January 29, 2008
GRUPPO EDITORIALE OGGI, INC., PLAINTIFF-RESPONDENT,
JOSEPH BONARO, DEFENDANT-APPELLANT.
On appeal from the Superior Court of New Jersey, Chancery Division, Bergen County, C-351-05.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued December 11, 2007
Before Judges Coburn, Fuentes and Chambers.
Plaintiff, Gruppo Editoriale Oggi, Inc., sued defendant, Joseph Bonaro, for specific performance of an option agreement involving commercial real estate. Following a bench trial, plaintiff obtained judgment awarding it the property, and plaintiff appealed. We reverse.
In 1988, plaintiff began publishing a newspaper, America Oggi. Initially, plaintiff's offices were at 41 Bergenline Avenue in Westwood. Bonaro agreed to have his corporation, J.B. Offset Printing Co., which was located at 55 Bergenline Avenue, print America Oggi for plaintiff. In 1994, plaintiff moved its offices to Bonaro's building and became his tenant in a portion of the building not used by the printing company, which occupied about half of the building's space. Beginning in 1995, plaintiff began expressing an interest in purchasing both Bonaro's printing company and the building in which it was housed at 55 Bergenline Avenue. In 2000, Bonaro agreed to sell plaintiff the assets of his printing company, while also indicating a willingness to sell the building to plaintiff in the future. Bonaro offered plaintiff a right of first refusal on the building, but plaintiff insisted on an option to purchase.
On July 25, 2000, the closing occurred on the sale of the assets of the printing company, and plaintiff's rent became approximately $8,300 per month. The price for the sale was set at about $4 million, with plaintiff paying $1 million at closing and Bonaro providing financing for the rest. The final payment on plaintiff's promissory notes for the asset purchase, $48,332.15, was due August 1, 2005. On the closing date, the parties also entered into the formal written option agreement that is at the center of this controversy.
The option agreement contains the following pertinent provisions:
2. TERM OF OPTION. The term of this option shall commence on the date hereof and shall terminate on July 25, 2005.
4. EXERCISE OF OPTION. The right to exercise the option granted Optionee is expressly conditioned upon the satisfaction and payment of all monies due and owing under [the notes given with respect to the sale of the assets of the printing company]. Upon satisfaction of this condition and at any time prior to the expiration of the option period, Optionee shall have the right to exercise its option to purchase the Premises. Optionee shall exercise its option by giving written notice to that effect to Optioner. In that event, closing of title shall take place as provided for in the terms and conditions of the sale as contained on the form of contract annexed hereto . . . . Upon exercise of the option as defined herein, the parties agree to execute said form of contract within ten days from the date thereof.
8. CONSEQUENCES OF FAILURE TO EXERCISE OPTION OR TERMINATION OF OPTION. If Optionee has not exercised its option to purchase the Premises prior to the expiration of the option period, then this Option Agreement shall terminate. In that event, Optionee shall have no further rights under this Option Agreement. In such event, neither Optioner nor Optionee shall have any further liability to the other, except that Optionee shall execute any and all documents necessary to signify of record the termination of this Option Agreement.
The agreement also provides that "[a]ny notice required, permitted or appropriate hereunder shall be served upon the respective parties by certified mail, return receipt requested," and that a copy of any notice must be sent to Bonaro's attorney, whose name and address is listed.
In late April or early May 2005, telephone discussions occurred between plaintiff's president, Andrea Mantineo, and Bonaro, who was then 79 years old. We accept the judge's finding that Mantineo indicated during those discussions that plaintiff intended to exercise the option, and that in early to mid-June 2005, Mantineo left a message on Bonaro's answering machine urging Bonaro "to tell his lawyer to prepare the papers for the closing."
On June 28, 2005, plaintiff received an undated letter from Bonaro (the "June 28th letter") noting that the balance was still due on the note, with payments due on "July 1, 2005, and August 1, 2005," and that plaintiff owed Bonaro unpaid rent and interest on an unrelated loan. The letter concluded with this statement: "I will be away for most of July. We'll get everything settled."
On July 13, 2005, Mantineo had his secretary mail a letter to Bonaro. Mantineo intended the letter to be plaintiff's exercise of the option. The subject of the letter was "Sale of building at Bergenline Avenue," and it read as follows:
I am not aware of the first two issues you mention in your letter of June 28. As for the third - the interest on the loan you gave America Oggi - it is fair that it be paid to you.
