Skip to main content

Pegill, Inc. v. 4 Palms, Inc.

C-354-10 (N.J. Super. Ch. Div. 2011) (Unpublished)

LEASES; OPTIONS — Where a tenant, in order to exercise a purchase option, is required to include a deposit with its notice of exercise, but has a fear that such money might be diverted, it can seek such alternatives as depositing the money with court or seeking restraints against misapplication, but its failure to make the payment will otherwise be fatal to the option exercise.

A property owner sold its restaurant and liquor license and the buyer gave a note to the seller for part of the purchase price and leased the seller’s property so as to continue operating a restaurant at that location. The buyer’s owner personally guaranteed the lease for the first five years. Disputes arose concerning the tenant’s performance under the lease and the seller-landlord sought to evict the tenant and to receive an award for money damages.

One of the alleged defaults was the tenant’s failure to maintain the required insurance and to name the landlord as an additional insured. In this regard, the Court found that although there may have been a brief period when an additional insured was not properly named and also when there was a small deficiency in coverage, both parties, through their respective insurance consultants, had been working together to resolve coverage issues and, during that time, the landlord never raised any objections. For most of the lease term, and at the time of trial, the required insurance appeared “to be in full force and effect.” “In sum, then, the court [found] that [the landlord had] failed to establish any material breach of the lease provisions relative to insurance which would bar either termination of the lease or an award of damages.”

The landlord also alleged that at various times during the lease term the tenant was delinquent in paying its rent. It appears that each of these periods immediately followed the date upon which the lease called for a rent increase. Each time, after correspondence, the tenant paid the deficiency. Then, according to the Court, the tenant made those payments within the notice and cure period allowed by the lease. With respect to related late fees, the tenant paid one set of late fees after the landlord insisted that it would not waive those charges. At the time of trial, there were outstanding late fees but the tenant alleged that it asked for a late fee waiver with respect to those charges and, unlike the first time, the landlord never responded. Therefore, the tenant assumed that the landlord, who never raised the issue again until shortly before filing suit, had, in fact, waived those charges. Here, the Court found that the late fees remained unpaid but held this to constitute a “de minimus violation of the lease terms at best which do not warrant the draconian remedy of termination.” Instead, it ruled that if, after any credits were granted to the tenant, money remained due and owing, it would be addressed by way of a money damage award.

The landlord also alleged that the tenant failed to increase its security deposit each time rent under the lease increased. The lease provided for these increases in the security deposit. On that basis, the landlord also insisted that the tenant owed a late charge of $500 per month for each of the forty-six months involved. The Court found that the landlord never sent any notices demanding that the tenant increase its security deposit or pay the late fees until it sent the lease termination letter just before suit. When the rent increase letters were sent, no mention was made of the need to increase the security deposit. When the landlord first raised the issue in its termination letter, insisting that there was a $7,500 security deposit shortfall, the tenant tendered that amount but it was rejected based on the landlord’s position that the lease had been terminated. In addition, the Court, during the trial, determined that the tenant had substantially overpaid its real estate tax obligations and, in fact, the landlord owed the tenant money, not the other way around.

The landlord also contended that the tenant breached the lease by failing to repair and replace loose roof slates. It sent a notice to the tenant, and the tenant insisted that it responded with a question about the status of any roof warranty, but never received a response. The tenant also testified that it inspected the roof on a regular basis and that all necessary repairs and maintenance were properly undertaken. The Court found that there had never been any claims related to the roof nor any leaks or problems with the roof. Neither party offered expert testimony. The landlord did not refer to the required roof repairs as a basis for default in its lease termination letter nor in its original complaint. Consequently, the Court found that the landlord’s “belated claim regarding roof repairs [was] insufficient to support a termination of the lease or an award of money damages.”

The landlord also made a number of claims related to the promissory note that it received when it sold the restaurant. Basically, the Court “conclude[d] at the end that any alleged breaches, whether viewed singly or in combination, either did not constitute breaches under the terms of the Note/Lease and/or if they did they were properly cured or immaterial.”

Another issue was the tenant’s claim that it had properly exercised its option or right of first refusal to acquire the property. A condition to exercising the option was that the “lease be in full force and effect and that it [had] not been cancelled.” The Court hadn’t found that the lease qualified and was not terminated, deemed “this precondition to have been satisfied.” In order to be valid, the exercise notice had to be sent “prior to the first day of the 60th month following the Commencement Date.” “The [c]ourt, noting [] varying interpretations of the lease language, [found] this lease terminology to be at best ambiguous and, more accurately confusing.” According to the Court, “[t]his ambiguity could have been easily avoided by simply stating the trigger date in the lease.” Based on the evidence at trial and using the date of the note, it found that the notice had been timely given.

The lease also required that an executed contract be attached to the notice. None was attached. The tenant “attribute[d] this to the fact that the form of contract was not annexed as an Exhibit to the Lease and, that despite numerous requests made of [landlord’s] counsel, the formal contract was never provided.” The Court found it undisputed that no contract was affixed to the lease. Consequently, the tenant could not have returned “a signed contract” to the landlord with its notice since, despite repeated requests for a copy from the landlord, it did not have the contract in its possession. According to the Court, this “excuse[d] non-compliance with this lease provision, absent any other deficiency” on the tenant’s part.

Lastly, the tenant failed to tender the required deposit with the notice. The amount of the option deposit was clearly specified in the lease and the tenant was “undoubtedly aware of it.” The tenant testified that it was “ready, willing and able to tender the deposit,” but felt “it would fruitless in view of [the landlord’s] position that the lease had been terminated and hence there is no valid option to purchase in effect.” The tenant was fearful that the landlord would apply the deposit to monies that the landlord wrongfully asserted was due to it. Basically, the tenant was arguing that “equity does not require performance of useless or futile acts.” The Court reviewed a substantial number of related cases and, believing that the tenant had other alternatives such as depositing the money with the court or seeking restraints against misapplication of the option deposit, it held that the tenant’s failure to submit the deposit amount with its option notice was fatal to the tenant’s exercise of the option. The Court was “mindful that this result [might] appear harsh, [but it noted] that while the purchase option [was] terminated[,] the lease term continue[d] for approximately 19 more years followed by an option to renew for an additional 20 years during which time [the tenant would be] free to carry on [its] restaurant business at the premises.” Further, the Court ruled that the tenant, although losing its option right, continued to have a right of first refusal should the landlord effect a sale or transfer the property.

66 Park Street • Montclair, New Jersey 07042
tel: 973-783-3000 • fax: 973-744-5757 •