Tag: ambiguity

Rights of First Refusal: Bankruptcy “Infotapes” Titan Wins Michigan Avenue Penthouse Dispute – IL 1st Dist.

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In today’s installment of High Class Problems, I feature Peter Francis Geraci, the Chicago bankruptcy lawyer whose pervasive television presence is doubtlessly familiar to weekday afternoon viewers.  Geraci and his wife recently won their real estate dispute with a company controlled by a foreign investor over rights to a 40th floor penthouse (“Penthouse”) in Chicago’s tony Michigan Avenue (“Magnificent Mile”) shopping district.

Reversing the trial court – who sided with the investor plaintiff- the First District appeals court in First 38, LLC v. NM Project Company, LLC, 2015 IL App (1st) 142680-U, expands on some recurring contract interpretation principles as applied to a high-dollar real estate dispute.

The plaintiff, a company associated with Mexican mining impresario and billionaire German Larrea, held a right of first refusal (“ROFR”) that required the Penthouse seller defendant to notify the plaintiff of any bona fide offer to buy the Penthouse that was accepted by the owner.  The owner was required to provide a copy of the signed offer (with certain identifying information blacked out) to the plaintiff who then had one (1) business day to match the offer.

When the owner sent the offer with the Geracis’ information redacted and failed to provide a copy of the earnest money check (a cool $860K, approx.), the plaintiff sued to block the sale of the Penthouse to the Geracis claiming the owner failed to adhere to the terms of the ROFR.  The Geracis eventually counter-sued for injunctive relief and specific performance and asked the court to require the owner to sell the Penthouse to them.

After a bench trial, the court ruled in plaintiff’s favor and the Geracis appealed.

Reversing, the First District discussed the operative contract law principles that framed the parties’ dispute.

– A right of first refusal is a restraint on alienation and is strictly construed against the holder;

– An Illinois court’s primary goal in interpreting a contract is to give effect to the parties’ intent by imputing the plain and ordinary meaning to the contract terms;

– A contract will not be deemed ambiguous just because the parties disagree on its meaning; instead, ambiguity requires words that are reasonably susceptible to more than one meaning;

– When a contract contains an ambiguity, a court may consider evidence of the parties intent (“your honor, this is what we meant….”);

– An “offer” in the context of contract law is a “manifestation of willingness to enter into a bargain made in such a way that another person’s assent to that bargain is invited and will conclude it’;

– An offer must be definite as to its material terms such that the parties are reasonably certain as to what the offer entails;

– A court cannot alter, change or modify terms of a contract or add new ones that the parties didn’t agree to and there is a presumption against provisions that could have easily been included in a contract;

– A bona fide offer is one where the purchaser can command the funds necessary to accept an offer.
(¶¶ 47-48, 51-52, 63)

Here, the court found the ROFR’s plain text unambiguous.  It provided that upon defendant notifying the plaintiff of an accepted and bona fide offer, the plaintiff’s ROFR obligations were triggered. (Plaintiff had one day to match the accepted offer.)  By its clear terms, the ROFR did not require the owner defendant to divulge the third-party buyer’s identity nor did it require proof of the third-party’s earnest money deposit.

According to the court, had the parties wished to require more offer specifics, they could have easily done so.  (¶ 54).  As a result, the First District reversed the trial court and held that the owner defendant complied with its ROFR notice requirements.  Since plaintiff failed to match the Geracis’ offer for the Penthouse within one business day of notice, it relinquished its rights to match the offer.

Take-aways:

For such expensive and unique subject matter, the main legal rules relied on by the court are simple.  The court applies basic contract formation and interpretation rules to decipher the ROFR and determine whether the parties adhered to their respective obligations under it.

From a drafting standpoint, the case cautions sophisticated commercial entities to take pains to spell out key contract terms as specifically as possible to avoid future disputes over what the contract says and means.

Bagel Shop Successor Tenant Hit For Rent Damages and Attorneys’ Fees in Commercial Lease Case – IL First Dist.

6945015869_a7cf0dd963_bThe First District affirmed a money judgment of about $150,000 (including $70,000 in attorneys’ fees) in a commercial lease dispute  in Alecta v. BAB Operations, Inc., 2015 IL App (1st) 132916-U.  An unpublished opinion, it’s useful for its vivid illustration of the importance of lease drafting clarity and an assigning tenant documenting its intent to not be responsible for post-assignment rent payments.

For over 15 years, the plaintiff landlord leased the property to various bagel shops.  The master lease was assigned six times over that time span. When the sixth assignee defaulted, the plaintiff sued multiple defendants including the third lease assignee – the defendant who ultimately got hit with the money judgment. (The other defendants either settled out or were defaulted.)

On appeal, the defendant (the third lease assignee) argued it was immunized from lease liability after it assigned the lease to a successor (the fourth assignee) several years earlier and that the trial court shouldn’t have awarded the landlord’s attorneys’ fees.

Affirming the money judgment, the First District provides a useful primer on contract interpretation rules applied in the commercial lease context.

