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135 Route 73 South, LLC v. Schafer

A-3060-09T3 (N.J. Super. App. Div. 2010) (Unpublished)

CONTRACTS; CONTINGENCIES — Where a contract has an expansive due diligence provision, a seller should reasonably know and expect that its buyer could exercise its cancellation option for any reason relating to the property including issues related to zoning.

A buyer expressed interest in purchasing a property, but had concerns about its viability for its planned commercial uses. The buyer attempted to negotiate a contract with a contingency for any change in zoning that might be required for its planned development. However, the seller refused to agree to such a contingency.

After negotiations, the parties entered into a contract which included a thirty-day due diligence provision to allow the buyer to examine all uses to which the property might be put based upon the then-current zoning regulations, with the buyer’s decision of dissatisfaction measured by the buyer’s sole discretion. The contract also contained an integration clause and required a deposit.

During the due diligence period, the buyer investigated the possibility of zoning changes, but found that such efforts would be futile. The buyer asked its seller to extend the due diligence period, but the seller refused. Within the thirty-day period, the buyer notified its seller of its intention to terminate the contract. The buyer requested refund of its deposit, but the seller refused to return it. The lower court found that the buyer had properly exercised its right to terminate the contract and rejected the seller’s argument that buyer had breached its implied covenant of good faith and fair dealing in exercising its right to terminate the contract.

The Court noted that the list of potential dissatisfactions in the due diligence clause was not exhaustive because it was preceded by the phrase “including without limitation.” It also noted that the covenant of good faith and fair dealing cannot be used to circumvent express terms in a contract. Because of the expansive language of the due diligence provision in the contract, the seller had to have reasonably known and expected that the buyer could exercise its cancellation option for any reason relating to the property, including its zoning.

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