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Kalogeras v. 239 Broad Avenue, L.L.C.

202 N.J. 349, 997 A.2d 943 (2010)

CONTRACTS; LIQUOR LICENSE; GOOD FAITH — Where a contract of sale includes the sale of a liquor license, the requirement for government approval is an implied condition of that contract and the contracting parties are bound by the implied covenant of good faith and fair dealing to obtain that approval.

Two brothers co-owned a diner. When their business relationship deteriorated, they decided to separate. The diner was appraised at $4,000,000. As equal owners, they agreed that the first brother would receive half in exchange for transferring his interest to the other brother. At closing, the first brother was paid $1,050,000 and took back a $950,000 mortgage note payable over ten years.

The selling brother was concerned his brother would immediately resell the diner for more than $4,000,000. Thus, it was agreed he would get half of any proceeds over $4,000,000 if the diner was sold within two years. He also got a right of first refusal on any sale of the business while any portion of the mortgage remained unpaid.

Three years after the sale, the buying brother entered into a sales contract for the diner, the land, and its liquor license for $6,500,000. The agreement revealed the first brother’s right of first refusal. When the first brother heard of the agreement, he assigned his right of first refusal to a second buyer for $100,000 and simultaneously exercised his right of first refusal. The brother who owned the diner countered by terminating the underlying agreement of sale, alleging that the diner-owning brother no longer was interested in selling the diner.

The non-owner brother filed suit to enforce his right of first refusal. His assignee intervened in the action and requested that the court consider him to be the purchaser of the diner. After a trial, the lower court granted specific performance for the sale to the assignee. The contract implied the need for prior approval from the New Jersey Alcohol Beverage Control Act (ABC Act), and the Court ordered the diner owner to cooperate in its transfer.

On appeal, the Appellate Division reversed, finding there was no explicit provision in the agreement that stated the transfer of the liquor license was conditioned on ABC approval, and so specific performance could not be granted for a contract of sale of a liquor license. Certification of the issue was granted by the New Jersey Supreme Court.

The Supreme Court reinstated the lower court’s ruling, holding that the requirement for governmental approval is an implied condition of all agreements for the transfer of alcoholic beverage licenses. The Court held that the fact that the government may possess the ultimate right to determine whether a contractual term is to be enforced does not relieve the contracting parties of the implied covenant of good faith and dealing. It concluded that even after cooperating in good faith, the parties might be unable to obtain the governmental approvals needed to secure the transfer of the liquor license. Because of that possibility, the lower court retained the authority to invoke the contractual doctrine of novation or other similar equitable power to adjust any of the terms or conditions of the contract.

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