Filed: May 31, 2002
IN THE SUPREME COURT OF THE STATE OF OREGON
2606 BUILDING,
a partnership comprised of
DONALD C. BURDICK, LINDA A. BURDICK,
EDGAR E. CLARK, M.D., and GILBERT W. EKLUND,
Respondents on Review,
v.
MICA OR I INC.;
OUTPATIENT RADIOLOGY CENTER,
a California limited partnership;
and US DIAGNOSTICS, INC.,
Petitioners on Review.
(97F-915006; CA A100481; SC S47555)
En Banc
On review from the Court of Appeals.*
Argued and submitted October 4, 2001.
Timothy R. Volpert, of Davis Wright Tremaine LLP, Portland, argued the cause and filed the petition for petitioners on review. With him on the petition was John F. McGrory.
Charles R. Markley, of Greene & Markley, PC, Portland, argued the cause and filed the brief for respondents on review. With him on the brief was M. Elizabeth Duncan.
BALMER, J.
The decision of the Court of Appeals is reversed. The judgment of the district court is reversed, and the case is remanded to the circuit court for further proceedings.
*Appeal from Multnomah County District Court, Michael H. Marcus, Judge. 165 Or App 240, 994 P2d 1226 (2000).
BALMER, J.
The issue in this commercial lease case is whether a lessee's unilateral mistake may constitute the equitable defense of excusable neglect to a forcible entry and detainer (FED) action based on the lessee's late payment of rent. The trial court denied the motion of the lessees (defendants) to file an amended answer raising the defense, declined to consider the defense on the merits, and entered judgment in favor of the lessors (plaintiffs). The Court of Appeals affirmed. 2606 Building v. MICA OR I Inc., 165 Or App 240, 994 P2d 1226 (2000). For the reasons that follow, we reverse the decision of the Court of Appeals and the judgment of the trial court and remand the case to the trial court for further proceedings.
I. FACTS
Plaintiffs own a commercial building in Portland. Defendants are three related entities that leased the building from plaintiffs under a written lease agreement. The lease required defendants to pay rent monthly by the first of the month. If plaintiffs did not receive rent and other required payments within 10 days after the due date, defendants owed a late charge. The lease also obligated defendants to obtain insurance on the property and, if they failed to do so, the lease authorized plaintiffs to obtain the insurance at defendants' expense. The lease further provided that "[a]ny monetary obligations of [defendants] to [plaintiffs] under the terms of this lease shall be deemed to be rent." If defendants failed to pay rent or make other required payments when due, and failed to cure after three days' written notice from plaintiffs, the lease deemed defendants in "material default and breach" of the lease, and plaintiffs could terminate defendants' right of possession. The parties entered into the lease as of November 1, 1984. The lease was for a 15-year term and provided for three optional five-year extensions. During 1997, defendants paid the rent late on several occasions and accrued late fees. In September 1997, plaintiffs learned that defendants had failed to obtain the required insurance for the premises; plaintiffs therefore purchased the insurance. Plaintiffs sent a letter to defendants dated November 12, 1997, demanding payment of the accrued late charges and reimbursement for the cost of the insurance. Notwithstanding the three-day cure period set out in the lease, plaintiffs' letter gave defendants 10 days to cure and stated that, if plaintiffs did not receive payment, then defendants' tenancy would terminate effective November 30, 1997. Plaintiffs did not receive payment by November 30, and the following day they commenced this action under the FED statute, ORS 105.105 to 105.168.
During the proceedings in the trial court, defendants sought leave to file a second amended answer that alleged the following facts. On November 19, 1997, defendants sent by overnight mail, through a commercial delivery service, a check for the amount demanded in plaintiffs' November 12 letter. The commercial mail delivery service attempted delivery on November 20, November 24, and November 25. Following the final attempted delivery, the delivery service returned the check to defendants as undeliverable. Defendants alleged that the check was not delivered because of a typographical error: they mistakenly had addressed the envelope to "464 Ridgeway Road" instead of "434 Ridgeway Road." Defendants alleged that the check was delivered to plaintiffs shortly after December 1, 1997, but plaintiffs refused to accept the check.
