Facts

In the 1970s, defendant, a small privately-held company entered into a long term lease for real property with a tenant for an initial term of 30 years. Upon the property was a licensed skilled nursing facility, an affiliate of a large multi-state healthcare facility operator. The landlord granted the tenant five additional options to extend the lease term for five years each. The rental rate for all periods was a flat $12,000 per month with no increases during the 55-year life of the lease (including the 25 years of option periods).

The property was sublet to a third party in 2003, and the tenant sold to the subtenant the remaining terms of the lease and the options for key money of over $5 million.

In 2005, the plaintiff subtenant sent a letter to the landlord, stating his intention to exercise the option to extend the lease. Nothing further was heard on this subject from either the tenant or the subtenant until after the expiration of the period in which to exercise the option. The landlord noticed that the lease required the tenant, not a sub-tenant, to exercise an option to extend the lease. The sublease and sub-sublease similarly provided very specific procedures for the subtenants to give notice to the tenant to exercise an option, which procedures were not followed.

Even though the subtenant that was occupying the property and the business stated his intent to exercise the option in writing, none of the specific procedures set forth in the agreement had been followed. Because of this, the landlord contended that the right to exercise the option remained only with the original tenant, and rejected the subtenant's attempt to exercise the option.

Plaintiff filed a declaratory relief action against landlord. Landlord cross-complained against tenant.

Result

Settlement whereby the plaintiff subtenant and tenant agreed to terminate the original lease with 25 years remaining at the below market rent of $12,000 per month for the entirety of the term; subtenant executed a new lease for 20 years with rent starting the first year at $59,000 per month, increasing by 4 percent annually thereafter through the 20th year; and subtenant will pay $265,000 of the landlord's attorneys' fees. Total additional rent to be paid to defendant landlord during new 20-year term as a result of the settlement and new lease is $18,240,000 not including attorneys fees paid by plaintiff to defendant landlord. The parties exchanged mutual general releases and the litigation was dismissed with prejudice.