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Rose, LLC v. Treasure Island, LLC

Court of Appeals of Nevada

June 5, 2019

ROSE, LLC, A NEVADA LIMITED LIABILITY COMPANY, Appellant,
v.
TREASURE ISLAND, LLC, A NEVADA LIMITED LIABILITY COMPANY, Respondent.

          Appeal from a judgment following a bench trial in a contract action. Eighth Judicial District Court, Clark County; Elizabeth Goff Gonzalez, Judge.

          Lewis Roca Rothgerber Christie LLP and Abraham G. Smith, Daniel F. Polsenberg, and Joel D. Henriod, Las Vegas, for Appellant.

          Hutchison & Steffen, LLC, and Michael K. Wall and Mark Hutchison, Las Vegas; Fennemore Craig, P.C., and Patrick J. Sheehan and Steven M. Silva, Las Vegas, for Respondent.

          BEFORE GIBBONS, C.J., TAO and BULLA, [1] JJ.

          OPINION

          TAO, J.

         In this appeal arising from the alleged breach of a commercial lease, we explore two legal questions not fully developed in Nevada law: (1) when a written lease is otherwise silent, whether the allegedly defaulting party is entitled to "strict" or merely "substantial" compliance with the notice requirements set forth in the lease for declaring the party in default, and (2) whether, under the circumstances of this case, a subtenant becomes a necessary party under Rule 19 of the Nevada Rules of Civil Procedure[2] (NRCP) to an action for breach of contract between the landlord and the prime tenant.

         These questions arise from a lease between landlord Treasure Island, LLC, and its prime tenant, Rose, LLC, for space inside of Treasure Island's hotel/casino that was subleased to a third party, Senor Frog's (a subsidiary of a Mexican company called Operadora Andersons, hereinafter collectively referred to as Senor Frog's), and used to operate a restaurant. Treasure Island alleged that Rose failed to make timely rent payments and declared the lease in default, triggering the instant lawsuit. In addressing the two questions before us, we note that a clear majority of states requires landlords to strictly comply with any contractual notice provisions when declaring a lease in default, but nonetheless we conclude that any failure to do so is excused when the allegedly defaulting party receives actual notice of the default despite any noncompliance. We also conclude that, under the particular circumstances of this case, Senor Frog's was not a necessary party to the litigation under NRCP 19.

         FACTUAL AND PROCEDURAL HISTORY

         Treasure Island and Rose entered into a 10-year lease (with options to renew for another 20 years) for space inside of Treasure Island's Las Vegas Strip hotel/casino that was turned into a Senor Frog's bar and restaurant. The lease provided for both monthly rent and quarterly percentage rent and required that notices under the lease be sent to Susan Markusch (an officer of Rose), with a copy to Senor Frog's. The lease provided that, upon the giving of any notice of default, Rose would be given 10 days to cure any alleged breach of the lease.

         The parties subsequently revised the lease a number of times through mutual agreement. At issue here is the fifth revision to the lease, which the parties negotiated primarily to reflect a change in the relationship between Rose and Senor Frog's, converting what had been a partnership between them into a sublease with Rose as the principal tenant and Senor Frog's as the subtenant. The fifth amendment introduced a new provision "for the benefit of Senor Frog's" as a subtenant, updated Rose's "notice address," and added Senor Frog's and Senor Frog's counsel to the list of those required to receive copies of any notices given under the lease. Although the amendment required notice to be given to Senor Frog's, by its terms the text of the amendment did not grant Senor Frog's any right to intervene to cure a default by Rose after receiving such notice.

         Approximately one year later, Rose failed to make its quarterly percentage rent payment on time. Treasure Island's in-house counsel sent a notice regarding the missed payment to Rose's president, also cc'ing Rose's in-house counsel via email. Treasure Island did not deliver separate notice to either Susan Markusch or Senor Frog's. After Rose failed to cure the default within the 10-day period set forth in the lease, Treasure Island's counsel sent a notice-of-termination letter to Rose's president and to Senor Frog's. In response to this letter, Senor Frog's attorney sent an email to Treasure Island asserting that the termination letter

was sent to my client for notice . . . purposes only under section 11 of the fifth amendment to the lease agreement [and] my client, Senor Frog's, is not affected by default by Rose LLC as to prime tenant. As we further discussed, [Rose] is disputing the default. You have confirmed with me that [Treasure Island] does not plan on taking any action until the dispute with [Rose] is resolved, whether by court action or settlement between the parties. None of this will impact adversely on my client, which will be permitted to continue its subtenancy.

