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Pathmark Stores, Inc. v. West Orange Plaza

A-3982-97T2 (N.J. Super. App. Div. 1999) (Unpublished)

LEASES; OPTIONS—The conditions precedent for exercising a lease renewal option will be strictly construed notwithstanding that deadlines for the timely exercise of renewal options are often overlooked by courts.

A supermarket’s shopping center lease contained a renewal option contingent upon the tenant furnishing a balance sheet and a written opinion from its independent accountant that the consolidated balance sheet at the time of renewal was not less favorable than the tenant’s consolidated balance sheet at the time that the original agreement was made. The supermarket did not submit the balance sheet with its attempted exercise of its renewal option and the landlord responded by telling the tenant that it could not exercise the option to renew without submitting the required financial disclosure and accountant’s opinion. The supermarket offered to provide a letter of credit in lieu of financial statements, but the landlord insisted on strict compliance with the contract terms. The supermarket then sought a ruling from the Chancery Division that its renewal option should be enforced, because to do otherwise would be a breach of the landlord’s covenant of good faith and good dealing and a forfeiture of the supermarket’s interest in the lease. The lower court rejected the supermarket’s contention because, in its view, the agreement expressly made the supermarket’s right to exercise its option conditional on the submission of the accountant’s opinion letter. The lower court found that the contract language was clear and unambiguous, obligating the court to enforce the terms of the contract as written. It further rejected the supermarket’s contention that a letter of credit was a satisfactory substitute, holding that the accountant’s opinion letter was a material term intended to provide more than a guarantee of a rental payment. Further, it held that enforcement of the express terms of the agreement would not cause a forfeiture, reciting the established rule that the express terms of an option must be followed before exercise of the option is considered valid. In doing so, the lower court distinguished cases excusing strict compliance with option terms, finding that the limited exceptions to the established rule involved the exercise of the option slightly after the time the option had expired. In support of its position, the landlord explained that the “financial condition of an anchor tenant affects the quality of operations and magnitude of customer flow to the shopping center.” Also, the landlord testified that “the financial strength of an anchor tenant bears upon the landlord’s ability to obtain financing.” The landlord was also concerned with the possibility that the lease could be rejected by a trustee in bankruptcy or a new tenant could be inserted by the bankruptcy court. In addition, the landlord feared that the supermarket’s financial condition would affect the landlord’s personal injury exposure and that the supermarket’s financial resources could affect the supermarket’s ability to maintain the leased premises. For all the reasons stated by the lower court, the Appellate Division affirmed.


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