Chesapeake Bank v. Monro Muffler/Brake, Inc.

KENNEY, J. Chesapeake Bank of Maryland appeals the decision of the Circuit Court for Baltimore County granting the petition for judgment of renewal of lease agreement and for declaratory judgment filed by Monro Muffler/Brake, Inc., appellee. Chesapeake Bank of Maryland presents two questions: 1. Did the trial court err in holding that Monro’s letter dated August 29, 2002 constituted an effective renewal of its lease with Chesapeake even though it was sent 27 days after the deadline specified in the Lease? 2. Did the trial court err in holding that Monro’s untimely notice of renewal was a default subject to cure under the lease?

For the following reasons, we shall reverse and remand to the circuit court. FACTUAL AND PROCEDURAL HISTORY In 1981, Chesapeake Bank of Maryland (“the Bank”), then doing business as Chesapeake Federal Savings and Loan Associates, leased property located at 10501 York Road in Baltimore County to Kimmel Automotive, Inc. The lease provided for a term of twenty years, to expire on October 31, 2002. It further provided: LESSEE shall have and is hereby granted a total of 3 successive options to extend the term of this lease for any period of time not exceeding 5 years for each such option ⁷⁰² upon the same covenants and conditions as herein provided. If LESSEE shall elect to exercise one or more of such options it shall do so by giving LESSOR wi’itten notice at least ninety (90) days prior to the expiration of the primary term or of the then current extension, and in such notice LESSEE shall state the date to which it elects to extend the term. * * * In the event LESSEE shall default in the performance of any of the terms or provisions of this lease other than the payment of monthly rent, LESSOR shall promptly so notify LESSEE in writing.

If LESSEE shall fail to cure such default within twenty days after receipt of such notice, or if the default is of such character as to require more than twenty days to cure and LESSEE shall fail to commence to do so within twenty days after receipt of such notice and thereafter deligently [sic] proceed to cure such default, then in either such event LESSOR may cure such default and such expense shall be added to the rent otherwise due, but any such default shall not work as a forfeiture of this lease. In a letter dated March 20, 2002, Monro Muffler/Brake, Inc. (“Monro”) informed the Bank that it was in the process of purchasing all the shares of Kimmel Automotive. Along with the letter, Monro sent the Bank a “landlord’s estoppel certificate,” which provided in part: 2. The Lease is valid, in full force and effect on the date hereof and enforceable in accordance with its terms and has not been modified or amended from the date of its execution to the date hereof, except as may otherwise be indicated in said Schedule. 3.

The term of the Lease commenced on the date of commencement shown in said Schedule and will terminate, unless renewed or extended in accordance with its terms, on the date of termination shown in said Schedule. The “Schedule” referred to in the estoppel certificate confirmed that the termination date on the lease was October 31, ⁷⁰³ 2002, and that the lessee had three options to extend the lease for terms of up to five years each. The Bank signed the estoppel certificate on April 10,2002, and returned it to Monro as provided for in Monro’s letter. In a letter dated May 8, 2002, Monro informed the Bank that it “has finalized its purchase of all of Kimmel Tire and Tread Quarters’ business.” The letter, which was signed by Thomas Aspenleiter, Monro’s Vice President of Real Estate, concluded: “We look forward to a long and prosperous relationship with you and we welcome any questions or comments you may have relative to this relationship.” In a letter dated August 8, 2002, Monro stated that it was updating its landlord information and asked the Bank to verify its name and contact information.

The Bank provided Monro with the requested information. Monro informed the Bank of its intention to exercise its option of extending the lease in a letter dated August 29, 2002: Please accept this letter as Monro Muffler / Brake, Inc.’s official notification of our intent to renew said lease agreement for the first five-year renewal period commencing November 1, 2002 and expiring October 31, 2007.... Tenant shall have two five-year renewal options remaining. Please sign below as confirmation of said renewal and fax back....

The Bank refused to confirm the extension, informing Mon-ro of its decision in a letter dated September 5, 2002: “I acknowledge receipt of your request to renew the lease for the above premises; however, the time period within which to exercise the right to renew the lease expired on or about August 2, 2002. Therefore, effective November 1, 2002, the lease for the above premises is terminated.” In the hearing before the circuit court, Aspenleiter testified that he had entered the lease’s expiration date into a computer system Monro uses to keep track of its approximately 615 locations. In entering the data, however, he inadvertently entered that the lease called for sixty days’ notice of extension, rather than the ninety days stated in the lease. Hence, ⁷⁰⁴ Monro’s records showed that it had until September 1 to extend the lease.