– A court interprets a contract by looking to its plain language to discern the intent of the contracting parties;

– The court considers the contract in its totality and tries to harmonize each part of the contract;

– If the contract is unambiguous, the court interprets it without considering any outside evidence as to what the contract is supposed to mean;

– if the contract is ambiguous – meaning it’s susceptible to more than one meaning, the court can consider external evidence to try to resolve the ambiguity;

– a contract can be modified but the changes must materially alter the parties’ rights and duties before the change is regarded as a new contract or agreement;

– A contract can be assigned.  An assignment operates to transfer to the assignee all of the assignor’s right, title or interest in the thing assigned, and the assignee then stands in the shoes of the assignor;

– A lease is a type of contract that is governed by general contract law and can be assigned;

– It (a lease) creates privity of contract (which obligates a tenant to pay rent) and privity of estate (right to possession, basically) between the lessor and the lessee;

– Where a lease is assigned, but not assumed, there is privity of estate between the landlord and the assignee but not privity of contract.  This means the assignee can avoid further lease liability by vacating the premises or assigning to someone else;

– By contrast, where a lease is assumed (“assumption of the lease”), the party assuming the lease remains responsible to the landlord through the life of the lease even after the assuming party decamps the premises or assigns the lease;

¶¶ 40-61.

Here, the court found the assignment from the defendant to the fourth assignee ambiguous.  The assignment’s text was conflicting because at one point it said the defendant was released from further lease obligations while another section provided the assignor/defendant’s liability to the landlord remained intact.  Because the assignment language clashed on the defendant’s future (after the assignment) lease liability, the court heard trial testimony as to what the parties intended when they drafted the assignment and ultimately found for the landlord.

Afterwords:

This case serves as a good reminder of how a court interprets a written contract and handles textual ambiguity.  Any contractual ambiguity will be determined against the drafter of the contract.  Since the defendant is the one who drafted the assignment here, the court sided against it and found it liable for the lease breaches of the later assignees.

The case is also useful for its discussion of lease assignments versus lease assumptions and the different liability rules that flow from that dichotomy.  If the parties intent is to relieve an assignor from further liability, they should take pains to document that intent.

 

 

 

 

Consultant’s Quantum Meruit and Time-And-Materials Contract Claims Fail Against Contractor (IL 2d Dist)

Mostardi Platt Environmental, Inc. v. Power Holdings, LLC, 2014 IL App (2d) 130737-U shows the importance of clarity in contract drafting – particularly compensation terms.  The case also illustrates the crucial distinction between a time-and-expense (or time and materials) contract and a lump-sum payment contract.

Plaintiff was hired to perform environmental assessment services and to secure government permits for the defendant contractor who was building a gas facility in southern Illinois.  The parties’ original agreement was a time-and-expense contract and was later amended to a lump sum contract totaling about $100,000.

A dispute arose when the plaintiff realized that it underestimated the project’s scope and time commitment and sought additional monies from the defendant.  The defendant refused after the plaintiff failed to specify the needed extra work.  The plaintiff sued for damages and the defendant counterclaimed.  The trial court ruled against the plaintiff on all counts and for defendant on its counterclaim.

Held: Affirmed

Reasons:

The Court first rejected the consultant’s quantum meruit claim.  Quantum meruit is an equitable theory of recovery used by a party to obtain restitution for the unjust enrichment of the other party. 

Illinois law allows alternative pleading and quantum meruit is often pled as a fallback theory to a breach of contract claim.  It allows a plaintiff to recover the reasonable value of his work where there is no contract a contractual defect.  A quantum meruit claim can’t co-exist with an express contract. 

Here, the court found that the parties had an express contract – the environmental consulting agreement.  Because of this, the trial court properly denied plaintiff’s quantum meruit claim.  (¶¶ 75-78).

The Court also agreed that the plaintiff breached the consulting contract.  Under basic contract law, where parties reduce an agreement to writing, that writing is presumed to reflect the parties’ intent. 

The contract is interpreted as a whole and the court applies the plain and ordinary meaning of unambiguous contract terms.  A party who seeks to enforce a contract must establish “substantial performance” – that he substantially complied with the material terms of the agreement.  (¶¶ 81-82, 95).

The Court found that the plaintiff breached the contract in multiple respects.  Reading the original and amended consulting contracts together, the court found that the plaintiff was required but failed to provide itemized invoices for extra or “out-of-scope” work and also failed to complete its permitting tasks.  By walking off the job before it secured the required environmental permit, the plaintiff breached a material contract term. (¶¶  89-91).

The Court also rejected plaintiff’s impossibility defense, based on the claim that a substitute contractor (hired after the plaintiff walked off the job) changed the scope of the project and made it impossible for the plaintiff to perform.

Impossibility refers to situations where a contract’s purpose or subject matter has been destroyed; making performance impossible.  But the defense is applied sparingly since the purpose of contract law is to allow parties to freely allocate risks among themselves and a party’s performance should only be excused in extreme circumstances.  (¶ 97).

Finding no impossibility, the Court noted that the plaintiff only showed that the stated contract price was underbid and didn’t adequately compensate it for the needed extra work.  The Court held that impossibility of performance requires a litigant to show more than mere difficulty in performing or that he struck a bad bargain.  Performance must truly be rendered impossible due to factors beyond the party’s control.  ¶¶ 97-98.

 Take-aways: In the construction realm, some typical contractual compensation schemes include time-and-materials or time and expense, cost-plus arrangements or lump sum payment agreements.  Labeling a contract with the proper payment designation is critical; especially when a project’s scope and duration is uncertain.  This case makes it clear that in situations involving commercially sophisticated parties, a court will hold them to the clear language of their contract – even if has harsh results for one of the parties after the fact.