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Brunswick Hills Racquet Club, Inc. v. Route 18 Shopping Center Associates

January 25, 2005

BRUNSWICK HILLS RACQUET CLUB, INC., PLAINTIFF-APPELLANT,
v.
ROUTE 18 SHOPPING CENTER ASSOCIATES, A LIMITED PARTNERSHIP, DEFENDANT-RESPONDENT.



On certification to the Superior Court, Appellate Division.

SYLLABUS BY THE COURT

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

ALBIN, J., writing for a unanimous Court.

The Court determines to what extent the covenant of good faith and fair dealing, which is implicit in every contract, governs the arms-length business transactions of sophisticated business entities.

Plaintiff Brunswick Hills Racket Club, Inc. (Brunswick or Plaintiff) owns and operates a tennis club on property it leases from Route 18 Shopping Center Associates (Defendant) in East Brunswick. The lease dates back to 1976, when the original tenants, some of whom now own Brunswick and who transferred the lease to the club, entered into a twenty-five year lease with the original landlords, who later conveyed their interests in the shopping center to Defendant. As permitted under the terms of the original lease, Brunswick built a tennis facility on the property, investing approximately one million dollars in capital improvements. The lease provided for an automatic twenty-five year extension unless the tenants communicated not less than six months prior written notice of an intention to terminate. The lease also provided the tenants with options to purchase the leased property or to enter into a ninety-nine year lease. In order to exercise either option, the agreement required the tenants both to notify Defendant of their intention and to pay $150,000 no later than September 30, 2001, six months before the expiration of the original lease term. If the tenants did not exercise an option or terminate the lease by that date, the rent would increase to more than triple the amount they had been paying.

Beginning in February 2000, nineteen months before the option deadline, Brunswick's attorney, Gabriel E. Spector, began a series of communications with Defendant's property management company and its attorney that informed Defendant of Brunswick's intention to exercise the option for the ninety-nine year lease. Although these communications between Spector and Defendant's agents discussed details with regard to the lease and Brunswick's intent to exercise the option, Brunswick never tendered the required payment of $150,000 at any time before the option deadline because it believed the payment was due at the closing of the new lease. Defendant never mentioned Brunswick's failure to provide the payment. Instead, through nineteen months of written and verbal communications, Defendant was silent on the payment until the deadline to exercise the option had passed. Finally, on February 5, 2002, two years after Spector first communicated Brunswick's intent, Defendant's attorney took the position that Brunswick had not properly executed the option and that Defendant would not honor its attempt to do so. Soon thereafter, Defendant rejected Brunswick's tender of the $150,000 option price. Brunswick deposited that sum in escrow and filed this litigation to compel specific performance.

At the conclusion of a bench trial, the trial court entered judgment in favor of Defendant. The court found that the contract clearly required Brunswick to exercise the option and pay the $150,000 in a timely manner. According to the court, a written notice exercising the lease option without tendering payment before the deadline did not satisfy the terms of the contract. The court ruled also that Defendant had no duty to inform Brunswick that it had not properly exercised the option and that Defendant had not misrepresented any fact causing Brunswick harm.

The Appellate Division, in a per curiam opinion, affirmed the trial court's decision, holding that Brunswick failed to act in strict accordance with the contract terms governing the option. Because Brunswick did not tender payment until after the option deadline, the panel determined that the attempt to exercise the option was nugatory. Furthermore, the panel ruled that the lease terms did not provide Brunswick with a right to cure its mistake. The panel agreed with the trial court that Defendant had no duty to disclose to Brunswick that it had fumbled in exercising the option. As such, it found that Defendant did not breach a duty of candor or the covenant of good faith and fair dealing inherent in every contract.

HELD: In the circumstances of this case, Defendant breached the covenant of good faith and fair dealing through a series of evasions and delays that lulled Plaintiff into believing it had exercised the lease option properly. Plaintiff is entitled to specific performance of the lease option in accordance with the terms of the contract.

