• Skip to primary navigation
  • Skip to content
  • Skip to primary sidebar

McCarter & English Logo

  • People
  • Services
  • Insights
  • Our Firm
    • Leadership Team
    • Social Justice
    • Diversity & Inclusion
    • Pro Bono
    • Client Service Values
  • Join Us
    • Lawyers
    • Summer Associates
    • Patent Professionals
    • Professional Staff
    • Job Openings
  • Locations
    • Boston
    • Philadelphia
    • East Brunswick
    • Stamford
    • Hartford
    • Trenton
    • Newark
    • Washington, DC
    • New York
    • Wilmington
  • Share

Share

Browse Alphabetically:

  • A
  • B
  • C
  • D
  • E
  • F
  • G
  • H
  • I
  • J
  • K
  • L
  • M
  • N
  • O
  • P
  • Q
  • R
  • S
  • T
  • U
  • V
  • W
  • X
  • Y
  • Z
  • All
Bankruptcy, Restructuring & Litigation
Blockchain, Smart Contracts & Digital Currencies
Business Litigation
Cannabis
Coronavirus Resource Center
Corporate
Crisis Management
Cybersecurity & Data Privacy
Delaware Corporate, LLC & Partnership Law
Design, Fashion & Luxury
E-Discovery & Records Management
Energy & Utilities
Environment & Energy
Financial Institutions
Government Affairs
Government Contracts & Global Trade
Government Investigations & White Collar Defense
Healthcare
Immigration
Impact Investing
Insurance Recovery, Litigation & Counseling
Intellectual Property
Labor & Employment Law
Life Sciences
Manufacturing
Products Liability, Mass Torts & Consumer Class Actions
Proptech
Public Finance 
Real Estate
Renewable Energy
Sports & Entertainment
Tax & Employee Benefits 
Technology Transactions
Transportation, Logistics & Supply Chain Management
Trusts, Estates & Private Clients 
Venture Capital & Emerging Growth Companies
  • Broadcasts
  • Events
  • News
  • Publications
  • View All Insights
Search By:
Insights Publication Magazine Corner
Main image for Landlords and Tenants Beware: Option Contracts and the Substantial Compliance Standard
Publications|Alert

Landlords and Tenants Beware: Option Contracts and the Substantial Compliance Standard

M&E Real Estate Alert

12.15.2014

In Pack 2000, Inc. v. Cushman, 311 Conn. 622 (2014), the Connecticut Supreme Court recently applied a “substantial compliance” standard to the exercise of tenant options contained in a lease, including purchase options. According to the Supreme Court, when the exercise of an option is conditioned upon the tenant being in compliance with the terms of the lease, the tenant need only be in substantial compliance with the lease (i.e., not in material default) at the time of exercise. The substantial compliance standard is in contrast to the “strict compliance” standard affirmed a year earlier by the Connecticut Appellate Court in Howard-Arnold, Inc. v. T.N.T. Realty, Inc., 145 Conn. App. 696 (2013). Arguably, the strict compliance standard of Howard-Arnold, Inc. still applies, but only to the method of exercising an option; this standard requires the tenant to exercise an option exactly as prescribed in the lease, including strict compliance with timing and notice requirements. If we can reconcile these divergent cases, two different standards may now apply to determine whether a tenant has validly exercised an option; landlords and tenants need to be aware of the potential application of these cases to their leases. These cases also demonstrate why careful attention is critically important in drafting option clauses. 

In Pack 2000, the landlord refused to recognize the tenant’s exercise of an option to purchase the leased property because the tenant had failed to make several payments required by the lease over the term of the lease, including payments of rent. The landlord never sent a default notice, and the trial court had found that the tenant had made all payments within a commercially reasonable period of time. The Appellate Court later reversed the trial court, applying a strict compliance standard, but the Supreme Court, applying a substantial compliance standard, held that the tenant validly exercised the option because late payments as made under the lease were not material breaches of the lease. The Supreme Court did imply, however, that parties can contractually adopt a standard more stringent than substantial compliance (such as a strict compliance standard).

Pack 2000 has important consequences for both landlords and tenants. From a landlord’s perspective, in order to avoid an outcome similar to that in Pack 2000, the lease must explicitly state that the tenant’s exercise of an option is conditioned upon the tenant being in strict compliance with the terms of the lease. In addition, landlords must adhere to default and notice requirements in the lease since a landlord’s failure to send formal default notices may impair its ability to claim that the tenant has not validly exercised an option. From a tenant’s perspective, Pack 2000 provides a tenant with a measure of forgiveness where the tenant has committed an immaterial breach.

These cases create differing standards for different parts of the option exercise process, and it is unknown whether, given the opportunity, the Supreme Court would apply the substantial compliance standard in both instances. At minimum, landlords and tenants should review their leases to determine if they want to expressly alter the application of the substantial compliance standard of Pack 2000 and to confirm the specific method by which an option must be exercised. At this point, only care in drafting will avoid the uncertainty recently created. While not addressed by either case, it would also appear prudent to observe the same principle in drafting option contracts for land purchases and in other matters involving the exercise of rights.

sidebar

pdfemail

Related People

Media item: Tiffany L. Stevens
Tiffany L. Stevens

Special Counsel

Media item: John R. Mallin
John R. Mallin

Partner

Media item: Jeffrey P. Matrullo
Jeffrey P. Matrullo

Partner

Related Services

Real Estate
Subscribe to our Insights
McCarter & English, LLP
Copyright © 2021 McCarter & English, LLP. All Rights Reserved.
  • Login
  • Attorney Advertising
  • Privacy
  • Awards Methodology
  • Contact
  • Subscribe
  • Sitemap

The McCarter & English, LLP website is for informational purposes only. We do not provide legal advice on this website. We can provide legal advice only to our clients in specific inquiries that they address to us. If you are interested in becoming a client, please contact us, but do not send any information about your specific legal question. We cannot serve as your lawyers until we establish an attorney-client relationship, which can occur only after we follow procedures within our firm and after we agree to the terms of the representation.

Accept Cancel