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Accredited Laboratories, Inc. v. Amax Cooper, Inc.

A-3265-01T5 (N.J. Super. App. Div. 2003) (Unpublished)

CONTRACTS; REASONABLE EFFORTS—Engaging experienced and competent counsel and expending time and money in an attempt to satisfy a contractual obligation satisfies a requirement that a seller use reasonable efforts to obtain subdivision approval.

A commercial lease agreement for a single unsubdivided lot provided the tenant with an option to purchase its demised premises, subject to subdivision and other land use and government approvals that might be necessary. The lease expressly provided that the landlord made no representations regarding the feasibility of obtaining the necessary approvals or the time required to obtain them. The only responsibility to seek approvals upon the tenant’s exercise of the purchase option was for the landlord to “use reasonable efforts and incur reasonable costs in obtaining any such governmental action.” Upon exercise of the purchase option, closing was to take place within twelve months. If closing did not take place within twelve months because of a problem with environmental issues or approvals, the tenant could extend the lease to a ninety-nine year term. That alternate option had to be exercised within thirty days after the twelve month period expired.

The tenant exercised the purchase option and the landlord engaged a major law firm to pursue all necessary land use and governmental approvals. An experienced attorney processed the application which required a number of variances, complicating the entire procedure. The proposed lot line confirmed exactly to the described demised premises in the lease. The planning board engineer questioned the proposed subdivision line and suggested reconfiguration that would add about twenty percent more land to the lot being conveyed. The landlord did not wish to do that, claiming that to do so “would have a potential adverse effect on it because it would lose control over [a] drainage swale that service[d] the entire property and because it might otherwise impair its development and use of the remainder of [its] tract.” The landlord furnished the planning board engineer’s comments to its tenant. It also sent a lengthy letter explaining the problem. The letter concluded, “nder the circumstances, the likelihood of obtaining the necessary subdivision approval at that time appears questionable.” The tenant replied by exercising its ninety-nine year lease option, and also stated its understanding that the landlord “would make any required modifications, including possible modifications of the lot lines, to enable completion of the fee title conveyance.” The landlord responded, refuting the tenant’s contentions regarding its subdivision application obligations under the lease agreement. Specifically, the landlord asserted that there was no basis for the tenant claiming that the landlord was obligated to modify the location of the proposed subdivision line. The tenant never demanded or even suggested that its landlord resist the planning board engineer’s comments reconfiguration of the lot. It did not send a representative to the planning board meeting. The planning board approved the preliminary and final major subdivision and all required variances, but required the landlord to amend its plan to include the additional land. Following that approval, the landlord’s attorney wrote to the tenant’s attorney saying that to include the additional land “may warrant an increase in the purchase price.” The letter requested the tenant to decide whether it wanted to pursue such a modification. The letter concluded that no further action would be taken by the landlord with respect to the subdivision until it heard from the tenant.

The landlord and tenant engaged in negotiations with the landlord asking for more money, and the tenant taking the position that the property was now worth significantly less. No agreement was reached and the tenant never invoked an arbitration and appraisal provision in the lease. Instead, it continued to occupy the premises under the ninety-nine year lease. Two and one half years later, when the landlord found a potential buyer for the property, the tenant reasserted its prior exercise of the purchase option and demanded compliance. The tenant contended that “by not agreeing to change the lot line upon the mere suggestion of the planning board engineer, [its landlord] breached the lease provision requiring it ‘to use reasonable efforts and incur reasonable costs’ to obtain necessary approvals.” The tenant further contended that the landlord “violated its implied covenant and good faith and fair dealing by agreeing to the lot line change and then demanding an unspecified increase in price for the reconfigured lot, and eventually refusing to convey the lot to [the tenant].”

The lower court disagreed with the tenant, holding that the landlord had, in fact, used reasonable efforts to obtain the necessary approvals. This decision was based on the landlord’s engaging “very experienced and competent counsel to process the necessary application.” The landlord had also pursued the process for more than a year, with all necessary engineering services and expenses. It devoted substantial time, efforts, and expense to that endeavor. When the landlord notified the tenant about the planning board engineer’s recommendations, the tenant did not object. The tenant’s actions were held to be an acknowledgment that “the purchase option could not be implemented because of the action taken by the planning board.” It never suggested or demanded that the landlord resist the engineer’s comments. In fact, it exercised its “safety net” alternative ninety-nine year lease and opened a new set of negotiations. When the negotiations proved unsuccessful, the tenant abandoned any further efforts to enforce its purported rights to purchase the property. Further, the Court felt it important that the lease provided for an acknowledgment by the parties of the “possibility that approvals might not be obtainable… .” All in all, “[t]he lease agreement simply [did] not obligate [the landlord] to convey the significantly larger lot which was created by a requirement of the municipality.” As to the argument that the landlord had breached its implied covenant of good faith and fair dealing, the Court pointed out that the landlord kept the tenant informed of all relevant information and events throughout the application process. Further, the landlord “expressed its willingness to continue with the process, at its expense, in a hope that a negotiated resolution, outside the purchase option clause, could be achieved.”

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