1. In a real estate transaction, an option contract is a unilateral agreement requiring a party to convey property at a specified price, provided the option holder exercises the option in strict accordance with the terms and time of the contract. Within the terms and time limitations of the option contract, the property owner is bound by an irrevocable offer to sell the property, while the option holder is under no obligation to act. Because the property owner cannot withdraw the offer, the option holder must adhere strictly to the contract's terms. The terms of the agreement between Brunswick and Defendant were clear. Brunswick was required to exercise the option no later than September 30, 2001, and its failure to make the requisite payment before that deadline rendered the right null and void. However, having concluded that Brunswick did not exercise the option properly does not end the matter. The Court must determine whether Defendant violated the covenant of good faith and fair dealing implicit in every contract. (Pp. 14 - 17).

2. Every party to a contract, including one with an option provision, is bound by a duty of good faith and fair dealing in both the performance and enforcement of the contract. Although good faith is a concept that defies precise definition, proof of"bad motive or intention" is vital to an action for breach of the covenant of good faith and fair dealing. The party claiming breach of the covenant must provide evidence sufficient to support a conclusion that the party alleged to have acted in bad faith has engaged in some conduct that denied the benefit of the bargain originally intended by the parties. As a general rule, subterfuges and evasions in the performance of a contract violate the covenant even though the actor believes his conduct to be justified. (Pp. 17 - 19).

3. Prior cases in which our courts have found a breach of the covenant of good faith and fair dealing yield a few salient principles. These principles include that a defendant may be liable for a breach of the covenant even if it does not violate an express term of the contract. A plaintiff may be entitled to relief if its reasonable expectations are destroyed when a defendant acts with ill motives and without any legitimate purpose. Moreover, a plaintiff may get relief if it relies to its detriment on a defendant's intentional misleading assertions. (Pp. 19 - 24).

4. The undisputed facts of this case make clear that Defendant breached the covenant of good faith and fair dealing. Brunswick mistakenly believed that the purchase price was not due until the time of closing and, as a result of its failure to tender the purchase price, execution of the option remained unperfected. During a nineteen-month period, Defendant, through its agents, engaged in a pattern of evasion, sidestepping every request by Brunswick to discuss the option and ignoring its repeated written and verbal entreaties to move forward on closing the ninety-nine year lease. Defendant never requested the purchase price of the lease. Indeed, as Defendant's attorney candidly admitted at oral argument, Defendant did not want the purchase price because the successful exercise of the option was not in Defendant's economic interest. Defendant, apparently, never intended to dispel Brunswick's misapprehension until it was fatally prejudiced. Although courts generally are content to let experienced commercial parties fend for themselves, there are ethical norms that apply even to commercial transactions. Gamesmanship can be taken too far, as in this case. Brunswick's repeated letters and telephone calls to Defendant concerning the exercise of the option and closing of the lease obligated Defendant to respond, and to respond truthfully. (Pp. 24 - 27).

5. The Court is not establishing a new duty for commercial landlords to act as calendar clerks for their tenants. Nor does it propose that attorneys must protect their adversaries from the mishaps and missteps that occur routinely in the practice of law. The breach of the covenant of good faith and fair dealing in this case was not a landlord's failure to cure a tenant's lapse. Instead, the breach was a demonstrable course of conduct, a series of evasions and delays, that lulled Brunswick into believing it had exercised the lease option properly. Defendant acted in total disregard of the harm caused to Brunswick, unjustly enriching itself with a windfall increase in rent at Brunswick's expense. The Court stresses that while a commercial party does not have to act with benevolence towards an opposing party, it cannot behave inequitably. In light of Defendant's breach of the covenant of good faith and fair dealing, the Court holds that Brunswick is entitled to specific performance of the lease option in accordance with the terms of the contract. (Pp. 27 - 28).

The judgment of the Appellate Division is REVERSED, and the matter is REMANDED to the trial court for proceedings consistent with this opinion.