You adviced (sic) us that you will be away for the month of July. I am also going on vacation from July 24 until August 23. However, Giustina and all the others will be at the newspaper if you need to contact them. I would suggest that you provide us a contract draft for the sale of the building, according to the terms of the option to buy agreement signed when we bought JB Offset Printing, so that our attorney can review it. We also ask you to provide us a list of current leases, rent income, taxes and other expenses.
If you can do that during the early part of August, we will be able to schedule a closing for the end of the month.
Mantineo, who was an experienced businessman, testified that he read the option agreement before preparing the letter and that he was aware of its requirements. Nonetheless, he had the letter sent by ordinary mail, and he failed to send a copy to Bonaro's attorney. He also failed to include a check for the balance due under the notes. He said he used ordinary mail because he believed that Bonaro would still be on vacation and that there might not be anyone at Bonaro's house to sign for certified mail.
Bonaro, who returned from vacation on July 12, testified that he did not receive plaintiff's July 13 letter. The judge found that Bonaro did in fact receive the letter, and we will accept that determination for purposes of this opinion. On August 1, plaintiff paid Bonaro the balance due on the asset purchase notes. On August 9, Bonaro's attorney sent a letter to plaintiff terminating the option agreement because plaintiff had "not exercised your Option as required in accordance with the terms and conditions of the Option Agreement." Mantineo returned from a vacation in Italy around August 23, and tried to persuade Bonaro to accept the exercise of the option. Bonaro refused, and this lawsuit ensued.
The well-settled legal principles governing real estate option agreements were recently summarized in Brunswick Hills Racquet Club, Inc. v. Route 18 Shopping Center, Assoc., 182 N.J. 210, 223 (2005):
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 requirements of the contract.
State By and Through Adams v. New Jersey Zinc Co., 40 N.J. 560, 576, 193 A.2d 244 (1963) (citing Schlein v. Gairoard, 127 N.J.L. 358, 359-60, 22 A.2d 539 (E. & A. 1941); see also Brick Plaza, Inc. v. Humble Oil & Refining Co., 218 N.J. Super. 101, 104, 526 A.2d 1139 (App. Div. 1987) (observing that "[t]he general rule is that in an option contract, time is of the essence"). 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.
Adams, supra, 40 N.J. at 576, 193 A.2d 244. Because the property owner cannot withdraw the offer, we require the option holder, who is "free to accept or reject," to adhere strictly to the terms of the contract. Goodyear Tire and Rubber Co. v. Kin Props., Inc., 276 N.J. Super. 96, 105, 647 A.2d 478 (App. Div.) (internal quotations omitted), certif. denied, 139 N.J. 290, 654 A.2d 470 (1994).
The Supreme Court also noted these related principles:
Courts generally should not tinker with a finely drawn and precise contract entered into by experienced business people that regulates their financial affairs. Equitable relief is not available merely because enforcement of the contract causes hardship to one of the parties. A court cannot abrogate the terms of a contract unless there is a settled equitable principle, such as fraud, mistake, or accident, allowing for such intervention.
[Id. at 223-24 (quotation and citations omitted).]
Another principle of law informing our decision is that acceptance of an offer must be clear and unequivocal, not ambiguous. Looman Realty Corp. v. Broad Street Nat'l Bank of Trenton, 74 N.J. Super. 71, 82 (App. Div. 1962) (citing Johnson & Johnson v. Charmely Drug Co., 11 N.J. 526, 538 (1953)). Those principles of law require rejection of the trial judge's legal conclusion that the July 13, 2005, letter "constituted a valid exercise of the Option." First, the letter was ambiguous at best. The judge described the letter as asking "Bonaro to provide the contract for signing." But that is not what the letter said; rather, it asked for "a contract draft for the sale of the building . . . so that our attorney can review it." Nowhere does the letter state clearly and unambiguously that plaintiff is in fact exercising the option. And the reference to the necessity for attorney review implies further negotiations.
Assuming the letter was unambiguous, it still was ineffective for three reasons: it was not sent by certified mail; a copy was not sent to Bonaro's attorney; and it was not accompanied by a check for the balance due on the notes. Since the option was not exercised in strict accordance with those terms, which were carefully spelled out in the option agreement, enforcement cannot be permitted unless a settled equitable principle provides otherwise.
