Happy Tuesday, all.
It is an exciting time to be working or living in downtown Grand Rapids. Everywhere you look, real estate development is transforming the town.
Check out Experience Grand Rapids for a detailed list of all the current downtown development.
Not to rain on anyone’s parade (but that is kind of a lawyer’s job)…
With increased commercial activity comes increased opportunity to fall into legal pitfalls.
As I tell my clients – if you are in business for any amount of time, it is just a matter of time, you will probably get into a business dispute.
Real estate development is no exception. The more transactions, the more opportunity for hiccups along the way. A Court opinion I read last week brought this reality to my mind.
Last week an unpublished Michigan court of appeals case was released that highlights some contract drafting pitfalls. You can check out the May 31st unpublished decision of Greater Faith Transitions, Inc. v Ypsilanti Community Schools here
The case was about a commercial lease in which Landlord also granted Tenant an option to purchase the Building.
These “lease with options to purchase” can pose interesting questions – as the facts of this case illustrate.
Summary of the Facts
- On August 13, 2013, plaintiff and defendant entered into a lease with option to purchase a property in Ypsilanti owned by defendant.
- The parties intended the lease to be effective until August 31, 2018.
- Under the lease terms, plaintiff was required to make monthly rent payments and to pay for all utility bills, including water bills.
- According to plaintiff, it had attempted to enforce its option to purchase the property in a text to defendant on February 2, 2017, that stated:
“I tried to call you to make you aware of the fact that we’re buying the church this year.”
- On February 13, 2017, defendant sent to plaintiff a letter from its attorney and a Notice to Quit Termination of Tenancy, claiming that plaintiff was in default of the lease for repeated failure to pay water bills.
Plaintiff, tenant, sued its landlord, among other things, for interfering with its right to exercise its option to Purchase. The trial court ended up dismissing Tenant’s lawsuit.
The tenant appealed.
The opinion of the Court of Appeals was interesting, essentially holding that the tenant’s claim for breach of contract was not ripe – since a contract was not yet breached. The tenant was not yet evicted.
(See opinion, page 2 – “Plaintiff claims that “Defendant’s improper use of summary proceedings to evict Plaintiff from the leased premises will breach the parties’ Lease
with Option to Purchase because Plaintiff will be deprived of its right to cure any defaults during the term of the Lease (i.e., through August 31, 2018) so that Plaintiff can exercise its option to purchase thereunder.”)
The ultimate ruling aside, the case, to me, provides a good opportunity to highlight a few drafting issues that can come up in commercial leases.
First, a general point I want to bring to the business owner’s attention:
Why Careful attention to Business Contracts is important – Freedom of Contract
First and foremost, when entering a business contract each party should understand – they will be bound to the contracts they sign.
In a commercial lease context the courts’ mantra is “Freedom of Contract“.
The Court will look at the contract that the parties’ agreed to, and, absent extraordinary circumstances, enforce it by its term. (therefore in a commercial lease you might see language such as the following “rent is due with no right of offset, setoff, counterclaim…”) In such instance, the landlord is telling the tenant that tenant has no right to withhold rent just because landlord may have breached a duty under the lease.
The Courts have recognized that commercial landlords and tenants are “free to contract”:
Going back to the court opinion, it doesn’t appear to me from reviewing the opinion that the parties disputed that the tenant defaulted in failing to pay utility bills.
Did the lease have a provision that said that the “Option to Purchase” terminated if:
- the tenant had been in default at any time?
- or, only in Default at the time the Option was being exercised?
- Or, did it say nothing on the subject of Default?
was there a lease provision that strictly provided where “notices” must be sent?
e.g. – was it left up to the parties to interpretation whether or not notice delivered “via text message” was an appropriate method?
If these issues are plainly addressed in business contracts, then possibly, the parties avoid a lawsuit.