Case Title: 2606 Building v. MICA OR I Inc.

Citation: 

Docket Number: S47555

State: oregon

Court: Oregon Supreme Court

Date: 2002-05-31T00:00:00Z

Document:
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 § 161, 150 (14th ed 1918).
See 2606 Building, 165 Or App at 245; Grove, 45 Or App at 785
(both quoting Story).  Consistent with their proposed rule,
plaintiffs argue that defendants' late payment in response to the
November 12, 1997, demand letter cannot be the basis for an
equitable defense, because the untimeliness of the payment was
due solely to defendants' own error in addressing the envelope.
		Finally, plaintiffs assert that their position is
consistent with an Oregon statute that provides for termination
of a tenancy when a tenant fails to pay rent in accordance with
the terms of the lease.  ORS 91.090 provides:
	"The failure of a tenant to pay the rent reserved by
the terms of the lease for the period of 10 days,
unless a different period is stipulated in the lease,
after it becomes due and payable, operates to terminate
the tenancy.  No notice to quit or pay the rent is
required to render the holding of such tenant
thereafter wrongful; however, if the landlord, after
such default in payment of rent, accepts payment
thereof, the lease is reinstated for the full period
fixed by its terms, subject to termination by
subsequent defaults in payment of rent."
Plaintiffs argue that, because defendants failed to pay the rent
within 10 days after it was due, defendants' tenancy
automatically terminated.
		We turn first to the role, if any, that ORS 91.090
plays in this case.  If the effect of that statute is to
terminate defendants' tenancy, then the cases discussed below
demonstrate that the court cannot consider defendants' equitable
defenses.  If, on the other hand, the forfeiture provisions in
the lease control whether the tenancy is terminated, then
defendants may raise their equitable defenses -- to the extent
that Oregon case law recognizes those defenses.
		A party to a lease may raise equitable defenses in
response to contractual lease forfeiture claims, but not in
response to statutory lease forfeiture claims.  The definitive
statement, still followed, came in Rainey v. Quigley, 180 Or 554,
557, 178 P2d 148 (1947):
				"Courts of equity have long recognized a
distinction between forfeitures agreed upon by the
parties and those provided by statute.  Equity may
relieve from the former, but not from the latter."
That is because "a court of equity may not defeat the legislative
will," even though it might be "harsh and severe in its
character."  Id. at 564.  Because Rainey involved a lease that
had no forfeiture provision itself, the only basis for forfeiture
was the statute, (3) and the court had no power to provide equitable
relief to the lessee.  Id. at 566-67.  The result would have been
different if the forfeiture had been based on a provision in the
lease:
		"A provision for forfeiture in a lease for failure
to pay rent is generally considered in courts of equity
as designed to secure payment, and the court will
ordinarily relieve against a forfeiture for such cause
upon payment of the sum secured, with interest.  So
that, if this case involved nothing more than the
contract of the parties, there would be no doubt of the
jurisdiction and power of the court to grant the relief
which the [lessee] seeks."
Id. at 565 (citations omitted).
		Many leases, however, including this one, do contain
forfeiture provisions, and the question in such cases is whether
the terms of the lease or ORS 91.090 control the forfeiture that
the lessor seeks.  This court's decisions demonstrate that, when
the terms of forfeiture in the lease differ from those in ORS
91.090, the lease terms control and the court treats the issue as
one of contract interpretation and enforcement, rather than as
one of statutory application.  The statute itself provides for a
10-day grace period before termination "unless a different period
is stipulated in the lease" and, on that ground, this court has
recognized that parties have the power to agree on notice and
other terms related to forfeiture that do not appear in the
statute.  More significantly for the purposes of this case, this
court also has held that, when a lessor seeks a forfeiture on the
basis of the lease, rather than under ORS 91.090, the lessee may
raise equitable defenses to the forfeiture action.
		In Moore, for example, the lease contained a
termination provision with a 30-day notice period.  The court
rejected the landlord's claim that ORS 91.090 controlled, because
that statute "is operative only in those cases where the lease
itself does not make provision for the manner in which the
tenancy is to be terminated." 233 Or at 43-44.  Because the lease
in Moore did provide for the manner in which the lessor could
terminate the tenancy, the lease, rather than ORS 91.090, was the
basis for the forfeiture, and therefore the court permitted
consideration of the lessee's equitable defenses to the
forfeiture action.  Id. at 47.  In State Hwy. Comm. v. Demarest,
263 Or 590, 601-02, 503 P2d 682 (1972), this court further
