Rose, LLC v. Treasure Island, LLC, 135 Nev. Adv. Op. 19 (Nev. App. 2019) and Resources Group, LLC v. Nevada Association Services, 135 Nev. Adv. Op. 8, 437 P.3d 154 (2019).
Actual Notice Versus Strict or Substantial Compliance
The Nevada Supreme Court and Nevada Court of Appeals each released opinions recently that dealt with failing to cure defaults in commercial contracts. In Rose v. Treasure Island, the Court of Appeals decided an issue of first impression for Nevada, namely, “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.”
Rose LLC leased store space inside Treasure Island’s casino/hotel (the “Lease”). Rose subleased the store to a restaurant Señor Frog’s (the “Sublease”). Under the Lease agreement, any notice of default was supposed to be sent to an officer of Rose, Susan Markusch. The fifth amendment to the Lease updated Rose’s address and added a provision that Treasure Island would also send a copy of any notice of default against Rose to Señor Frog’s and Señor Frog’s attorney. About 1 year later, Rose failed to make a rental payment, so Treasure Island sent a default notice with ten days to cure. However, Treasure Island sent the notice to Rose’s president and not Ms. Markusch. In addition, Treasure Island did not send a copy of the notice to Señor Frog’s. Rose did not cure the default within the ten days, so Treasure Island terminated the lease by sending a notice of termination.
In district court, Rose argued Treasure Island’s termination was invalid because it did not send the default notices to all the required parties (Ms. Markusch and Señor Frog’s) at the stated addresses in the Lease. Rose argued although it received the default notice indicating ten days to cure, the notice of termination was ineffective because “Treasure Island failed to comply with the notice requirements specifically agreed upon by the parties.” In response, Treasure Island admitted it did not “strictly comply” with the Lease terms, but argued the termination was valid because Treasure Island “substantially complied” and Rose admits receiving actual notice. The district court found in favor of Treasure Island and Rose appealed.
Before deciding the strict/substantial compliance issue, the Nevada Court of Appeals noted “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.” One court reasoned: “forfeiture is a result ‘so harsh[ that] the law requires that every prescribed requirement be met unless waived by agreement of the parties.” See Boyd v. Boone Mgmt., Inc., 676 S.W.2d 24, 26-27 (Mo. Ct. App. 1984). The Court of Appeals also pointed out a minority of states require only substantial compliance.
Although the Court of Appeals stated “the majority approach seems the better one,” it did not explicitly decide which approach Nevada will take because it found actual notice by a defaulting party is sufficient to overcome any failure of strict or substantial compliance. The Court of Appeals held:
“[strict construction does not. . . require ritualistic compliance with [notice requirements].”…Instead, the notice of termination “must reflect the purpose that the notices were meant to serve.” Thus, when actual notice is received and the defaulting party is fully aware of the problem, how the notice was sent becomes immaterial… 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.
The Court of Appeals determined that since Rose received actual notice of the default and knew how many days it had to cure the rent payment issue, the notice of default was valid regardless of any failure of strict compliance.
Mailing a Payment to Cure a Default
The Nevada Supreme Court’s opinion in Resources Group, LLC v. Nevada Association Services dealt with a different issue concerning a party in default of a commercial contract. Defendant Hydr-O-Dynamic (HODC) owned commercial real property (the “Property”) located within a unit-owners’ association (UOA). The UOA was managed by Co-Defendant Nevada Association Services (NAS). HODC became late on the periodic assessments it owed the UOA. Consequently, NAS served HODC with a notice of default and election to sell the Property. The sale was then scheduled for February 13, 2015 at 10:00 am.
On February 6, 2015, HODC wrote a check for the full delinquent amount and sent it to NAS through regular U.S. mail. HODC did not take any steps, such as a phone call or email, to notify NAS it sent the check for the delinquent amount. Testimony at trial revealed the mail carrier delivered the check to NAS on the morning of the day of the sale (Feb. 13th) sometime between 9:30 a.m. and 11:30 a.m. The foreclosure sale went forward on February 13th and concluded around 10:30 am. The Property was sold to Plaintiff Resources Group LLC (“RGL”) for $350,000, who was the highest bidder.
After the sale, NAS opened the mail and saw HODC’s check for the entire delinquent amount. NAS then refused to issue RGL the foreclosure deed to the Property. NAS told RGL it would refund its money plus interest, but RGL declined, wanting either the deed or $1 million. NAS refused either option so RGL filed a lawsuit to quiet title. As a defense, NAS and HODC argued the court should declare the foreclosure sale void for one of two reasons: either because NAS received the check prior to the sale or under the court’s equitable powers.
For the Nevada Supreme Court, the question of whether NAS received HODC’s check prior to the sale came down to the time the mail was delivered on February 13th. The mail carrier could not remember what time he delivered the mail to NAS on February 13th, but in the normal course of business, he delivered the mail between 9:30 and 11:30 am. Since the foreclosure sale ended at 10:30 am, the Nevada Supreme Court held there was insufficient evidence to conclusively determine NAS received the check prior to the sale. Therefore, HODC did not cure the default prior to the sale, which complied with all aspects of the law.
The Nevada Supreme Court also rejected HODC’s equitable argument, finding equity favored the purchaser, RGL. The court found it significant that HODC did nothing to ensure NAS received the check or notice HODC had placed it in the mail, prior to the sale. The court explained:
Additionally, with regard to the check, HODC only mailed it in the regular course of mail, one week before the sale. At trial, HODC’s president conceded that he failed to pursue other options, such as overnight delivery or certified mail. HODC’s president also acknowledged that he could have delivered the check in person or called NAS to ensure that the check had arrived, but failed to do so. Based on these facts, we agree with the district court that “HODC did nothing [beyond putting the check in the mail] to ensure the check had arrived and there were certainly a number of alternatives.”
As a result, the court found in favor of RGL, requiring NAS to issue the foreclosure deed.
Significance of the Two Opinions
Although the Court of Appeals in Rose v. Treasure Island punted on the question of whether Nevada requires strict compliance or substantial compliance with contractual notices of default, it is clear the court is leaning towards strict compliance. Regardless, when a party receives actual notice and such notice is sufficient to appraise the party of how to cure a default, Nevada courts will find the notice “valid notwithstanding any failure of strict compliance.”
The Rose decision also provides a good practical reminder for anyone who is a party to a commercial contract who believes another party is in default. Since you have to review the contract anyway to determine how the other party breached it, also make note of any notice requirements found in the contract during the review. This will ensure strict compliance with contractual notice requirements.
The Nevada Supreme Court’s opinion in Resources Group, LLC v. Nevada Association Services is another reminder that Nevada continues to adhere to the rule that equity favors the diligent. If a defaulting party to a contract has to cure the default by a certain date, the defaulting party needs to ensure it notifies the other party of its attempts to cure within the applicable cure period. Furthermore, Nevada courts will be unsympathetic to a party who misses a deadline because it sent something by regular mail instead of delivering it personally or using overnight delivery. At the very least, a defaulting party must contact the other party and notify the other party that it placed a check in the mail.