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Sattely v. Cregg

A-1094-98T3 (N.J. Super. App. Div. 1999) (Unpublished)

CONTRACTS; INTENT—A court should avoid interpreting a contract by giving the literal meaning of particular terms supremacy over the reason and spirit of the whole of the contract.

An owner of a franchised restaurant sold the franchise, together with an assignment of the premises’ sublease and equipment lease (both with the franchisor) to a new owner. A substantial portion of the sales price was to be paid in monthly installments over a ten year period. There was concern, however, that the property lease would end well before the ten years would run and a renewal might not be forthcoming. In those circumstances, the franchise agreement would end by its terms. To deal with this problem, the seller added a provision to the contract such that if the franchise agreement, sublease, and equipment lease were not renewed, then the obligation to make the note payments would cease as of the last day of business of the franchise. That forgiveness clause was conditioned on the buyer not being otherwise in default under the promissory note. As the real property lease was reaching its end, the landlord advised the buyer (and, in turn, the franchisor) that it would not renew the lease. Nonetheless, the landlord agreed to allow the tenancy to continue on a month-to-month basis. With this information in hand, the franchisor amended the franchise agreement so that its term would continue on a month-to-month basis. A time came, however, when the landlord advised the buyer that the tenancy would be terminated although it later agreed to extend the lease a few more months. Based upon this last piece of information, the buyer started to look for a new restaurant location and found a suitable site about a half-mile away. The franchisor was willing to allow the buyer-franchisee to continue operating at the new location, but insisted on a new franchise agreement. The new restaurant was larger, newer, more attractive, and produced substantially increased revenue. Before moving to the new location, the buyer advertised the new restaurant by placing posters in the windows of the old one. It retained the telephone number of the old restaurant, brought most of the employees of the old restaurant to the new one, and many of the regular customers of the old restaurant followed to the new location.

These facts created a situation where the buyer sought to enforce the forgiveness clause. It advised its seller that the move was imminent and that since the move would trigger the forgiveness clause, it would pay the note on a weekly, prorated basis. The seller then declared the debt in default and exercised the acceleration remedy contained in the note. In its motion for summary judgment, the seller focused on the acceleration provision, claiming that the buyer had defaulted in its payments of the note and therefore could not take advantage of the forgiveness provision. The lower court held that the franchise agreement had been terminated at the end of the original lease term and that all continued activities were on a month to month basis. Under that theory, when the franchise ceased, the forgiveness provision took effect. To the extent that there was any ambiguity in the document, the lower court construed it against the seller, the draftsperson of the agreement. The Appellate Division thought that it was “plain that the premise of the court’s reasoning was in error.” It held that the termination date of the original agreement was extended by the modification agreement, which provided specifically that the franchise’s operating documents “should be extended on a month-to-month basis.” Consequently, those operating documents were in effect and fully operative until the termination of the month-to-month tenancy, and that did not occur until after the default in payments. Further, under the Court’s analysis, the buyer’s obligation to make its note payments did not cease, even in the case of the non-renewal of the operating documents, until “[t]he last day of business of the franchise.” Consequently, the agreement was construed as meaning that any failure by the buyer to meet its payment obligation, as long as that payment obligation endured, would be a default. Most importantly, the Court did not believe that either party was entitled to summary judgment. It recognized that a court must avoid an interpretation of a contract that “gives the literal sense of particular terms, isolated from the contract, ascendancy over the reason and spirit of the whole of the contract, expressed ... in the agreement, assessed in relation to the circumstances and the situation of the parties and the objects they were striving to attain.” Consequently, it found that the meaning of the contract as a whole and the manner in which the forgiveness clause evidenced the parties’ intent had not been adequately addressed. The core question was whether the buyer’s new franchise agreement could be regarded as tantamount to a renewal of the original franchise agreement for purposes of the forgiveness clause. As a result, the matter was remanded for further proceedings.


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