         Thereafter, Treasure Island sued Rose alleging breach of the lease agreement and seeking declaratory relief, Rose counterclaimed, alleging breach of contract and breach of the implied covenant of good faith and fair dealing, and seeking a declaratory judgment. The district court conducted a bench trial during which the president of Senor Frog's testified as a witness and expressed no concern that Senor Frog's was not a participant in the lawsuit. Ultimately, the district court entered judgment in favor of Treasure Island, declaring that it properly terminated the lease. Rose now appeals.

         ANALYSIS

         On appeal, Rose challenges the district court's judgment on two grounds. First, it argues that the district court erred in declaring the lease terminated because Treasure Island failed to give proper notice of the default. Second, it argues that the judgment is void because a necessary party, namely Senor Frog's, was not joined in the action in violation of NRCP 19.

         Termination of the lease

         The parties do not dispute that Rose missed the quarterly rent payment in question. They also do not dispute that, after Treasure Island sent notice of the missed rent payment to Rose, Rose failed to pay within 10 days. Nonetheless, Rose argues that Treasure Island failed to comply with the notice requirements specifically agreed upon by the parties and recited in the fifth amendment and, therefore, the notice of default was legally ineffective, rendering the notice of termination ineffective. In response, Treasure Island concedes that its notice failed to strictly comply with the terms of the fifth amendment, but it argues that it substantially complied with those terms and that, in any event, the district court found that Rose received actual notice.

         The Nevada Supreme Court has not yet addressed whether, under Nevada law, a party declaring another party in contractual default must comply strictly with the notice requirements set forth in the contract, or whether it need only substantially comply with those requirements, especially when the defaulting party has received actual notice. While Nevada law is silent, a review of other jurisdictions reveals that a clear majority of states that have addressed the question holds that a party declaring default must strictly comply with any and all contractual notice requirements. These courts reason that "equity abhors forfeitures of valuable leasehold interests," Metro. Transp. Auth. v. Cosmopolitan Aviation Corp,, 471 N.Y.S.2d 872, 873 (App. Div. 1984), and forfeiture is a result "so harsh[ that] the law requires that every prescribed requirement be met unless waived by agreement of the parties/' Boyd v. Boone Mgmt., Inc., 676 S.W.2d 24, 26-27 (Mo.Ct.App. 1984). See Tiller v. YW Rous. Partners, Ltd., 5 So.3d 623, 629 (Ala. Civ. App. 2008); Berry v. Crawford, 373 S.W.2d 129, 131 (Ark. 1963); Boston LLC v. Juarez, 199 Cal.Rptr.3d 452, 460 (Ct. App. 2016) (citing Cal. Civ. Code § 1442 (West 2007)); Entrepreneur, Ltd. v. Yasuna, 498 A.2d 1151, 1160 (D.C. 1985); Wood v. Ensworth, 430 So.2d 617, 618 (Fla. Dist. Ct. App. 1983); Preferred Real Estate Equities, Inc. v. Rous. Sys., Inc., 548 S.E.2d 646, 648 (Ga.Ct.App. 2001); Tage II Corp. v. Ducas (U.S.) Realty Corp., 461 N.E.2d 1222, 1225 (Mass. App. Ct. 1984); ARE-100/800/801 Capitola, LLC v. Triangle Labs., Inc., 550 S.E.2d 31, 35 ( N.C. Ct. App. 2001); Keller v. Bolding, 678 N.W.2d 578, 584 (N.D. 2004); Elizabethtown Lodge No. 596, Loyal Order of Moose v. Ellis, 137 A.2d 286, 290 (Pa. 1958); Litchfield Co. of S.C, Inc. v. Kiriakides, 349 S.E.2d 344, 347 (S.C. Ct. App. 1986); Vinson Minerals, Ltd. v. XTO Energy, Inc., 335 S.W.3d 344, 354 (Tex. App. 2010); Grow v. Marwick Dev., Inc., 621 P.2d 1249, 1251 (Utah 1980); Vt. Small Bus. Dev. Corp. v. Fifth Son Corp., 67 A.3d 241, 245 (Vt. 2013); Tacoma Rescue Mission v. Stewart, 228 P.3d 1289, 1291 (Wash.Ct.App. 2010); see also Tatewosian v. McLellan, 80 A.2d 879, 880 (R.I. 1951) (cited in Turks Head Realty Tr. v. Shearson Lehman Hutton, Inc., 736 F.Supp. 422, 428 (D.R.I. 1990) for the proposition that notice provisions are literally construed); cf In re Kapiolani Blvd. Lands, Inc., 563 P.2d 390, 391 (Haw. 1977) (noting that covenants in a lease upon "the breach of which a forfeiture is claimed. . . must be strictly construed"); Davis v. Wickline, 135 S.E.2d 812, 814 (Va. 1964) ("[A] breach of covenant [in a lease] to sustain forfeiture is construed strictly against forfeiture.").

