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Window Shapes, Inc. v. Toma Realty, LLC

A-1417-08T3 (N.J. Super. App. Div. 2009) (Unpublished)

LEASES; OPTIONS; “FAITHFUL PERFORMANCE” — When a lease requires that the tenant “faithfully perform” its lease obligations as a pre-requisite to its ability to exercise an option under the lease, a court will not interpret that to mean that the tenant must technically comply with all of its obligations where the inability to exercise the option would cause disproportionate forfeiture well beyond any damage the landlord may have experienced by its tenant’s technical default.

A commercial tenant entered into a lease. Prior to the expiration date, it sent notice to the landlord exercising a purchase option contained in the lease. The tenant’s “faithful performance” of its leasehold obligations was a requirement to the effective exercise of the option. After receiving the notice, the landlord reviewed its files “to make sure [the tenant had] complied with the lease.” The landlord discovered that the tenant had failed to comply with certain insurance requirements. In particular, in the lease’s last year, the tenant had furnished insurance certificates, not the policies themselves, and had failed to name its landlord as an additional insured. Despite the fact that the landlord had never notified its tenant that it was in violation and despite the fact that it did not sustain any harm, the landlord refused to convey the property based on that noncompliance. The landlord admitted that the property had a greater value than the price it would receive if the tenant exercised its option and that it wanted to nullify the option. The tenant sued to specifically enforce its rights. The landlord responded by filing an action to evict for failing to pay rent for the two months following the expiration date of the lease.

The Chancery Division confirmed the validity of the purchase option and ordered the landlord to transfer the property for the agreed-upon option price within sixty days. It also ordered that rents paid for the period after the expiration date were to be credited against the purchase price. While it held that the tenant did not comply with all of the insurance requirements in the lease, it found that the landlord waived its right to later claim a default based on such noncompliance because it accepted rent with knowledge of past breaches. It further opined that the landlord did not object to the tenant’s failure to comply with the lease and accepted certificates of insurance in the past without concern. In addition, the Court found that the landlord confirmed the existence of the option by inquiring whether the tenant intended to exercise such option before the tenant sent its notice of exercise. It ruled that there is an obligation on the part of a landlord who accepts the benefit of a lease not to lull its tenant into a belief that its tenant is in compliance with the lease.

The Appellate Division affirmed, holding it was undisputed that the tenant exercised its option in strict accordance with the contract terms. As to the issue of whether the tenant faithfully performed its leasehold obligations, it noted that neither party cited any New Jersey authority that interprets the phrase “faithful performance” in this context. It also declared, in other contexts, that it has recognized that a tenant’s failure to technically comply with all obligations under the terms of an option does not automatically lead to the forfeiture of its rights. It ruled that, in the instant case, there were material factual disputes as to whether the tenant had a good excuse for its failure to strictly perform under the lease. Nonetheless, the Court concluded that the landlord’s conduct demonstrated that forfeiture of the option would be inequitable. According to the Court, refusing to permit the exercise of the option would cause disproportionate forfeiture because the landlord’s interests were not damaged by its tenant’s non-compliant actions. It agreed with the lower court that the landlord’s acceptance of rent and acting as if the option was still intact was, as a matter of law, conduct that constituted a waiver of any violation of the lease provisions. Further, it mentioned that equity does not ordinarily aid one whose indifference was the sole cause of the injury of which he or she now complains. Here, the Court noted that had the landlord ever asked for the actual insurance policy during the last year of the lease, it would have seen that it was not included as an added insured on the property damage coverage. The Court also ruled that had the landlord not acted indifferently and had served notice that the insurance requirements were not being complied with, the tenant would have had the opportunity to cure the default and fully comply with its obligations. The Court rejected the landlord’s contention that the landlord’s motivation was irrelevant because such an assertion is inconsistent with the equitable concerns raised by its own actions. Finally, the Court believed the lower court’s exercise of discretion could only be disturbed if it was so wholly unsupportable as to result in a denial of justice. The Court held that, in this case, the lower court properly exercised its discretion.

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