had not changed its position in reliance on the failure to give timely notice. Indeed, the only prejudice to its interests that Landlord could point to was the fact that it would continue to receive rent at a rate set in the 1960s and substantially below what the market would bear today. This, however, is the result of the rental rate and the number of extensions allowed under the lease and has nothing to do with the timeliness or untimeliness of the notice of intent to renew for an additional term.
{43} Lastly, the district court also considered the interests of possible third parties. It was undisputed below that Landlord had not looked for or found a new tenant, nor had Landlord listed the property for sale, so its interests did not implicate those of any third parties or owner whose interests had to be considered. On the other hand, it was equally undisputed that the interests of the Subtenants would also have been significantly harmed if relief was not granted. In short, this was a case in which the equities favored giving relief.
{44} In summary, I believe New Mexico law should allow the exercise of equitable powers and require a Landlord to treat as timely an untimely notice of intent to extend a long term lease for another term of years if, as is true here, the delay in giving notice is not willful or deliberate, the length of the delay is relatively short, the notice of intent to extend is given before the term of the lease expires, and the hardship to the tenant in denying relief clearly outweighs any hardship that will be incurred by the landlord if relief is granted.
{45} For the above reasons, I respectfully dissent.