What is an Option Clause in a Lease in California?

As discussed in the recent California appellate decision of Coyote Aviation Corporation v. City of Redlands, on April 4, 2000, plaintiff and appellant Coyote Aviation Corporation (Coyote) entered into a 20-year lease (April Lease) with the City of Redlands (City) for property located at the Redlands Municipal Airport (Property). 

Coyote intended to build hangars on the Property and lease them to pilots in need of storage for their planes. The parties negotiated a 20-year term for the April Lease and agreed that Coyote, with proper notice, could twice exercise a 15-year option (Option) to extend the lease. 

The April Lease would terminate on April 4, 2020, unless Coyote exercised an Option.

The parties signed an amended lease on September 5, 2000, based on Coyote being unable to take possession of the Property until that date.

The Amended Lease had the original termination date of April 4, 2020. 

Several months after the Amended Lease was signed, Coyote raised the issue with a City official that the Amended Lease should terminate on September 5, 2020, in order to be a 20-year lease, but no written amendment to the Amended Lease was ever executed by the parties. 

In June 2020, Coyote attempted to exercise the Option to extend the Amended Lease by sending written notice to the City.

The City informed Coyote that it was too late and that the Amended Lease had terminated on April 4, 2020. The City considered Coyote a holdover month-to-month tenant under the terms of the Amended Lease. 

The City issued a 30-day notice to quit the Property to Coyote.

Coyote filed an action against the City for breach of contract, specific performance, breach of the implied covenant of good faith and fair dealing, declaratory relief and promissory estoppel/detrimental reliance.

The trial court sustained the City’s demurrer to the first amended complaint in the action and entered judgment against Coyote. 

When Coyote did not vacate the premises after the 30-day notice to quit, the City filed an unlawful detainer action against Coyote. 

The trial court granted summary judgment in favor of the City and ordered Coyote to vacate the Property.

In its appeal Coyote claimed, as to the demurrer, that the trial court erred by sustaining the City’s demurrer to the breach of contract claim based on the City breaching the Amended Lease by refusing to extend the lease term and rejecting Coyote’s exercise of the 15-year Option; the City is estopped from asserting that Coyote’s exercise of the 15-year Option was untimely as the City caused any failure by Coyote to timely exercise the option; and the City waived any objection to Coyote’s exercise of the 15-year Option. 

Coyote also contended the trial court erred by sustaining the demurrer on a reformation cause of action raised in the original complaint based on it pleading sufficient facts to state a claim for reformation of the Amended Lease, the statute of limitations was tolled by the statements and conduct of the City’s employees, and the City was estopped from raising the statute of limitations as a bar to Coyote’s reformation cause of action. 

Coyote further claimed, as to the demurrer, that the City breached the Amended Lease by preventing it from removing the improvements on the Property, and that it can allege facts to support a claim of unjust enrichment based on the City taking control of the tenant improvements made by Coyote on the Property. 

Those issues were not properly raised on appeal as they were not decided by the trial court and are part of another ongoing case.

With respect to the appeal of the grant of summary judgment for the unlawful detainer, Coyote contended there are triable issues of fact as to whether the City should be estopped from contending that Coyote’s exercise of the 15-year Option was untimely.

Coyote relied on the course of conduct and representations by the City that it would be able to exercise the 15-year Option. Coyote also argued that the City’s attempt to deprive Coyote of the 15-year Option is barred by promissory estoppel and that the City waived any objection to Coyote’s exercise of the 15-year Option. 

The trial court issued a tentative ruling on the demurrer, and reviewed the provisions in the April Lease. 

It then noted the language in the Amended Lease that the parties intended to rescind the April Lease and enter into a new lease in its place. It quoted the language in the Amended Lease as to the term, notices and the 15-year Options. 

The trial court noted that the two leases were “clearly different.” 

The Amended Lease was not ambiguous as to notice on the 15-year Option; City must be given 45 days prior to April 4, 2020. 

The trial court noted that Coyote’s argument for breach of contract was based on its allegation that it had fully performed its duties and obligations under the Amended Lease. 

However, Coyote’s own allegations and exhibits demonstrated that it failed to timely exercise the 15-year Option under the terms of the Amended Lease. 

Given the finding that there was no claim for breach of contract, the second cause of action on specific performance also failed.

The third cause of action, breach of implied covenant of good faith and fair dealing, required proof that the City unfairly interfered with Coyote’s right to receive the benefit of the contract. 

The Amended Lease provided a termination date and deadline by which Coyote had to deliver written notice of its intent to exercise the 15-year Option, which Coyote failed to timely deliver. 

Under the doctrine of implied covenant, the implied covenant could not contradict the express terms of the contract. 

Under the express terms of the Amended Lease, Coyote had to timely exercise the 15-year Option and failed to do so. The declaratory relief claim in the fourth cause of action was part of the substantive claim and would also be denied. 

Finally, the fifth cause of action for promissory estoppel, the trial court found the claim was that Coyote relied on the promise made on December 5, 2000, by a City official, that City acknowledged the termination date error and made a clear promise to honor the full 20-year term to September 5, 2020.

The trial court cited to cases holding that promissory estoppel could not be asserted against a public entity to bypass rules that required contracts to be in writing. 

