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In Re Nickels Midway Pier, LLC

341 B.R. 486 (D. N.J., 2006)

LEASES; BANKRUPTCY — Where a tenant occupies premises by virtue of a lease and has an option to purchase the property pursuant to a separate contract, it is not considered a “purchaser in possession” for the purposes of bankruptcy law and therefore, if the parties intended to have two separate agreements, the contract of sale may be rejected as an executory contract for the sale of real estate.

A tenant leased part of a pier. It and its landlord also entered into an oral contract for the sale of the leased premises to the tenant. The tenant took possession of, and operated its business from, the pier. When the landlord filed a Chapter 11 bankruptcy petition, the landlord sought to reject the lease and the contract for sale. In response, the tenant claimed protection as a “purchaser in possession.” While admitting that its tenant was in possession, the landlord claimed the lease and the contract were separate agreements and that because its tenant held possession pursuant to the lease and not pursuant to the contract for sale, it could not take advantage of the protection afforded a “purchaser in possession.” Whether a business transaction is entire or divisible depends on the intent of the parties as disclosed by the circumstances, and by the terms of the transaction itself. Although the lease and contract for sale were part of one overarching business transaction, the lease and contract for sale each had their own consideration, performance obligations, penalties, and conditions precedent. Therefore, the Court found that the parties intended to have two separate agreements, making the business transaction divisible. Viewing the lease and the contract for sale as separate aspects of one agreement, the Court found that the tenant was in possession of the pier as a tenant and not as a contract purchaser. Although there was a contract for sale, and although the tenant was a purported purchaser in possession, the tenant had taken possession pursuant to the separate and unique terms of the lease, and not by virtue of any authority in, or reliance on, the contract for sale. Therefore, the tenant was not a “purchaser in possession.”

The tenant did have a claim for specific performance of the contract for sale which could be discharged in the bankruptcy proceeding. An equitable remedy gives rise to a right of payment when the payment of monetary damages is an alternative to the equitable relief. When a seller breaches an executory contract for the sale of real estate (or rejects it in the event of bankruptcy), the buyer may seek compensatory damages. The alleged breach of the contract for sale by the landlord created an alternative to equitable relief.

That part of the bankruptcy court’s order holding that the lease and the contract for sale were not to be analyzed separately was reversed, and the matter was remanded to the bankruptcy court for further proceedings.


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