Scott E. Mollen

Commercial Landlord-Tenant—Lease Provision Permitting Early Termination Was Not Negated by Amendment That Permitted Partial Contraction—Landlord Sought a Declaratory Judgment As To Whether an "Early Termination Clause" Is "In Effect" or "Alternatively, To Reform the Lease"—Landlord Alleged Tenant "Anticipatorily and Actually Breached Its Lease"—Court Granted Tenant's Motion To Dismiss In Part and Denied Motion In Part—Rules of Contract Construction—Apparently Unambiguous Meaning to Lay People May Have Specialized Meaning in a Particular Industry—Motion To Dismiss Landlord's Reformation Claim Denied

In 2010, the landlord's predecessor entered into a lease with the commercial tenant for property located at Location 1. That lease embodied an early termination provision which stated: "[p]rovided that tenant is not in default…beyond all applicable cure periods, tenant shall have the right and option to accelerate the expiration date of this lease to a date not earlier than May 14, 2015 and provided that tenant provides twelve (12) months prior written notice of the early termination date and pays to landlord within thirty (30) days thereafter the unamortized cost of the broker commission and the lease hold improvements and enhancements." The lease was to expire in November 2017.

In May 2016, the tenant prepared a Request For Proposal (RFP) "regarding an amendment to the initial lease." The RFP contained a section entitled "contraction options" which stated that the "tenant requires the right to terminate up to 25 percent of its aggregate leased premises."

In April 2017, the parties entered into a lease amendment that extended the lease term until December 2027 (amendment). The amendment contained a "contraction clause" which permitted the tenant to "contract or terminate" up to, but no more than 25% of its "aggregate leased premises," at the end of the fourth and seventh year of the extended term, provided that the tenant gives nine months prior written notice and pays a contraction fee equal to the "respective unamortized tenant Improvements and brokerage commission costs (termination costs) at a six percent (6%) interest rate."

The Location 1 lease contained a substantially identical contraction clause. The Location 1 lease contained "an early termination date" that had expired at the time of the amendment. However, the amendment provided that "[i]n all other respects the (initial) lease is hereby ratified and confirmed." The terms of the amendment had been negotiated by the parties directly and/or "through a real estate broker engaged by (tenant)."

In November 2018, the tenant notified the landlord in writing, of the tenant's decision to "accelerate expiration of lease to November 30, 2019." The landlord rejected the tenant's exercise of its purported right to terminate the lease. The tenant reiterated its intent to terminate the lease and enclosed a check payable to landlord in the amount of $167,809, which allegedly represented the tenant's "best estimate of the (termination costs) based on the information available to tenant." The landlord returned the check and rejected the attempt to terminate the lease. The landlord also noted that the tenant's payment failed to compensate for the (termination costs), which were presently estimated to be approximately $700,000.

In July 2019, the tenant failed to pay its rent when due or within the fifteen-day cure period. In August the tenant sent a payment to the landlord of $67,914.51. The landlord responded that it considered such payment to be payment of rent after an event of default.

The landlord sought a judgment declaring that the early termination clause had been "rescinded, terminated and replaced by the contraction clause." The landlord also asserted that the tenant breached the lease by terminating the lease and that even if the early termination clause is still in effect, the tenant may not exercise its right to terminate since it had subsequently defaulted. Additionally, the landlord claimed that if a declaratory judgment is not warranted, it is entitled to reformation of the contract, to reflect the parties' intent that the early termination clause be "rescinded, terminated, and replaced by the contraction clause."

The landlord asserted that the contraction clause and the early termination clause could not be read consistently since the contraction clause is inconsistent with the "right to fully terminate the lease." The tenant countered that there was "nothing inconsistent with having the right to get back some limited amounts of space and having a right to fully terminate" and that the "plain language of the lease is not ambiguous."

The landlord argued that the tenant cannot terminate its lease, which represents 29% of the combined lease space, without violating the contraction clause limit to not contract more than 25% of the combined lease space. The tenant argued that it had the right to both terminate the lease early and contract up to 25% of the leased space. The tenant emphasized that "termination and contraction are 'separate and distinct valuable rights' that [tenant] bargained for" and that the ratification clause incorporated the early termination clause into the amendment.

Citing dictionary definitions, the court explained that "termination implies something ceases to exist, contraction implies a continued existence that is limited in scope."

The landlord had also argued, that "[e]vidence of trade practice and custom may assist a court in determining whether a contract provision is ambiguous." However, the landlord had not "indicated that there is any specialized meaning of these terms in the real estate industry or provided any basis to believe that they are not, as (tenant) contends 'separate and distinct valuable rights.'"