         A minority of states, on the other hand, concludes that mere substantial compliance with contractual notice terms is sufficient. See Kimmel v. Cockrell, 317 N.E.2d 449, 451 (Ind.Ct.App. 1974) (finding notice sufficient when it "substantially complie[d] with the terms of the lease"); First Nat'l Bank of Commerce v. DiRosa, 545 So.2d 692, 694 (La. Ct. App. 1989); Equity Props. & Dev. Co. v. Entinger, No. 188302, 1996 WL 33347540, at *2 (Mich. Ct. App. Dec. 27, 1996) (citing Gordon v. Great Lakes Bowling Corp., 171 N.W.2d 225 (Mich. Ct. App. 1969)); Hil-Roc Condo. Unit Owners Ass'n v. HWC Realty, Inc., No. 87344, 2006 WL 2627553, at *3 (Ohio Ct. App. Sep. 14, 2006) (citing McGowan v. DM Grp. IX, 455 N.E.2d 1052 (Ohio Ct. App. 1982)).

         Although the majority approach seems the better one, we need not decide which of these lines of cases to follow because an additional wrinkle exists here; in this case, the district court specifically found that, notwithstanding Treasure Island's failure to strictly comply with the contractual notice requirements, Rose received actual notice anyway. A number of states that require strict compliance with notice requirements nonetheless recognize that, if a defaulting party received actual notice anyway despite some failure of strict compliance, then the failure resulted in no prejudice and therefore no breach to complain about. See Jefferson Garden Assocs. v. Greene, 520 A.2d 173, 183-84 (Conn. 1987); Thompson v. Fairchild, 468 P.2d 316, 318-19 (Idaho 1970); Vole, Inc. v. Georgacopoulos, 538 N.E.2d 205, 210-11 (Ill.App.Ct. 1989). These courts reason that "[s]trict construction does not. . . require ritualistic compliance with [notice requirements]." Greene, 520 A.2d at 183. Instead, the notice of termination "must reflect the purpose that the notices were meant to serve." Id. Thus, when actual notice is received and the defaulting party is fully aware of the problem, how the notice was sent becomes immaterial. See Thompson, 468 P.2d at 319 (noting that whether formal requirements regarding notice were complied with is immaterial where it is clear that notice was in fact received); Vole, 538 N.E.2d at 210 (noting that provisions requiring a particular form of notice are only meant to ensure delivery). Whether the legal standard is characterized as "strict" or "substantial" compliance, the point is to ensure that the defaulting party actually receives the information to which it is entitled, not to penalize the noticing party for minor technical failures that caused no prejudice to any other party.

         Because the district court found, as a factual matter, that Rose received actual notice of the default, for our purposes it matters little that Treasure Island failed to technically comply with the notice requirements agreed upon in the fifth amendment. Rose knew what it was entitled to know: that the quarterly rent payment had not been received in a timely manner, and consequently the notice of default was valid notwithstanding any failure of strict compliance. When the missing rent was not paid despite the giving of actual notice, Treasure Island became entitled to terminate the contract.

         Whether Senor Frog's is a ...


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