Brunswick Hills Racquet Club, Inc. v. Route 18 Shopping Center Associates

Supreme Court of New Jersey · 2005 · Contracts

ContractsImplied covenant of good faith and fair dealingLease optionsSpecific performancegood faith and fair dealingoption contractstrict compliancecommercial lease

Facts

Plaintiff leased property from defendant and held an option to convert its lease into a ninety-nine-year lease if, by September 30, 2001, it gave written notice and paid $150,000. Nineteen months before that deadline, plaintiff's attorney sent written notice stating plaintiff was exercising the option, but plaintiff did not tender the payment because it mistakenly believed payment was due at closing. For the next nineteen months, plaintiff and its attorneys repeatedly wrote and called defendant and defendant's attorney seeking to prepare the lease and close the transaction, and plaintiff also stated in an estoppel certificate that it had exercised the option. Defendant and its agents responded with silence, evasions, and delay, never mentioning the missing payment until after the deadline passed, when defendant declared the option null and void.

Issue

Whether plaintiff's failure to tender the option payment by the contractual deadline defeated the option notwithstanding defendant's conduct, and specifically whether defendant breached the implied covenant of good faith and fair dealing by remaining silent and evasive while plaintiff repeatedly sought to consummate the option.

Rule

Option provisions generally must be exercised in strict accordance with their terms and time limits. Nevertheless, every contract, including one with an option provision, carries an implied covenant of good faith and fair dealing, which bars a party from engaging in subterfuges, evasions, or other conduct motivated by bad faith or improper purpose that destroys the other party's justified expectations or denies the benefit of the bargain, even if no express contract term is violated.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Phoenix, Mesa Fitness Group leased commercial property from Desert Lantern Plaza, LLC. The lease gave Mesa an option to convert to a 75-year ground lease if, by June 30, it sent written notice and paid $90,000; Mesa sent notice 14 months early but forgot the payment, then repeatedly asked Desert Lantern's manager and lawyer to prepare closing documents, and both responded with vague promises to "circle back" while never mentioning the missing payment until after June 30, when the landlord declared the option forfeited.

If Mesa sues to enforce the option, which is the best result?

Explanation. Option provisions generally require strict compliance, so Mesa did not properly exercise the option. But every contract also includes an implied covenant of good faith and fair dealing. A party may breach that covenant through a demonstrable course of subterfuges, evasions, and delays motivated by improper purpose that destroys the other side's justified expectations and denies the benefit of the bargain, even without violating an express term and even without an affirmative misrepresentation. The landlord's deliberate stalling while knowing Mesa believed the option was being consummated supports relief.