After reviewing the rules of contract construction, the court stated that "[l]ooking at the initial lease and the amendment as a whole, the court does not find (landlord's) interpretation reasonable." The court noted that "[n]othing within the four corners of the amendment and the language of the contraction clause suggests that the contraction rights granted to (tenant) negate the early termination rights granted by the initial lease. The rights are 'distinct alternatives that serve different purposes.'" Thus, the court held that there was "no ambiguity because the amendment is not 'reasonably susceptible to more than one interpretation.'" Therefore, the court declined to consider "extrinsic evidence" alleged by the landlord.

The court also noted that the contract pertained to real property and "was negotiated between sophisticated counseled business people negotiating at arm's length." Thus, the court dismissed the landlord's causes of action that were based on the lease's alleged ambiguity and the assertion that the early termination clause was rescinded by the contraction clause.

The tenant further argued that the landlord's cause of action for reformation should also be dismissed since the landlord failed to allege a "mutual mistake with the required particularity." The tenant contended that "if there was any mistake at all, it was not 'mutual'." The "thrust of a reformation (claim), is that a writing does not set forth the actual agreement of the parties," and "generally neither the parol evidence rule nor the Statute of Frauds applies to bar proof, in the form of parol or extrinsic evidence, of the claimed agreement." The court noted that this "leads to a 'danger that a party, having agreed to a written contract that turns out to be disadvantageous, will falsely claim the existence of a different, oral agreement.'" Therefore, there is a "heavy presumption that a deliberately prepared and executed written instrument manifests the true intention of the parties…and a correspondingly high order of evidence is required to overcome that presumption." A party seeking reformation, must "show in no uncertain terms, not only that mistake or fraud exists, but exactly what was really agreed upon between the parties."

The landlord claimed that "the parties' mutual intention is manifested in the RFP exchanged between the parties, the language of the amendment and in the reciprocal language of the (Location 1 lease), and both parties' course of conduct."

Although the court found that the language of the amendment did not establish an intention to nullify the early termination clause, the landlord argued that the RFP provides "evidence of this intention." The RFP stated that the tenant required the right to terminate up to 25% of its aggregate leased premises. The landlord argued that the use of the term, "right to terminate" in the RFP in the "contraction options" section, combined with the fact that "over the course of the following months (tenant's) representatives allegedly 'referred to the contraction option and the right to terminate interchangeably" shows that both parties intended to replace the early termination clause with the contraction clause." The landlord noted that the Early Termination Right in the initial lease had expired at the time of the amendment and asserted that the "reciprocal contraction clauses were unequivocally intended to provide (tenant's) only rights to partially terminate its leases with respect to both leased properties."

The tenant countered that the "right to terminate" language is in "proximity to 'contraction option' precisely because the right relates only to contracting up to 25 percent of the leased premises" and that it said "nothing about, nor in any way hints at the demise of (tenant's) option to terminate the entirety of the lease."

The court observed that the plaintiff "will ultimately have to provide 'evidence of a very high order' to succeed in its reformation claim and 'overcome the heavy presumption that a deliberately prepared and executed written instrument manifested the true intention of the parties." However, the court found that the landlord had "alleged a plausible claim for relief" because the complaint "provides the particular circumstances of 'the nature of the mistake and when it occurred.'" Accordingly, the court denied the tenant's motion to dismiss the landlord's claim for reformation.

The landlord had also alleged that even if the early termination clause was in effect, the tenant had breached the lease by attempting to terminate the lease while in default. The tenant argued that a "subsequent default does not invalidate the early termination." The tenant asserted that since it was not in default at the time it exercised the early termination option, the untimely payment of July rent did not "negate its right of early termination." The early termination clause stated that it could be exercised "provided that tenant is not in default." The court found that when the tenant exercised the option to terminate the lease early, it was not in default and thus, the exercise to terminate the lease early was permissible.

The court also found that the landlord's argument that the early termination clause required that the tenant remain in compliance with the lease was unsupported by the language of the lease. Thus, the tenant had not breached the lease by its default subsequent to exercising its early termination option. However, the early termination clause required that the tenant pay the landlord the termination costs and the tenant allegedly breached that provision. The court stated that such claim overlooked the tenant's timely attempt to pay rent and the landlord's rejection of the payment. Regardless, the tenant acknowledged that an issue remained as to the amount of the termination costs that it owes to the landlord.

Accordingly, the court dismissed claims for declaratory judgment and certain claims for breach and anticipatory breach of contract, and denied the tenant's motion to dismiss the landlord's claim for reformation and for a breach of the obligation to pay the termination costs.

4 BAB LLC v. Beacon Health Options Inc., U.S. District Court, N.D.N.Y., Case No. 1:19-cv-00889, decided Jan. 24, 2020, Sannes, J.

Scott E. Mollen is a partner at Herrick, Feinstein.