Breach of Lease Doesn’t Negate Earlier Exercise of Option to Purchase Property – Illinois Court

A dispute over the purchase price of a veterinary practice boiled over into multi-year litigation after the plaintiff in Ruffolo v. Jordan, 2015 IL App (1st) 140969 leased the defendant’s practice under a multi-year lease with an option to buy.

The plaintiff exercised the purchase option in August 2005 and paid rent for 18 months until finally stopping in March 2007 when it became clear the parties wouldn’t resolve the purchase price issue.

The plaintiff sued for specific performance and the trial court granted summary judgment for her, ordering defendant to sell the property for $525,000 – a figure midway between the parties’ respective appraisals. Defendant appealed.

Affirming summary judgment, the First District examined the interplay between parties rights and duties under a lease that contains an option to purchase the property.

The lease gave plaintiff an option to buy the property at a price to be determined by the parties’ handpicked appraiser. Eventually, the parties’ appraisers selected a third party to appraise the property.  When the defendant refused to sell at the third-party appraiser’s $525,000 figure, plaintiff sued to enforce the purchase option.

In Illinois, the goal of contract interpretation is the intent of the parties and a contract must be interpreted as a whole and ascribed its terms’ plain and ordinary meaning. ¶ 10

A party is entitled to specific performance of a contract for real estate where it establishes that it was ready, willing and able to perform under a contract but was prevented from doing so by the other party.

When a lease contains an option to purchase, it becomes a present contract for the sale of the property. Once the option holder exercise the option, the relationship of landlord-tenant morphs into one of vendor-vendee (seller-buyer).  A contract for the sale of land cannot be enforced until all essential terms are established, including sale price. (¶ 14).

Here, the parties’ landlord-tenant relationship didn’t end until the sale price was mutually agreed upon. As a result, the parties’ had a concurrent landlord-tenant relationship vis a vis the lease and a vendor-vendee one concerning the purchase option.

In finding for the plaintiff, the court rejected seller defendant’s argument that plaintiff breached the lease by not paying rent for several months. Defendant claimed that the plaintiffs’ failure to pay rent from March – October 2007 nullified the purchase option exercised by plaintiffs in August 2005.

The court held that since the plaintiff was in compliance with the lease when she exercised the option (August 2005), she could enforce the purchase contract.  The court explained that once the plaintiffs’ right to purchase the property vested, her corresponding right to buy the property no longer depended on her adhering to the lease terms. The lease became severable (separate) from the purchase option once plaintiff exercised the option. (¶¶ 19-20).

The one consolation for the defendant was that the court found it was entitled to a credit of seven months of unpaid rent towards the purchase price.  This figure will be calculated on remand.

Take-aways:

1/ A lease with an option to buy creates two distinct agreements once the option is exercised;

2/ The timely exercise of an option can’t be negated by a later lease breach;

3/ A definite price term in a real estate contract is a necessary precondition for a successful specific performance suit.

 

Commercial Landlord’s Suit for Rent Damages Accruing After Possession Order Survives Tenant’s Res Judicata Defense

18th Street Property, LLC v. A-1 Citywide Towing & Recovery, Inc., 2015 IL App (1st) 142444-U examines the res judicata and collateral estoppel doctrines in a commercial lease dispute.

The plaintiff landlord obtained a possession order and judgment in late 2012 on a towing shop lease that expired March 31, 2013. 

About six months after the possession order, the lessor sued to recover rental damages through the lease’s March 2013 end date.  The defendant moved to dismiss on the basis of res judicata and collateral estoppel arguing that the landlord’s damage claim could have and should have been brought in the earlier eviction suit.  The trial court agreed, dismissed the suit and the lessor plaintiff appealed.

Held: Reversed.

Q: Why?

A:  Res judicata (claim preclusion) and collateral estoppel (issue preclusion) seek to foster finality and closure by requiring all claims to be brought in the same proceeding instead of filing scattered claims at different times.

Res judicata applies where there is a final judgment on the merits, the same parties are involved in the first and second case, and the same causes of action are involved in the cases.  

Res judicata bars the (later) litigation of claims that could have brought in an earlier case while collateral estoppel prevents a party from relitigating an issue of law or fact that was actually decided in an earlier case.  (¶¶ 20-21, 30)

In Illinois, a commercial landlord’s claim for past-due rent and for future rent on an abandoned lease are different claims under the res judicata test.

This is because the payment of future rent is not a present tenant obligation and a tenant’s breach of lease usually will not accelerate rent (i.e. require the tenant to immediately pay the remaining payments under the lease) unless the lease has a clear acceleration clause.  Each month of unpaid rent gives rise to fresh claims for purposes of res judicata.

The landlord’s remedy where a tenant breaches a lease is to (a) sue for rents as they become due, (b) sue for several accrued monthly installments in one suit, or (c) sue for the entire amount at the end of the lease.

