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

182 N.J. 210, 864 A.2d 387 (2005)

LEASES; OPTIONS; GOOD FAITH—Because a landlord is bound by the covenant of good faith and fair dealing implied in every lease, neither a landlord nor its attorney can lull a tenant into believing that it has properly exercised a lease option and then, when it becomes too late, assert that the option was not properly renewed.

A tenant and landlord entered into a lease agreement which provided the tenant with the option to purchase the property or lease it over a ninety-nine-year term, so long as the tenant notified the landlord of its intentions and paid $150,000 no later than September 30, 2001, which was six months before the original lese term’s expiration. On February 23, 2000—which was nineteen months before the option deadline—the tenant’s lawyer sent the landlord a letter informing it of the tenant’s desire to enter into the ninety-nine year lease. Although the letter mentioned—among other things—the option price of $150,000, the tenant neither tendered the $150,000 payment with the letter nor at any time prior to the option deadline. The tenant believed that this payment was not due until execution of the new lease. Despite the tenant’s repeated requests for a reply to its letter, the landlord’s lawyer did not respond until nearly four months later, stating that the tenant’s lawyer should phone him whenever possible. One month after this, the tenant’s lawyer mailed another letter to the landlord’s lawyer reminding him about the phone conversation in which he promised to get back to the tenant after reviewing the file. After several weeks went by without any response from landlord’s lawyer, the tenant’s lawyer sent him yet another letter requesting a status report. Five days after this, the landlord’s lawyer merely informed the tenant’s lawyer that its letter would be forwarded to the landlord.

Verbal and written communications between the tenant’s lawyer and the landlord’s agents proceeded in this fashion through the passing of the nineteen-month deadline, without the landlord or its agents ever bringing the required $150,000 payment to the tenant’s attention. Finally, two years after communications about the lease renewal had begun, the landlord’s attorney informed the tenant that it would not honor the tenant’s attempt to execute the lease option because the tenant failed to tender the $150,000 option price by the stipulated deadline. The tenant sued the landlord to force specific performance of the ninety-nine-year lease option.

The Appellate Division held that despite the fact that the landlord accurately abided by the written terms of the contract, the landlord’s pattern of conduct was a breach of an implied covenant to act in good faith and fairness. The Supreme Court agreed, holding that the landlord’s untruthfulness and evasiveness during its two-year communications with the tenant led the tenant to believe that it had properly exercised the lease option. Thus, the Court held, although courts generally allow experienced business people to look after themselves without any court intervention, there are some cases in which ethical norms require the courts to intervene to the Supreme Court, the case at bar represented one of those cases. The Court, in conclusion held that because the landlord breached the covenant of good faith and fair dealing, the tenant was entitled to specific performance of the ninety-nine-year lease option in compliance with the contract terms.

The Court admonished both the landlord and the landlord’s attorney with the following: “We are not eager to impose a set of morals on the marketplace. Ordinarily, we are content to let experienced commercial parties fend for themselves and do not seek to ‘introduce intolerable uncertainty into a carefully structured contractual relationship’ by balancing equities. ... But as our good faith and fair dealing jurisprudence reveals, there are ethical norms that apply even to the harsh and sometimes cutthroat world of commercial transactions. Gamesmanship can be taken too far, as in this case. We do not expect a landlord or even an attorney to act as his brother’s keeper in a commercial transaction. We do expect, however, that they will act in good faith and deal fairly with an opposing party. [The tenant’s] repeated letters and telephone calls to [the landlord] concerning the exercise of the option and the closing of the ninety-nine-year lease obliged [the landlord] to respond, and to respond truthfully. In concluding that [the landlord] violated the covenant, we do not establish a new duty for commercial landlords to act as calendar clerks for their tenants. We do not propose that attorneys must keep watch over and protect their adversaries from the mishaps and missteps that routinely occur 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 [the tenant] into believing it had exercised the lease option properly. [The landord] acted in total disregard of the harm caused to [its tenant], unjustly enriching itself with a windfall increase in rent at [its tenant’s] expense.”

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