Wharf Restaurant, Inc. v. Port of Seattle

Citations: 605 P.2d 334; 24 Wash. App. 601; 1979 Wash. App. LEXIS 2817Docket: 6753-1

Court: Court of Appeals of Washington; November 5, 1979; Washington; State Appellate Court

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Wharf Restaurant, Inc. (Wharf) operated on premises leased from the Port of Seattle (Port) and received a $1,300,000 purchase offer in August 1976. However, Wharf failed to timely exercise its option to renew the lease, which was originally established in 1951 and allowed for a renewal of five years starting June 1, 1977, provided notification was given 180 to 150 days prior to the expiration of the current lease on May 31, 1977. The deadline to exercise this option was January 3, 1977, but Wharf's management forgot to send the required notice. The Port did not notice this lapse until mid-February 1977, after which it informed Wharf of its intent to lease the property to another operator, The Wharfside Companies. Efforts by Wharf’s president to remedy the situation through the Port's real estate department were unfruitful, leading to a series of discussions at Port commission hearings without resolution. Consequently, the Port leased the premises to The Wharfside Companies for 20 years, prompting Wharf to initiate legal action against the Port and the new lessee. Despite not being ejected, Wharf sought specific performance of its lease option. After a trial, the court ruled in favor of Wharf, granting specific performance for a new 5-year lease term through May 31, 1982, while denying Wharf's claims for a right of first refusal on the new lease and other related claims. Additionally, the court declared the Port's lease to The Wharfside Companies null and void. Each party was ordered to bear its own costs and fees, except for the injunction bond premium paid by Wharf, which the Port was required to reimburse.

The Wharf appeals the trial court's decision denying its claim for a new 20-year lease, asserting that the court erred by not recognizing a promise from the Port for a right of first refusal regarding a future lease. The Port cross-appeals, contending the court mistakenly enforced specific performance of the Wharf's option to extend its previous lease for five years. The two main issues addressed are: 

1. Whether the trial court improperly denied specific performance of the Wharf's claimed right of first refusal for a new lease or damages related to that claim.
2. Whether the trial court erred in absolving the Wharf from the consequences of its delay in notifying the Port about exercising its renewal option.

The court concluded that the claimed promise of a right of first refusal was illusory and that specific performance and damages were rightly denied. The trial court found that the Port had not promised the Wharf a right of first refusal but rather a commitment to negotiate a new lease. This negotiation promise, stemming from a Port Commission meeting in March 1977, was deemed non-binding and unenforceable. The trial court acknowledged a misunderstanding between the parties about the term "negotiate," indicating that the Port’s refusal to counter the Wharf's lease offers constituted a failure to negotiate. As a result, the Wharf's claims for a long-term lease or a right of first refusal were found unsubstantiated. The Wharf argued in its brief that the promise implied a right of first refusal or at least a commitment to negotiate a lease at prevailing rates based on the meeting's context.

The trial court's findings establish that the promise to negotiate was not illusory, supporting promissory estoppel for the Wharf, allowing either specific performance of a long-term lease or damages due to the Port's refusal to negotiate. The analysis of the Port Commission's March 22, 1977 meeting reveals no material differences in the meeting minutes that would affect the legal interpretation of Commissioner Kotkins' resolution. The resolution does not grant the Wharf a right of first refusal for a 20-year lease with The Wharfside Companies, as the Wharf's president's subjective understanding is not relevant. Under the objective manifestation theory, no reasonable person could interpret the resolution as a promise justifying reliance for promissory estoppel. The trial court correctly deemed the promise to negotiate illusory due to its vagueness and discretionary nature, noting that it may not even constitute a promise since it appears to instruct the Port staff without creating enforceable rights for the Wharf.

Regarding the Wharf’s failure to timely exercise its option to renew its lease for a 5-year term, the trial court acted equitably in granting relief without finding waiver of notice by the Port. The court determined that the Wharf did not rely on the Port's previous conduct, thus the Port was not estopped from requiring timely notice. The trial court concluded that, based on equitable principles, the Wharf was entitled to exercise the renewal option in its old lease, making the central issue the implications of the lessee's failure or delay in providing notice regarding the renewal option.

A notice to renew a lease must be clear, unambiguous, and comply with the lease terms. A lessee's obligation to notify the lessor of their intent to renew by a specific deadline is a condition precedent; failure to do so typically results in the loss of the renewal right unless special circumstances justify equitable relief. Courts generally resist allowing relief for a lessee's negligence, emphasizing the need for stability in business transactions. However, some courts recognize that special circumstances may warrant relief against a lessee’s failure to provide timely notice. These circumstances are limited, as articulated by legal scholars, with a notable exception for cases where the lessee has made significant improvements to the property and the delay in notice is brief, without any detrimental change in position for the lessor. In such instances, specific performance may be granted to avoid unjust forfeiture. The mere payment for an option does not prevent forfeiture if notice is not given within the specified timeframe. The Washington cases of Jones v. Dexter and Gray v. Lipscomb are distinguished as they did not present equities favoring the lessee. In this case, the trial court's decision to grant specific performance for an additional five-year term is justified due to the inadvertent nature of the late notice, lacking any intentional or grossly negligent behavior from the lessee.

An inequitable forfeiture was avoided due to equity's intervention. The trial court determined that the Wharf made permanent improvements to the leased premises with the intention of renewing the lease, as evidenced by discussions between the Wharf's president and Port staff about further enhancements just before the notice deadline. Although the Wharf failed to provide timely notice for lease renewal, the Port was not prejudiced by this delay, which was only two months. The trial court noted the Port had not altered its position and had nearly three months remaining in the lease term to negotiate rent. 

The lease had a long-term duration, and the Wharf had a 25-year history of continuous leasing and timely rent payments exceeding $1 million. The delay was not excessive due to the Port staff’s actions, which contributed to the late notice. Historically, the parties had not strictly adhered to lease option procedures, and the Port had previously accepted late notices without issue. A new policy requiring strict compliance was instituted without notifying the Wharf, which the trial court found problematic.

The trial court's decision to grant specific performance was upheld, and the Wharf’s fraud claim was rejected due to a lack of evidence of bad faith or misconduct by the Port. The Wharf's request for attorneys' fees was also denied since there was no statutory basis or lease provision supporting such a claim. Citing prior cases, the court confirmed that attorneys' fees could only be recovered in cases involving third-party litigation, which was not applicable here. The court found sufficient evidence to support its findings and ruled that the Wharf should be reimbursed for the injunction bond premium and related costs by the Port. The judgment was affirmed, with judges James and Ringold concurring.

The lessee of the Wharf Restaurant premises is The Wharfside Companies, a Washington corporation, along with its related entity, Artisan's Guild, Inc., which were defendants at trial but are not part of the current appeal. The Port invited bids for a long-term lease, receiving responses from over 12 parties, with The Wharfside Companies ranking first and the Wharf ranking fourth. The Port Commission accepted The Wharfside Companies' proposal. A separate trial was held to determine the rental amount for the Wharf's lease, resulting in a judgment that set the rent for the period from June 1, 1977, to May 31, 1982, at 7% of gross sales or a minimum of $8,500 per month. This judgment is under appeal by the Port, which argues that the trial court misinterpreted the term "negotiate" as requiring counteroffers. However, due to the resolution of another issue, the court found it unnecessary to address this argument. The Wharf's brief claims the trial court determined it was reasonable for the Wharf's president to interpret a motion as granting a right of first refusal, but the trial court explicitly rejected this finding and struck down the proposed finding that a reasonable person would have understood the promise as such.