On October 26, Division I of the Washington Court of Appeals released its opinion in LM15, LLC v. Girmay, Inc. This involved a lease, option to purchase, and notice to remodel of commercial property.
Girmay owned a piece of commercial real property that needed repairs. The property contained an unbranded gas station, a mini-mart, an auto repair shop, and an espresso stand. The members of LM15, LLC entered into an agreement with Girmay regarding the property.
The agreement consisted of three documents:
- Commercial lease agreement: It was a 5-year lease ending October 31, 2020, and subletting only with Girmay's written consent.
- Option to purchase: The option had to be exercised by October 31, 2020, would be at a price of $1,150,000, and required letter confirmation of loan approval from a bank. The option automatically terminated if LM15 breached the lease.
- Notice to remodel: The notice gave LM15 virtually free reign to remodel.
The parties regularly communicated remodeling plans for the mini-mart and gas station, and LM15 spent about $550,000 there.
In 2017, LM15 exercised the option to purchase and provided written notice. Girmay was hesitant because he wanted to do a 1031 exchange when selling the property. As a result, two of the LM15 members became concerned about finances.
In January 2018, LM15 subletted a spot on the property to a taco truck. Girmay was aware of the sublease and helped set up the power connections so the truck could operate.
In March 2018, Girmay terminated the option to purchase, claiming LM15 breached the lease agreement.
LM15 sued Girmay to enforce the purchase option. The trial court found for LM15, ordering Girmay to close on the option and convey the property to LM15. The court also awarded prevailing party attorney fees to LM15.
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Division I affirmed the trial court's ruling.
First, Division I agreed that the lease and option were part of the same transaction and did not require separate consideration. The parties executed all documents on the same day. The lease referenced an option to purchase, and the option document explicitly stated the lease was an attachment and "incorporated herein by reference". The LM15 members all testified that they planned to purchase the property all along, and the option was always a part of the initial deal. Division I distinguished Ledaura, where the lease and option documents had separate consideration, and the option did not reference the lease.
Second, Division I ruled that LM15 did not materially breach the lease because evidence backed up LM15's assertion that Girmay was fine with any deviation the parties made from the written lease terms.
- Permits: On appeal, Girmay argued LM15 did not get all permits for the property. But trial court testimony revealed Girmay was fine with it.
- No bank letter: When LM15 realized it would be tough for them to secure a bank loan, LM15 presented an all-cash offer to Girmay instead. Girmay did not object at the time and the trial court found no reason to believe otherwise.
- Sublet to taco truck: Based on trial court testimony, Girmay likely did not object to LM15's subletting a part of the property to the taco truck.
Third, Division I agreed that LM15 should get equitable relief from needing to strictly comply with all purchase option terms. While purchase option contracts are strictly construed, the court may grant equitable relief if ruling otherwise would lead to inequitable forfeiture. There would have been inequitable forfeiture here because LM15 would have been out a lot of money and Girmay would have received a significantly improved parcel of land. Further, LM15 had always intended to purchase the property and any deviations from the option terms were minor. LM15 proved it could still timely pay Girmay in full even without a bank loan approval letter. Thus, the trial court properly ruled for LM15.
Finally, the appellate court affirmed LM15's attorney fees from the trial court because the lease and option documents contained prevailing party attorney fee clauses. Further, LM15 was entitled to attorney fees on appeal pursuant to RAP 18.1(d).
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This reminds me of a case I argued a few years ago representing a residential landlord. The tenants were husband and wife. This case included a lease and an option to purchase, all in the same document and executed on the same day. The lease section and purchase option section had clear, separate monetary consideration. The document clearly stated the rent amount.
Then, for a different specific sum, the tenants could purchase the property at a specific price, but had to exercise said option in writing and prove they could get the proper financing by a certain date. If they did so, that initial sum would be credited towards the purchase price. If the option was not exercised, they forfeited their payment but remained liable for all tenant obligations.
The tenants' written communications only either expressed continued interest in exercising the option or asking for more time in which they could exercise the option (they allegedly had trouble getting financing). Not all requirements were satisfied.
The tenants eventually owed several thousand dollars in back rent, so we served rent notices. After no payments, we brought an unlawful detainer action for nonpayment of rent. The tenants lawyered up, filed counterclaims, and asked for a hearing.
The tenants never alleged any procedural or substantive missteps in the eviction process. Instead their central arguments/counterclaims were twofold: (1) the lease and purchase option were one transaction, not separate contracts; and (2) they had properly exercised their purchase option and withheld rent because my client materially breached the lease first by not signing any other documents to give them the property. In essence, they were hoping to stay in the property by arguing they did everything to purchase it - other than handing my client the money for the purchase.
Their first argument was crucial. Because I filed an eviction matter, they first needed to justify their arguments were part of the landlord-tenant arena. If the counterclaim is not part of the landlord-tenant situation, it's generally not heard. Otherwise, their best hope would be to refile a civil suit and expend thousands of dollars (and a long wait) in litigation. My client and I knew they didn't have that type of money - and predictably, very few tenants do.
Before opening statements, I argued that their case lacked subject matter jurisdiction, hoping to throw their counterclaims out. The judge didn't buy it, so the case continued. I remember getting a nod from him, though, as if to say, "Good argument and nice try, but sorry."
My client testified, as did one of the tenants. I quickly got that tenant to concede they owed rent to my client. The other tenant never testified.
All documents were entered, including the lease/purchase option and a few emails and texts between the parties. Again, there was no evidence that the tenants properly exercised the purchase option, nor was there any evidence showing they could even finance the transaction according to the agreed written terms.
We prevailed. The court granted our writ of restitution and ruled that the tenants owed back rent. But the court even concluded that the lease and purchase option were separate transactions.
Less than two hours after the case ended, we struck a deal on payment and move-out date.
Interestingly, at the time, I felt it was a very straightforward case and I was confident I would win. Since I brought an unlawful detainer case, I also refocused the judge to the real story: unpaid rent.
Although the LM15 case dealt with commercial property, it made me rethink if the judge in my case could have ruled the lease and purchase option were part of the same transaction. I recall their lawyer asking on direct if the tenant had always wanted to purchase the property, and the tenant answered affirmatively. The tenants also could have distinguished Ledaura because I do believe the lease and option in my case referenced each other more than once. But the clear, separate consideration my client had for the lease and the purchase option might have still been a difference maker. I felt that I would also have won on their second argument anyway.