The trial judge determined that Bonaro's conduct constituted a breach of the implied covenant of good faith and fair dealing. In Brunswick, supra, 182 N.J. at 224-25, the Court summarized the meaning of this implied covenant in this manner:
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. See Wilson v. Amerada Hess Corp., 168 N.J. 236, 241, 244, 723 A.2d 1121 (2001) (holding that "[a] covenant of good faith and fair dealing is implied in every contract," including contract granting party unilateral discretion over pricing); see also Sons of Thunder, Inc. v. Borden, Inc., 148 N.J. 396, 420-21, 690 A.2d 575 (1997) (holding same for contract granting party unilateral right of termination); Restatement (Second) of Contracts § 205 (1981) ("Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement."); 25 Williston on Contracts § 63:22, at 506 (Lord ed.2002) (same).
Good faith is a concept that defies precise definition. The Uniform Commercial Code, as codified in New Jersey, defines good faith as "honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade."
N.J.S.A. 12A:2-103(1)(b). Good faith conduct is conduct that does not "'violate community standards of decency, fairness or reasonableness.'" Wilson, supra, 168 N.J. at 245, 773 A.2d 1121 (quoting Restatement (Second) of Contracts, supra, § 205 comment a). "'Good faith performance or enforcement of a contract emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party.'" Ibid. (quoting Restatement (Second) of Contracts, supra, § 205 comment a). The covenant of good faith and fair dealing calls for parties to a contract to refrain from doing "anything which will have the effect of destroying or injuring the right of the other party to receive" the benefits of the contract. Palisades Props., Inc. v. Brunetti, 44 N.J. 117, 130, 207 A.2d 522 (1965) (internal quotations omitted); see also Wade v. Kessler Institute, 172 N.J. 327, 340, 798 A.2d 1251 (2002) (same).
Proof of "bad motive or intention" is vital to an action for breach of the covenant. Wilson, supra, 168 N.J. at 251, 773 A.2d 1121. The party claiming a breach of the covenant of good faith and fair dealing "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." Williston, supra, § 63:22, at 513-14 (footnotes omitted); see also Wilson, supra, 168 N.J. at 251, 773 A.2d 1121; Sons of Thunder, supra, 148 N.J. at 420, 690 A.2d 575. As a general rule, "[s]ubterfuges and evasions" in the performance of a contract violate the covenant of good faith and fair dealing "even though the actor believes his conduct to be justified." Restatement (Second) of Contracts, supra, § 205 comment d.
Although we accept the judge's finding of fact that Bonaro knew before he left for vacation that plaintiff intended to exercise the option, he never engaged in any conduct that could be described fairly as subterfuge or evasion. The judge emphasized the comment in Bonaro's June 28th letter that they would settle up when he returned. But that letter made no reference to the option at all, and plaintiff did not rely on it as a basis for not attempting to formally exercise the option on time. The judge also said that Bonaro timely received actual notice [referring to the July 13 letter] and pretended he did not, silently content to rely on the deniability of receipt of a regular mailing, and on the failure of [plaintiff] to provide certified notice in accordance with the Option Agreement, until after the time for doing so had lapsed.
Based on those facts, the judge concluded: "That is suberfuge and evasion which - while far from being the most egregious one could contemplate - is sufficient to establish a breach of the covenant of good faith and fair dealing."
We reject the judge's legal conclusion respecting Bonaro's conduct. This is not a case like Brunswick, supra, or Bak-A-Lum Corp. of America v. Alcoa Building Products, Inc., 69 N.J. 123, 126-30 (1976), where the covenant was enforced because defendants intentionally misled plaintiffs while being aware that in reliance on their conduct plaintiffs were investing substantial sums of money. Nor is this a case in which Bonaro "lulled plaintiff into believing it had exercised the . . . option properly." Brunswick, supra, 182 N.J. at 231.
We reject, as well, the judge's legal conclusion respecting plaintiff's conduct. He described Mantineo's attempt to exercise the option as "an honest, if astounding, mistake, or imperfect comprehension . . . as to what was required," but Mantineo's testimony was that he read the option and knew what it required. And the judge also more accurately described Mantineo's conduct as a "casual approach," which was "breathtaking." When a party has acted with positive neglect of its obligations, as here, and particularly when the party has not been misled in any respect, directly or indirectly, equitable relief is inappropriate. Brick Plaza, Inc. v. Humble Oil & Refining Corp., 218 N.J. Super. 101, 105 (App. Div. 1987). In short, Bonaro, who did nothing other than rely on his legal rights under the contract, did not breach the covenant of good faith and fair dealing. Although we accept the judge's finding that plaintiff will suffer financially because of its failure to satisfy its obligations under the option agreement, equitable relief is not available "merely because enforcement of the contract causes hardship to one of the parties." Brunswick, supra, 182 N.J. at 223 (citation omitted).
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