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You Goof, You Lose
by Ron Davis

A costly mistake by a tenant will allow a Utah shopping center owner to claim the entire amount of a condemnation settlement that the state would have split between the two parties.

The shopping center is the Woods Cross K-Mart Center in Woods Cross, and the mistake occurred when the tenant—a shopping center management firm named U.S. Realty 86 Associates—failed to renew its lease by the deadline.

U.S. Realty had leased the space at the shopping center since 1986 and had, in turn, subleased to other tenants. The lease with U.S. Realty, at expiration of the original term, allowed for six five-year extensions.

To exercise the first extension, U.S. Realty merely had to notify its intention in writing. But because of an error by the accountant for the firm, U.S. Realty never renewed.

Meanwhile, the state of Utah condemned part of the shopping center to build a new access road to an adjacent highway. Both the owner of the shopping center and U.S. Realty were thus due a “severance damage” settlement. Or so it seemed.

In fact, the shopping center owner soon discovered that U.S. Realty had never renewed its lease. In response, U.S. Realty explained that even though it had not renewed, it had certainly intended to do so.

The shopping center owner did not accept that explanation and declared that the lease with U.S. Realty had terminated at the end of the first term. By so declaring, the shopping center owner would not have to split the condemnation award with U.S. Realty.

U.S. Realty sued, arguing that the failure to exercise the lease renewal was simply a “mistake” and that, under Utah law, it cannot be penalized for a simple mistake.

A Utah court rejected U.S. Realty’s argument, finding that U.S. Realty’s mismanagement of the lease was not a mistake, but instead was “negligence.” U.S. Realty appealed.

The Utah Supreme Court upheld the lower court decision, explaining, “U.S. Realty has not shown that its untimely exercise of the renewal option was caused by fraud, misrepresentation, duress, undue influence, or mistake, or that there was waiver. Indeed, U.S. Realty’s failure to timely exercise its option stems solely from its own negligence…. As such, U.S. Realty is not untitled to equitable relief.” (U.S. Realty 86 Associates v. Security Inv., 40 P.3d 586 [Utah 2002])

Decision: February 2002
Published: June 2002



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