On the basis of those allegations, defendants sought to raise an affirmative defense to the FED complaint, arguing that their late payment of rent because of the misaddressed envelope was an inadvertent mistake and constituted the equitable defense of excusable neglect. The trial court held that such a unilateral mistake was not a defense to an FED action. Accordingly, the trial court denied defendants' motion to file a second amended answer raising that affirmative defense and granted plaintiffs' motion to strike various related affirmative defenses in the amended answer. The court granted plaintiffs possession of the property and entered judgment in their favor.
The Court of Appeals affirmed. It noted that courts have equity jurisdiction to relieve a lessee from forfeiture of a lease and framed the issue before it as whether "defendants' unilateral mistake in misaddressing the rent payment was 'excusable neglect or accident.'" 2606 Building, 165 Or App at 244 (quoting Fry v. D.H. Overmyer Co., Inc., 269 Or 281, 304, 525 P2d 140 (1974)). Because defendants' allegations demonstrated that the mistake in misaddressing the rent payment was solely defendants' responsibility and was uninfluenced by plaintiffs or any third party, the court concluded that the equitable defense was not available to defendants. 2606 Building, 165 Or App at 245.
On review, the issue is whether defendants' allegations regarding their mistake are sufficient to raise the equitable defense of excusable neglect to plaintiffs' FED action. (1) If so, the trial court should have allowed defendants to raise the defense and then proceeded to determine whether, based on all the facts, defendants' failure to pay the rent was excusable and, if it was excusable, whether it nevertheless would be equitable to permit the forfeiture of the lease. (2)
II. ANALYSIS
This court has recognized the equitable defense of excusable neglect when a landlord seeks to terminate a commercial lease for failure to make timely rent payments. See Moore v. Richfield Oil Corp., 233 Or 39, 47, 377 P2d 32 (1962) ("When the failure to pay rent in accordance with the terms of the lease is due to excusable neglect equity will ordinarily refuse to decree a forfeiture of the lease."); Caine v. Powell, 185 Or 322, 330, 202 P2d 931 (1949) ("'* * * [W]here the breach of the tenant's covenant causing a forfeiture of the term is due to excusable accident or mistake, this may constitute ground for equitable relief under the general power of equity to grant relief in the case of accident or mistake.'" (citation omitted)).
Plaintiffs argue that those and similar cases allow an equitable defense only when the lessor induced the mistake or when the lessor knew or reasonably should have known of the mistake. In Caine, for example, this court granted relief from foreclosure to lessees whose rent payment was late. Although the lease provided for a 10-day grace period, the lessees thought that they had a 30-day grace period based on a representation made by the lessor's agent. 185 Or at 327-28.
Plaintiffs contrast cases like Caine with those cases (including the present one) in which the mistake or error was solely the lessee's fault. Plaintiffs argue that, in the latter cases, equitable relief from forfeiture is unavailable. In particular, plaintiffs argue that we should adopt the rationale of the Court of Appeals' decision here, which relied on its earlier decision in Grove v. The Hindquarter Corporation, 45 Or App 781, 609 P2d 840 (1980). In Grove, a lessee's new manager had forgotten to pay the rent when it was due. The Court of Appeals, citing an equity treatise, held that forgetfulness "was not the kind of 'mistake' for which equity supplies a remedy * * *." 45 Or App at 785.
From the foregoing cases, plaintiffs derive a rule that a lessee may not raise its own unilateral mistake, unknown to and uninduced by the lessor, as an equitable defense in an FED or lease foreclosure proceeding. Plaintiffs also rely on the same treatise that the Court of Appeals cited in Grove and in this case:
"In cases where the parties deal with each other at arms' length, and there is no mistake caused by the misconduct of the other party, and especially where the parties have had ample time to consider their own business matters of importance, and a mistake is made innocently, this fact, nothing else appearing, is no reason why a Court of Equity should grant relief."
Joseph Story, 1 Equity Jurisprudence