Tag: specific performance

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 Lessor’s Acceptance of Rent After Lease Termination Notice Doesn’t Waive Termination

 Z&S Corp. v. Fill & Fly, Inc., 2014 IL App (3d) 130253-U examines whether a commercial lessor, who serves a 30-day notice to terminate an oral month-to-month lease, waives the termination  by accepting rents after the notice period expires.  The case also addresses what factual elements a plaintiff must prove to prevail on a specific performance claim under Illinois law.

The defendant operated gas stations on two properties owned by the plaintiff since 2008.  And while they had discussed the defendant’s purchase of the sites at various times – most recently in 2009 – they were operating under a verbal month-to-month tenancy pursuant to which the tenant paid monthly rents and real estate taxes to the plaintiff landlord.  When tenant defaulted under the oral lease, plaintiff served a 30-day notice (on February 28, 2012) to terminate the tenancy (effective March 31, 2012) and eventually filed a forcible suit seeking possession of both properties.  After the 30-day termination period expired, plaintiff accepted some rent payments from the tenant defendant.

The tenant filed a 2-619 motion to dismiss the forcible action on the basis that the landlord waived the 30-day termination notice by accepting rents after March 31, 2012 – the 30 day notice period’s expiration.  735 ILCS 5/9-207 (month-to-month tenancy terminable on 30 days’ notice); See  http://paulporvaznik.com/how-to-terminate-periodic-tenancies/23,

The trial court rejected this argument and denied the tenant’s motion on the basis that the parties were actively engaged in settlement talks and so the landlord’s lease termination notice wasn’t waived when the landlord accepted post-termination rents.  After a bench trial, the trial court found in favor of the plaintiff and awarded it possession of the properties.  The  trial court also entered judgment for plaintiff on the tenant’s specific performance counterclaim – which sought to enforce an earlier purchase contract for the sites – on the basis that the purchase contract lapsed.  The tenant appealed both the denial of its 2-619 motion and the trial result.  Z & S, ¶¶ 21-22.

The Third District affirmed the trial court.  On the termination notice issue, the Court held that a landlord’s acceptance of rent after a termination date usually results in a waiver of the notice.  Z & S, ¶ 30; Bismark Hotel Co. v. Sutherland, 92 Ill.App.3d 167, 173 (1980).  But Illinois case law provides that if the parties are involved in active settlement negotiations at the time the landlord accepts the rent payment, the landlord’s acceptance of the rent won’t waive the lease termination.  Z & S, ¶ 30; Yarc v. American Hospital Supply Corp., 17 Ill.App.3d 667, 671 (1974).  Here, since the record evidence demonstrated that the parties were engaged in settlement talks, the landlord’s acceptance of rent after the 30-day notice period ended didn’t nullify the notice.

The Court also upheld the trial verdict in landlord’s favor on the tenant’s specific performance claim. The tenant was trying to enforce a 2009 purchase contract for the two gas station properties.  A key component of a specific performance claim is whether the claimant (1) has complied with all terms of the contract or (2) was ready, willing and able to complete the contract but was prevented from doing so by the opposing party. Z & S, ¶ 37; Maywood Proviso State Bank v. York State Bank and Trust Co., 252 Ill.App.3d 164, 171 (1993).

The defendant’s failure to establish either element doomed its specific performance claim.  The trial evidence demonstrated that the defendant’s failure to pay real estate taxes on the properties – as required under the lease and aborted purchase contract – was the reason the properties’ mortgage lender wouldn’t permit defendant to assume the existing mortgages on the sites and consummate the purchase.  Also, the Court noted that the defendant’s principal’s trial testimony established that he was unable to complete financing for the purchase of the properties because he didn’t have a green card.  Without a green card, the bank wouldn’t allow the defendant to complete the purchase transaction.  Taken together, the evidence clearly demonstrated that the tenant couldn’t prove either that he complied with the purchase contract or was prevented from doing so by the plaintiff. Z & S, ¶¶ 37-39.

Z & S is useful for its discussion of how to terminate a month-to-month commercial lease and when a landlord can still accept rent payments after a termination notice lapses.  The case also shows that to plead and prove specific performance, a litigant must show that he either complied with the contract terms or stood ready to but was impeded by some act of the other contracting party.