explained Moore, noting that the forfeiture terms in the lease in
that case differed from those in the statute:
			"Obviously, in such a situation the provisions of the
lease, not the statute, would control the rights of the
parties.  The statute expressly states that a 10-day
grace period is allowed 'unless a different period is
stipulated in the lease.'  When the Moore lease
provided for notice of default and 30 days' grace after
such notice, such terms constituted the exception
mentioned in the statute."
		As noted, the lease here, like the lease in Moore,
contained a specific provision providing for forfeiture for non-payment of rent.  Moreover, the forfeiture provision required
notice, unlike ORS 91.090, and established a different grace
period than that contained in ORS 91.090.  As in Moore, the
parties' agreement to those lease terms demonstrates their intent
to apply them, rather than the different terms set out in the
statute, to their relationship.  The fact that plaintiffs' demand
letter specifically refers to the forfeiture provision in the
lease further supports that conclusion.
		Because the forfeiture here is based on the lease
agreement, rather than on ORS 91.090, defendants were entitled to
raise their equitable defenses, to the extent that Oregon law
recognizes those defenses in contractual lease foreclosure
actions.  We now return to that issue.
		As discussed above, plaintiffs argue that a lessee's 
unilateral mistake in making late rental payments does not
constitute the equitable defense of excusable neglect.  This
court, however, never has held that a lessee's mistake may not
constitute excusable neglect, even when the mistake was solely
the fault of the lessee.  Indeed, this court's cases suggest the
opposite.  Moreover, the quotations from Story, upon which the
Court of Appeals relied in Grove and in this case, provide little
guidance in an action such as this, as we explain below.
		This court's decision in Moore illustrates our
approach.  That case involved a 20-year lease of a gasoline
station under which the parties agreed to calculate the rent
based on the gallons of gasoline delivered to the premises. 
Because of fraudulent conduct by a third-party station operator
and an employee of the lessee, the lessee consistently underpaid
the rent, and the lessor gave notice of termination.  After it
learned of the underpayment, the lessee made good faith efforts
to obtain the necessary records and to resolve the dispute, but
the lessor nevertheless filed an action to terminate the lease
based on the lessee's default.  This court allowed the lessee
equitable relief against the lessor's forfeiture action:
	"Equity would listen to defendant's plea with an
unsympathetic ear if [defendant's] agents had purposely
failed to disclose these records in an effort to obtain
a more favorable settlement.  But as we interpret the
evidence, defendant's failure to produce these records
was not a calculated scheme to avoid meeting its
obligations to plaintiffs.  Defendant's agents may have
been negligent in the treatment of plaintiffs' claim,
but the fault was not of such a character as to warrant
the forfeiture of the lease."
233 Or at 47.  On those facts, the Moore court held that the 
lessee's failure to pay the rent in accordance with the terms of
the lease was the result of "excusable neglect" and that the
lessee was entitled to equitable relief against forfeiture.  Id.
		Plaintiffs seek to distinguish Moore on two grounds. 
First, they note that Moore was a suit in equity to terminate a
lease, rather than a statutory FED action.  We perceive no reason
to allow the equitable defense of excusable neglect in an
original proceeding in equity, but to deny it in an FED case. 
Certainly, nothing in the FED statutes suggests that a party may
not raise equitable defenses in a statutory FED action. 
Moreover, this court consistently has held that a lessee may
raise excusable neglect as a defense in such an action.  See,
e.g., Washington Square, Inc. v. First Lady Beauty Salons, Inc.,
290 Or 753, 762, 625 P2d 1311 (1981) ("[P]laintiff concedes that
'exusable neglect' or estoppel might be defenses to an f.e.d.
cause; we agree."); Fry, 269 Or at 304 (considering, but
rejecting on merits, "excusable neglect" defense to FED action);
Demarest, 263 Or at 602 (same).  Second, plaintiffs point out
that the lessee in Moore was the victim of a fraudulent scheme,
albeit not one involving the lessor, and that the lessee acted in
good faith.  Yet the court in Moore described the actions of the
lessee's agents as possibly "negligent" and noted that, even
before the lessor's notice of termination, the lessee had
information from which it could have calculated the rent
deficiency.  233 Or at 47.
		Plaintiffs are correct that, unlike the present case,
Moore did not involve a situation in which the lessee's mistake
was entirely of its own making.  However, as discussed below, the
equitable principles upon which Moore and the cases cited in
Moore relied are sufficiently broad to justify defendants in
raising the defense of excusable neglect.  Plaintiffs are also
correct that Story's equity treatise provides assistance in