Monro responded to the Bank’s termination of the lease in a letter dated September 11, 2002, stating: Although, admittedly, the renewal notice was not received ninety (90) days before the expiration of the lease, the intent to renew was clear. The undersigned acquire [sic] the rights to this lease, one of 38 sites acquired earlier this year, with the clear intent of conducting ongoing business in the area. An administrative oversight caused the delayed issuance of the notice to renew, the receipt of which was acknowledged by you on September 5, 2002. We have no intention of recognizing the termination notice and plan to remain as a tenant under the terms of the renewal lease....

Indeed, Monro refused to vacate the property. In a letter dated September 30, 2002, Monro informed the Bank of its intention to exercise its option to purchase, as provided for in the lease. The parties sought appraisals of the property, and Monro made an offer. But, Aspenleiter testified, Monro ultimately decided not to purchase the property because, under the county zoning regulations, it would also have had to purchase an adjacent lot.

On November 14, 2002, the Bank filed a complaint and summons against tenant holding over in the District Court of Maryland for Baltimore County. On November 19, 2003, Monro. filed a petition for judgment of renewal of lease agreement and for declaratory judgment in the Circuit Court for Baltimore County. Pursuant to a consent order from the District Court, the cases were consolidated in the circuit court. The circuit court held a hearing on October 5, 2004, and issued its disposition of the case on November 4, 2004, “granting Monro’s Petition for Judgment of renewal of the lease.” The court issued a declaratory judgment to that effect on December 15, 2004.

Thereafter, the Bank noted this timely appeal. ⁷⁰⁵ STANDARD OF REVIEW Maryland Rule 8 — 131(c) states: When an action has been tried without a jury, the appellate court will review the case on both the law and the evidence. It will not set aside the judgment of the trial court on the evidence unless clearly erroneous, and will give due regard to the opportunity of the trial court to judge the credibility of the witnesses. Accordingly, we “review the case on both the law and the evidence.” Id. When “ ‘there is any competent, material evidence to support the factual findings below, we cannot hold those findings to be clearly erroneous.’ ” Cannon v. Cannon, 156 Md.App. 387, 404 , 846 A.2d 1127 (2004), aff'd, 384 Md. 537 , 865 A.2d 563 (2005) (quoting Shallow Run Ltd. P’ship v. State Highway Admin., 113 Md.App. 156, 174 , 686 A.2d 1113 (1996)).

But, whereas “the factual determinations of the circuit court are afforded significant deference on review, its legal determinations are not.” Liberty Mut. Ins. Co. v. Maryland Auto. Ins.

Fund, 154 Md.App. 604, 609 , 841 A.2d 46 (2004). “Indeed, the appropriate inquiry for such determinations is whether the circuit court was ‘legally correct.’ ” Id. at 609-610 , 841 A.2d 46 (citing Maryland Envtl. Trust v. Gaynor, 140 Md.App. 433, 440, 780 A.2d 1193 (2001)). DISCUSSION I. Was the Lease Effectively Renewed? The circuit court granted Monro’s petition for renewal of lease agreement because it found that Monro’s correspondence with the Bank, including its untimely notice of extension, clearly demonstrated its intent to exercise the extension option.

The court also based its decision on principles of equity, granting the extension despite Monro’s untimely notice. The Bank contends that the court erred in both respects. Monro argues that its notice of extension was timely under the terms of the lease. Monro also contends that the circuit court was correct in finding that its correspondence with the ⁷⁰⁶ Bank constituted an effective extension.

Additionally, Monro presents a number of equitable arguments in support of the circuit court’s judgment. A. Monro’s Notice of Extension The circuit court did not find that Monro’s notice was timely. Rather, the court concluded that its untimely notice was nevertheless effective. The Bank contends that the court erred because “[t]he lease provision at issue in this case is clear and unambiguous,” and that “[tjhere is no doubt ... that Monro failed to comply with the renewal provision.” “Leases are contracts and, as such, are to be construed by application of the well established rules of contract interpretation.” Middlebrook Tech, LLC v. Moore, 157 Md. App. 40, 65 , 849 A.2d 63 (2004). “Maryland follows the law of objective contract interpretation.” Sy-Lene of Washington, Inc. v. Starwood Urban Retail II, LLC, 376 Md. 157, 166 , 829 A.2d 540 (2003).