Pursuant to Government Code section 40602, a mayor shall sign all written contracts. Redlands Municipal Code section 3.04.010 only authorized contracts approved by the City council and mayor. 

There was no promise that was reduced to writing, approved by the City council and signed by the City’s mayor. 

The City argued there was no amendment to the FAC that could be made based on the unambiguous language in the Amended Lease. 

The extrinsic evidence—including the April Lease—clearly showed that the intent of the parties was that the Amended Lease would be for a 20-year term. Moreover, City officials throughout the term of the Amended Lease stated that the actual termination date of the Amended Lease was September 5, 2020. 

The elements of a cause of action for breach of contract are (1) the existence of the contract, (2) plaintiff’s performance or excuse for nonperformance, (3) defendant’s breach, and (4) the resulting damages to the plaintiff. 

Coyote insists that it sufficiently pleaded that it had performed its obligations under the Amended Lease to exercise the 15-year Option and that the City breached its duty under the Amended Lease by refusing to honor the 15-year Option. 

Coyote relied on extrinsic evidence, which included the agreement by the parties that the lease term was 20 years, and that City officials promised that the Amended Lease expired on September 5, 2020.

The language of a contract is to govern its interpretation, if the language is clear and explicit, and does not involve an absurdity.

Extrinsic evidence cannot be used to contradict the contract’s terms unless the language is reasonably susceptible to the proposed interpretation. Indeed, unless the language is reasonably susceptible to the proposed meaning, extrinsic evidence cannot even be considered to explain or otherwise shed light upon the parties’ intent.

Moreover, under the parol evidence rule, when a contract is integrated, extrinsic evidence cannot be used to vary or contradict the instrument’s express terms. 

Terms set forth in a writing intended by the parties as a final expression of their agreement with respect to the terms included therein may not be contradicted by evidence of a prior agreement or of a contemporaneous oral agreement.

Under the parol evidence rule, extrinsic evidence is not admissible to contradict express terms in a written contract or to explain what the agreement was. The agreement is the writing itself. 

Parol evidence cannot be admitted to show intention independent of an unambiguous written instrument. 

The appellate court found that there are no grounds for the consideration of extrinsic evidence in this case.

Coyote signed the Amended Lease. The Amended Lease provided for a termination date of April 4, 2020, and all notices must be in writing and sent to the City clerk 45 days prior to the termination of the Amended Lease. 

It provided that any amendment to the Amended Lease was to be in writing. It also included an integration clause, which provided that the Amended Lease superseded all prior written and oral agreements, and was the entire agreement between the parties. 

The termination date in the April Lease and the Amended Lease are the same date.

It is clear that Coyote never provided written notice to the City clerk 45 days prior to April 4, 2020. 

The City did not have to accept any other type of notice, including any email notices to Shaffer and/or Sullivan that were made in December 2019 and January 2020. 

The terms of the Amended Lease were clear that if Coyote was in good standing under the Amended Lease, it “may” exercise the 15-year Option. The Amended Lease simply cannot be interpreted that the term “may” referred to the ability to provide any type of notice. This would contradict the express provision in paragraph 25 that all notices must be in writing. 

Coyote simply cannot prove it performed its duty under the Amended Lease to provide proper written notice of its decision to exercise the 15-year Option. As such, the breach of contract and specific performance causes of action fail.

Extrinsic evidence is not admissible to vary, alter or add to the terms of an integrated written agreement. 

The parol evidence rule establishes that the terms contained in an integrated written agreement may not be contradicted by prior or contemporaneous agreements, the rule necessarily bars consideration of extrinsic evidence of prior or contemporaneous negotiations or agreements at variance with the written agreement.

There was no ambiguity that needed to be resolved by extrinsic evidence.

The Amended Lease specifically required all amendments to be in writing. There is no evidence that there was a written amendment to the Amended Lease. Coyote cannot raise a viable claim that the Amended Lease had been changed by oral agreement by City officials. 

Coyote further contends the City should be estopped from contending that Coyote did not timely exercise the 15-year Option and that the Amended Lease expired on April 4, 2020, as its actions showed that it believed it expired on September 5, 2020. 

The appellate court found there was no waiver of the termination date. As previously stated, the Amended Lease provided that all amendments had to be in writing. There is no evidence that the Amended Lease was ever amended to include the termination date of September 5, 2020.

There is no dispute that the 15-year Option had to be submitted in writing to the City clerk 45 days prior to the termination date of the Amended Lease. 

In order to extend the Amended Lease, the parties would have to reach a new agreement, which would have to be approved by the City council and mayor under Government Code section 40602 and Redlands Municipal Code section 3.04.010. 

LESSONS:

1.         Any amendments to a written contract such as a lease should be in a writing signed by the parties to the contract.

2.         Extrinsic evidence is not admissible to vary, alter or add to the terms of an integrated written agreement. 

3.         The parol evidence rule establishes that the terms contained in an integrated written agreement may not be contradicted by prior or contemporaneous agreements, the rule necessarily bars consideration of extrinsic evidence of prior or contemporaneous negotiations or agreements at variance with the written agreement.

4.         An integration clause, which provided that the Amended Lease superseded all prior written and oral agreements, and was the entire agreement between the parties.