CHIEF JUSTICE PORITZ and ASSOCIATE JUSTICES LONG, LaVECCHIA, ZAZZALI, WALLACE, and RIVERA-SOTO join in JUSTICE ALBIN's opinion.

The opinion of the court was delivered by: Justice Albin

Argued October 28, 2004

In the highly competitive world of commercial transactions, sophisticated business entities operate according to the impersonal laws of the marketplace in which self-interest, not altruism, is the dominating principle. We must decide to what extent the covenant of good faith and fair dealing, which is implicit in every contract, governs the arms-length business transactions of such entities.

In this case, a commercial tenant was obliged to exercise an option for a long-term lease by both giving notice and tendering a fixed sum of money to the landlord by a specified date. The tenant timely notified the landlord of its intent to exercise the option nineteen months in advance of the contractual deadline. The tenant, however, failed to make the up-front payment necessary to perfect the option, believing that the payment was required only at the time of closing of the new lease. Over the next nineteen months, the tenant, through its attorneys, repeatedly wrote and spoke with agents of the landlord for the purpose of setting the date and terms of the closing. The landlord's agents, through a series of written and verbal evasions, delayed responding to the persistent requests of the tenant to close the deal. The landlord never requested the option payment money or advised the tenant that it had not fulfilled an essential term of the contract. When the deadline for exercising the option passed, the landlord, for the first time, pointed out the deficiency to the tenant. The landlord told the tenant that the option was "null and void."

The tenant unsuccessfully brought suit to enforce the option. The Appellate Division affirmed the trial court's denial of relief to the tenant, stating that the tenant had no legal recourse in light of its failure to abide by the strict terms for executing the option. The panel found that the covenant of good faith and fair dealing was not violated by the landlord's artful dodging and studied silence. We disagree and now reverse.

I.

A.

Plaintiff Brunswick Hills Racquet Club, Inc. owns and operates a tennis club in East Brunswick on property that it leases from defendant Route 18 Shopping Center Associates. In December 1976, the original landlords, Route 18 Shopping Center, Inc. and Old Bridge Annex, Inc., entered into a written lease agreement with the original tenants, Joseph Grossman, Joseph Manzo, Alfred Horowitz, and Allen Glenn. The original landlords later conveyed their interests in the shopping center to defendant, and the original tenants later conveyed their interests in the lease to plaintiff.*fn1

The agreement provided for an initial twenty-five-year term and permitted plaintiff to construct and operate an indoor tennis center on the leased premises. In accordance with the terms of the contract, plaintiff built a tennis facility, investing approximately one million dollars in capital improvements. The lease provided for an automatic twenty-five year extension, unless plaintiff "communicated not less than siX (6) months prior written notice to [defendant] of its intention to terminate this Lease...."

The agreement also provided plaintiff with the option of purchasing the leased property or entering into a ninety-nine year lease, both on very favorable financial terms.*fn2 In order to exercise the option either to purchase the property or to lease the property over a ninety-nine-year term, the contract required plaintiff both to notify defendant of its intention and to pay $150,000 no later than September 30, 2001, six months before the expiration of the original lease term. Otherwise, the option would be lost. Additionally, if plaintiff did not exercise the option or terminate the lease by that date, the rent would increase to more than triple what plaintiff had been paying during the original lease term. During the period leading up to the option deadline, plaintiff repeatedly expressed in writing its intent to exercise the option. The heart of the controversy concerns defendant's nineteen-month posture of silence, which was punctuated by written and verbal evasions and delay, and plaintiff's failure to pay the option price of $150,000 to defendant before the deadline.

B.

We now review the series of letters that have led to this litigation. On February 23, 2000 23af nineteen months before the option deadline 23af plaintiff's attorney, Gabriel E. Spector, wrote to Rosen Associates Management Corporation, defendant's property management company, informing it that plaintiff intended to exercise its ...


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