understanding those equitable principles, but the most relevant
sections in that treatise are not those upon which plaintiffs or
the Court of Appeals relied.  The quotations from Story that
plaintiffs cite concern unilateral mistake in the formation of a
contract.  That analysis does not apply necessarily to mistake in
contract performance or, more to the point, to the question
whether a lessee may raise an equitable defense based on mistake
in the late payment of rent in a forfeiture action.
		Consideration of a party's mistake in a forfeiture case
based on late payment of rent is different from mistake in
contract formation for at least two related reasons, both of
which Story identified.  First, when a lease specifies that the
landlord may retake possession for failure to pay rent on time,
"the right of entry is deemed to be a mere security for the
payment of the rent."  Story, 3 Equity Jurisprudence § 1727, at
343.  See also Rainey, 180 Or at 565 ("A provision for forfeiture
in a lease for failure to pay rent is generally considered in
courts of equity as designed to secure payment, and the court
will ordinarily relieve against a forfeiture for such cause upon
payment of the sum secured, with interest.").  That is, the
bargain struck by parties to a lease is that the lessor will
receive the agreed-upon rent for the term of the lease;
forfeiture for non-payment is security to ensure payment and, if
the lessee makes payment (with interest and any permissible late
payment fee that the lease requires), then the lessor's contract
rights are protected.
		Second, forfeiture of a leasehold for late payment of
rent -- depending upon circumstances such as the remaining term
of the lease, market conditions, and improvements that the lessee
might have made to the property -- might result in substantial
harm to the lessee compared to the minimal harm to the lessor of
receiving the rent several days late.  That asymmetry provides a
basis for equitable relief.  As Story explained:
	"[T]here is no ground to say because a man has
stipulated for a penalty in case of his omission to do
a particular act (the real object of the parties being
the performance of the act), that if he omits to do the
act he shall suffer an enormous loss wholly
disproportionate to the injury to the other party."
Story, 3 Equity Jurisprudence § 1728, at 345.  See also id., §§
1729-36, at 346-57 (discussing situations in which courts allow
equitable defenses to prevent forfeiture or penalty); Caine, 185
Or at 331-32 (granting equitable relief to lessee who had spent
"several hundred dollars" painting and redecorating premises and
had tendered rent, with interest, to lessor within three days
after expiration of grace period for payment).  
		The equitable principles that Story articulated and
that the courts in Moore and Caine followed find broad support in
other jurisdictions.  See generally Annot., Relief Against
Forfeiture of Lease for Nonpayment of Rent, 31 ALR 2d 321 (1953)
(collecting cases).  Indeed, cases from other states cited in
Moore for the proposition that excusable neglect is a defense to
a lease forfeiture action all involved situations in which the
lessee, through good faith error or inadvertence, failed to pay
the rent on time.  See Moore, 233 Or at 47 n 5 (citing Thomas v.
Given, 75 Ariz 68, 251 P2d 887 (1952); Wylie v. Kirby 115 Md 282,
80 A 962 (1911); Gould v. Hyatt, 154 NE 173 (Ohio Ct App 1926)). 
A more recent commentator concurs with that approach:
		"If the tenant's default is the failure to pay
rent or some other sum of money, equity ordinarily
intervenes to prevent the exercise of a power of
termination, provided that the money is paid.  In
ordering relief from forfeiture upon the payment of the
monetary obligation, courts sometimes refer to a
theory, developed in English cases, that a power of
termination represents security for the payment of a
monetary obligation, and that enforcement of the power
of termination is not required if payment will make the
landlord whole."
David A. Thomas, ed., 5 Thompson on Real Property
§ 40.08(b)(3)(iv), 63-64 (Thomas ed 1994) (footnotes omitted).
		For the reasons discussed above, we conclude that
defendants' allegations regarding the circumstances under which
the envelope containing the rent payment was misaddressed are
sufficient to permit defendants to raise the defense of excusable
neglect.  Of course, whether it will be equitable, in any
particular case, to grant relief from forfeiture based on late
payment of rent "'* * * must depend to a great extent upon its
own circumstances[.]'"  Caine, 185 Or at 331 (quoting Welch v.
Johnson, 93 Or 591, 600, 183 P 776 (1919)).  We express no
opinion whether, in light of all the evidence, including the
circumstances of defendants' breach, and the potential harm that
defendants would suffer if the lease were terminated or that
plaintiffs would suffer if the lease were not terminated, it
would be equitable to allow defendants relief from the forfeiture
sought by plaintiffs in this case.  That issue is one for the
trial court to decide, in the first instance, on remand.
		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. (4)