Our “duty is to determine the intention of the parties as reflected in the terms of the contract.” Id. “When a contract’s language is expressed in clear and unambiguous terms, the court will not engage in construction, but will look solely to what was written as conclusive of the parties’ intent.” Moore, 157 Md.App. at 66 , 849 A.2d 63 . “A contract is ambiguous if it is subject to more than one interpretation when read by a reasonably prudent person.” Sy-Lene of Washington, 376 Md. at 167 , 829 A.2d 540 . When the terms of a lease are unambiguous, the interpretation of those terms “involves a question of law for the court to resolve.” Nicholson Air Servs., Inc. v. Bd. of Comity Comm’rs of Allegany Comity, 120 Md.App. 47, 63 , 706 A.2d 124 (1998). Generally, “[a] landlord is not bound to renew a lease ■without an express covenant to this effect.” Milton R. Friedman, Friedman on Leases § 14:1 (4th ed.1997). In this case, the lease provides for an extension option: “LESSEE shall have and is hereby granted a total of 3 successive options to extend the term of this lease for any period of time not ⁷⁰⁷ exceeding 5 years for each such option upon the same covenants and conditions as herein provided.” The Bank was therefore obligated to extend the lease at Monro’s option.

With respect to the exercise of that option, the lease states: “If LESSEE shall elect to exercise one or more of such options it shall do so by giving LESSOR written notice at least ninety (90) days prior to the expiration of the primary term or of the then current extension.... ” “A condition is an event, not certain to occur, which must occur, unless its non-occurrence is excused, before performance under a contract becomes due.” Restatement (Second) of Contracts § 224 (1981). The question whether the stipulation in a contract constitutes a condition precedent is one of construction dependent on the intent of the parties to be gathered from the words they have employed and, in case of ambiguity, after resort to the other permissible aids to interpretation. Although no particular form of words is necessary in order to create an express condition, such words and phrases as “if” and “provided that,” are commonly used to indicate that performance has expressly been made conditional, as have the words “when,” “after,” “as soon as,” or “subject to.” Chirichella v. Erwin, 270 Md. 178, 182 , 310 A.2d 555 (1973) (citations omitted). The option to renew is not ambiguous.

It states that “if’ the tenant wishes to extend the lease, it “shall do so by” giving the landlord ninety days’ written notice. The requirement of ninety days’ notice was a condition precedent to Monro’s exercising its option to extend the lease. It is undisputed that the primary lease term ended on October 31, 2002. To provide ninety days’ notice, Monro would had to have given such notice no later than August 2, 2002.

Its letter attempting to exercise its option to extend was dated August 29, 2002. Monro acknowledges that it failed to provide ninety days’ notice, stating in its brief to this Court: “Monro’s [sic] provided Chesapeake with sixty-three (63) days ⁷⁰⁸ advance notice of Monro’s intention to renew by sending its August 29, 2002 letter.” “Generally, when a condition precedent is unsatisfied, the corresponding contractual duty of the party whose performance was conditioned on it does not arise.” B & P Enterprises v. Overland Equipment Co., 133 Md.App. 583, 606-607 , 758 A.2d 1026 (2000). Because the requirement of ninety days’ notice was a condition precedent to the Bank’s obligation to extend the lease, Monro’s failure to meet the condition relieved the Bank of that obligation. After August 2, 2002, the Bank no longer had an enforceable covenant to extend the lease.

Monro argues, however, that its notice of renewal was not untimely because the lease provides that the primary term was to “continue for a period of TWENTY (20) years [from its 1981 signing] unless sooner terminated or extended as hereinafter provided.” The lease grants the lessee “3 successive options to extend the term of this lease for any period of time not exceeding 5 years for each such option.” Further, the lease states how the tenant may exercise the option to extend: “If LESSEE shall elect to exercise one or more of such options it shall do so by giving LESSOR written notice at least ninety (90) days prior to the expiration of the primary term or of the then current extension.... ” (Emphasis added). The lease also gives the tenant an option to purchase: “The LESSEE shall further have the right to purchase the leased premises at the expiration of the term of this lease, or any extension thereof.... The contract of sale shall provide for apportionment of rent to the day of settlement....” After the Bank notified Monro that it was terminating the lease, Monro attempted to exercise its option to purchase. When it learned, however, that it would likely have to purchase the adjacent lot as well, it decided not to purchase the property.