The commercial lease here gave the landlord a wide range of remedies for the tenant’s breach including acceleration of rental payments. 

The tenant defendant argued that since the lessor failed to try to recover future rent payments in the earlier eviction case, it was barred from doing so in the second lawsuit.  The landlord claimed the opposite: that its claims for damages accruing after the possession order were separate and not barred by res judicata or collateral estoppel.

The court held that res judicata did not bar the lessor’s post-possession order damage suit.  It noted that while the lease contained an optional acceleration clause, it was one of many remedies the landlord had if the tenant breached.  The lease did not require the landlord to accelerate rents upon the tenant’s breach. 

The court also noted that the lease required the landlord to notify the tenant in writing if it (the landlord) was going to terminate the lease.  Since terminating the lease was a prerequisite to acceleration, the Court needed more evidence as to whether the lessor terminated the lease.  Without any termination proof, the trial court should not have dismissed the landlord’s suit.

Afterwords:

1/ If a lease does not contain an acceleration clause, a landlord can likely file a damages action after an earlier eviction case without risking a res judicata or collateral estoppel defense.

2/ If a lease contains mandatory acceleration language, the landlord likely must sue for all future damages coming due under the lease or else risk having its damages cut off on the possession order date.

 

 

Illinois Court Gives Agency Law Tutorial In Commercial Lease Fight

Three agency law issues that I regularly encounter in commercial litigation practice are (1) authority, (2) ratification and (3) a contract that doesn’t identify a valid entity.

The authority question posed is whether an individual – typically a company employee or independent contractor – can bind the company by the individual’s conduct.

Ratification applies where a corporate principal accepts the benefits of an agent’s unauthorized conduct.

The third, “unclear party” issue arises where a contract is signed by an individual on behalf of an unsueable entity such as a street address (i.e. “Tenant: 15 S. Wacker Drive”) or a generic business name with no “Inc.”, “Ltd.” or “LLC” designation.

Cove Management v. AFLAC, Inc. 2013 IL.App (1st) 120884, features all of these in a commercial lease dispute involving a large insurance company.

The lease designated the company as “tenant” but was signed by an independent  (non employee) sales agent.  After a lease default, the plaintiff landlord sued the company to recover rent damages.

The trial court dismissed the suit, buying the company’s argument that the agent who signed the lease wasn’t authorized to sign on the company’s behalf.  The landlord appealed.

Held: Affirmed.

Rules/Reasoning:

Even though the agent used business cards, envelopes and stationery submitted that bore the company colors and logo, it wasn’t enough to saddle the company with lease liability.

The Court rejected this argument as it laid out the operative Illinois agency rules:

An agent’s authority to bind a principal can be actual or apparent;

Actual authority can be express or implied;

Express authority is authority explicitly granted to the an agent by the principal, while implied authority is proven circumstantially based on the nature of the agent’s position;

Apparent authority is authority imposed by law – regardless of whether there is actual (express or implied) authority – based on a principal holding out an agent as having authority to bind the principal;

– Apparent authority must be based on words or conduct of the principal; not of the agent;

– If there is no showing of detrimental reliance by a third party on the agent’s authority; there can be no finding of apparent authority;

– A third party dealing with an agent has a duty to inquire into an agent’s supposed authority and can’t blindly rely on an agent’s claim that he has authority to enter contracts on behalf of his corporate principal;

Ratification applies where a principal learns of an unauthorized action (taken by a supposed agent) but retains the benefits of the transaction;

– Ratification requires the principal- with full knowledge of an agent’s unauthorized act – to manifest the intention to accept the benefits of the unauthorized act or to acquiesce in the transaction

¶¶ 9-14.

The Court found that there was no actual authority since the agent’s independent contractor agreement specifically provided that the agent could not sign contracts for the company.

There was also no apparent authority since plaintiff pointed to no conduct by the company that clothed the agent with authority to execute leases in the company’s name.

All of plaintiff’s apparent authority arguments were based on conduct of the agent; not the company.

The Court also found the lessor failed to show the company ratified the agent’s conduct.  All rent payments that were made came from the agent and there was  no evidence the company even knew the lease existed before suit was filed.

The corporate lack of lease knowledge also doomed the lessor’s alternative unjust enrichment/quantum meruit counts.  Since the company didn’t know about the lease, the plaintiff couldn’t show it conferred a benefit on the insurance company based on the sales agent renting the office space.  (¶¶ 34-35). (Quantum meruit requires plaintiff to prove that the defendant benefitted from plaintiff’s services.)

Take-aways: This case demonstrates the paramount importance of precision in lease drafting.  The insurance company defendant probably should have vetted all independent agent leases to ensure that the leases don’t designate the company as tenant.

Procedurally, the case shows how important it is to file counter-affidavits in response to a section 2-619 or summary judgment motion.  Since the landlord didn’t file a counter-affidavit in response to the company’s own affidavit, the Court had to accept the company’s version of events as true.  This spelled defeat for the landlord.