1. 	Defendants identified the affirmative defense as
"excusable negligence and mistake."  The courts below and
decisions of this court describe that defense variously as
"excusable accident," "unilateral mistake," and "excusable
neglect," among other terms.  Although "unilateral mistake"
accurately describes the inadvertent error that defendants allege
here, we prefer to avoid using the term "mistake" to identify the
defense because, in contract law, that term often is used in
connection with contract formation issues.  The specific issue in
this case is whether the error that defendants allege constitutes
the equitable defense known as excusable neglect.  For purposes
of consistency, we use the term "excusable neglect" to identify
this defense, as this court did in Moore v. Richfield Oil Corp.,
233 Or 39, 47, 377 P2d 32 (1962).

2. 	Plaintiffs assert that this case is moot because the
lease expired after the Court of Appeals issued its decision.  We
disagree.  The trial court awarded attorney fees as provided in
the lease, and that award depends on the correctness of the trial
court judgment.  See Pacific N.W. Dev. Corp. v. Holloway, 274 Or
367, 546 P2d 1063 (1976) (FED action not moot, even after lessee
surrendered possession of property, because attorney fee award
was reviewable on appeal and right to attorney fees depended on
correctness of judgment).  Because the attorney fees award is
still in controversy and a decision from this court will have a
"practical effect on the rights of the parties," Brumnett v.
PSRB, 315 Or 402, 405, 848 P2d 1194 (1993), the case is not moot.

3. 	The statute at issue in Rainey and other pre-1953 cases
that we cite here was OCLA § 8-309, which the legislature first
enacted in 1909, Or Laws 1909, ch 185, § 9, and recodified as ORS
91.090 in substantially the same form.

4. 	The judgment in this case was entered in the Multnomah
County District Court in December 1997.  Effective January 15,
1998, the jurisdiction and authority of the district courts was
transferred to the circuit courts.  Or Laws 1995, ch 658, §§ 1,
150.  We therefore remand to the circuit court.