In the intervening time, while the parties were negotiating the possible sale, Monro remained in possession of the leased property and continued to pay rent. ⁷⁰⁹ In support of its argument that it gave timely notice, Monro states: Since the Lease contemplated that Monro would remain on the Premise[s] and pay an apportioned rent through the date of settlement, it follows that Monro was a tenant in good standing under the Lease during the entire time that it was operating in good-faith to purchase the Premises. It also follows that the purchase and appraisal period could be construed as a “then current extension” of the Lease, as that phrase was used in the Lease. Accordingly, for the purposes of considering the import of Monro’s twenty-seven day omission, and the fact that the parties operated under the extended Lease period until at least November 2003 when Monro filed its court action. Monro’s notice letter was ultimately received by Chesapeake well outside of any ninety-day period before the Lease would have terminated.

We are not persuaded. “Contract interpretation involves discerning the terms of the contract itself. The terms of the contract must be interpreted in context and be given their ordinary and usual meaning.” Moore, 157 Md.App. at 66 , 849 A.2d 63 . The reference to “the then current extension” in section 4 of the lease follows the provision giving the tenant the right to “3 successive options to extend.” The only way to create a “then current extension” is in accordance with the terms of section 4 of the lease. In order to exercise its first option to extend, the tenant must provide “written notice at least ninety (90) days prior to the expiration of the primary term.” In 2002, Monro was still in the twenty year “primary term” of the lease.

It had not yet exercised any of its three successive options to extend. Because Monro did not give ninety days’ notice prior to the expiration of the primary term, the time during which it was in possession of the property while negotiating to purchase was not a “then current extension” under the lease. Monro also argues that, because the lease provided for a twenty-year primary term and three five-year extensions, it is ⁷¹⁰ “a single document that was intended to serve as the sole contract between the parties ... for the next thirty-five years [after its signing].” According to Monro: [R]eview of the “four corners” of the Lease at issue provides overwhelming indicators that the original parties to the Lease did not intend for the twenty-seven day mistake by Monro to be a material shortcoming warranting complete forfeiture under the Lease. Instead, the Lease evidences that the original parties contemplated a mutually beneficial lease arrangement, including joint development of the parcels.

In support of its argument, Monro cites Schaeffer v. Bilger, 186 Md. 1 , 45 A.2d 775 (1946). In Schaeffer , a lease gave the tenant an option to purchase the property “ ‘during the period of the term hereby created,’ ” upon sixty days’ notice. Id. at 3 , 45 A.2d 775 . The lease also included an option to extend.

The issue before the Court was whether the tenant could exercise its option to purchase during an extension, or whether it had to have exercised the purchase option during the primary term. The Court concluded: We think the intention of the parties in the instant case, as gathered from the lease executed by them, is clearly that the option to purchase should continue during the extended term.... There may be, and doubtless can be, distinctions drawn between provisions in different leases, and the earlier decisions make much of these distinctions, but the present tendency and, we think, the better rule, is to hold that where a lease with a right of renewal or extension contains an option to purchase, it will be considered as an indivisible contract. Id. at 9 , 45 A.2d 775 .

In Schaeffer , the Court noted: “It seems to be generally agreed that [this issue] depends upon the intention of the parties to be gathered from the lease itself.” Id. at 4-5 , 45 A.2d 775 . Accordingly, the Court determined that the lease demonstrated that the intent of the parties was to allow for the exercise of the option to purchase during an extension of ⁷¹¹ the lease. In the present case, the lease clearly shows that the parties intended that the tenant have the option of extending the lease. But, as explained supra, the tenant was to exercise its option by providing written notice at least ninety days in advance of “the expiration of the primary term or of the then current extension.” Monro argues, “[alternatively, the Lease should be deemed ambiguous because it did not address the particular circumstances that ultimately faced these parties.” That is, Monro contends that the lease does not provide for the possibility that “the tenant elected to purchase the Premises but ultimately concluded that purchase could not occur without having to purchase additional property that was not part of the Premises.... [The lease is] silent as to what rights existed if the purchase was not consummated.” “A contract is ambiguous if it is subject to more than one interpretation when read by a reasonably prudent person.” Sy-Lene of Washington, 376 Md. at 167 , 829 A.2d 540 .

