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Clifton Savings Bank, S.L.A., v. Source 1 Capital Corp.

A-0757-06T3 (N.J. Super. App. Div. 2007) (Unpublished)

CONTRACTS —Where a contract states that a party has sixty days within which to conduct inspections that might give rise to that party’s right to terminate the agreement, the court will not interpret such a provision to necessarily mean that the party only has sixty days within which to give its notice of termination.

A bank contracted to buy a tract of real estate but later cancelled the contract because the property was environmentally contaminated. The contract between the bank and the property owner allowed the bank to cancel the deal if it couldn’t obtain bank-related approvals from government agencies or in the event that environmental contamination was discovered. According to the contract, the bank was to conduct environmental due diligence of the property within sixty days of the contract’s execution. An engineering firm began an on-site assessment within four days of the agreement’s execution and conducted a subsequent assessment after the first one indicated that there might have been significant environmental contamination. This took more than sixty days. The bank sued the property owner after it refused to refund the bank’s deposit. The lower court found that the bank had commenced due diligence within the required sixty days and that there was considerable evidence of environmental contamination. It noted that the bank’s continuation of due diligence beyond the sixty-day period was evidence that the bank was making a good faith effort to determine whether the property was suitable in hopes of eventually closing on the contract. The bank was awarded the return of its deposit plus attorneys’ fees.

On an appeal brought by the property owner, the Appellate Division noted that interpretation of a contract was to be done on its own terms, without excluding any extrinsic evidence, and was to be done as a matter of law. The Court found that the text of the contract stated that the sixty-day period was the time limit in which the bank was required to undertake due diligence, but that the bank had one year in which to terminate the agreement. The Court noted that while the contract stated that one option was for the bank to obtain a letter from the State of New Jersey that the property was not contaminated, the provision did not preclude the bank’s option to conduct its own independent investigation. The Court additionally noted that there was no specified level of contamination that had to be reached before the bank could terminate the contract.

The Court held that to have construed the contract according to the property owner’s interpretation that the bank had only sixty days to cancel due to environmental contamination, would have amounted to a re-writing of the contract, which is not the proper role for a court. It found that the bank satisfied the provisions of the contract which called for it to use its best efforts in conducting its environmental due diligence study when it hired the engineering firm within four days of the contract’s execution.

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