Again, the lease before us provides for a twenty year “primary term” and three successive optional extensions of up to five years each. It also gives the tenant an option to purchase, which may be exercised “at the expiration of the term of this lease, or any extension thereof.” These terms are not subject to divergent interpretations when read by a reasonably prudent person. To be sure, the lease does not expressly address the specific situation in which Monro finds itself. Nonetheless, the terms of the lease establish the rights and duties of both parties in the event the exercise of the option to purchase does not result in a sale.

At the expiration of the primary term, or the first or second extension, the tenant may exercise its option to extend by providing ninety days’ written notice. Then, if the tenant attempts to exercise its option to purchase, the tenant could remain during the lease extension if the sale did not go through. On the other hand, if the tenant does not properly extend the lease, or is in the third and final extension, and unsuccessfully attempts to exercise its option to purchase, the ⁷¹² landlord-tenant relationship established by the lease ends at the completion of the then current term. At that point, the parties may negotiate a new lease, or go their separate ways.

Because Monro failed to properly exercise its option to extend, the Bank may require a new lease or seek a new tenant. B. Despite its Untimely Extension Notice, Did Monro Effectively Extend the Lease? Relying on Beckenheimer’s, Inc. v. Alameda Assocs. Ltd. P’ship, 327 Md. 536 , 611 A.2d 105 (1992), the circuit court concluded that Monro effectively extended the lease despite its failure to give timely notice.

Beckenheimer’s involved a sublease that included a term giving the sublessee, Beckenheimer’s, the option to renew the sublease “for five additional terms of five years each.” Id. at 539 , 611 A.2d 105 . To exercise its option to renew, the sublease required that Beck-enheimer’s give 120 days’ notice, not be in default, and have a net worth equal at least to its net worth at the time of execution of the sublease. Beckenheimer’s gave a timely notice of renewal, but it was written on the letterhead of Beckenheimer’s’ parent company and did not include a statement of Beckenheimer’s’ net worth. The sublessor, Acme, informed Beckenheimer’s that, because its notice did not comply with the requirements of the sublease, it considered the sublease to have expired.

Finding that Beckenheimer’s had failed to validly renew the sublease, the circuit court granted summary judgment. On appeal, the Court of Appeals explained that the case did not involve an untimely attempt at renewal, but rather, a timely notice of renewal that failed to meet other required conditions: Beckenheimer’s did not cause Acme to have in hand on or before May 4, 1989, a notice of renewal that strictly complied with the Sublease’s renewal provisions. To determine whether Maryland equity can assist Beckenheimer’s we must first determine precisely what deficiencies taint the attempted renewal. The appellees say that Beckenheimer’s did not act within the time required by the Sublease.

This ⁷¹³ argument, more precisely, is that the letter of April 26 should not be considered to have any effect, not because it was untimely, but because it did not comply with certain conditions for renewal, other than timeliness. Id. at 545-46 , 611 A.2d 105 . The Court noted that there were three alleged defects in Beckenheimer’s renewal attempt, the first of which was that the letter of renewal was from the parent company, rather than Beckenheimer’s. Acme based its argument on the fact that the notice of renewal was written on the parent company’s letterhead due to Beckenheimer’s mistaken belief that the parent company held the sublease.

The Court “tested” Acme’s argument by considering whether Acme could have enforced a renewal based on the letter: Appellees’ argument can be tested by reversing the direction of the action. Assume that, after receipt by Acme of the April 26 letter, Beckenheimer’s vacated the premises, and Acme was suing Beckenheimer’s to enforce an allegedly renewed lease. Further assume that Beckenheimer’s moves for summary judgment on the ground that it thought that [the parent company] held the sublease and that an attempted renewal by [the parent company] was of no legal effect. Summary judgment for Beckenheimer’s would be denied.

The renewal letter identifies the sublease being renewed by its date [and] by the parties to it.... Were a trier of fact to find, in the hypothetical, that a reasonable person in the position of Acme objectively would conclude that it was Beckenheimer’s that was renewing by the April 26 letter, there would be sufficient evidence to support that conclusion. Id. at 547 , 611 A.2d 105 . The Court stated that “[t]he exercise of the option to renew should be viewed much like the formation of a contract.

The option is a continuing offer by Acme which may be accepted by complying with the conditions of the offer.” Id. at 546 , 611 A.2d 105 . Thus, the letter was an effective, timely notice of renewal because it “clearly manifests an