A Manhattan Commercial Division judge has ruled that a “best efforts” clause in a real estate contract can be enforced even though the contract has no objective criteria for defining best efforts, addressing an issue that has long been murky in New York courts.
Supreme Court Justice Eileen Bransten (See Profile) ruled on Oct. 9 in Maestro West Chelsea PDE LLC v. Pradera Realty Inc., 652142/12, that the owners of a large plot of real estate in Chelsea who had contracted to buy air rights from the owner of a neighboring plot of land, which failed to close the deal, are entitled to a preliminary injunction preventing the neighboring owner from selling the air rights to anyone else.
The plaintiffs, Maestro West Chelsea and Kadima Tenth Avenue SPE LLC, own a large plot of land at 10th Ave. and West 28th St. in Manhattan, where they are planning to build a large mixed residential and retail complex. In order to comply with city zoning regulations, they must acquire unused air rights from the owner of a neighboring property, Pradera Realty.In March 2012, according to Bransten’s decision, the plaintiffs agreed to buy the air rights from Pradera for $4.6 million. The deal was set to close by Dec. 26.
In order to sell the air rights, Pradera must obtain a waiver from JPMorgan Chase, the holder of the mortgage on the property. The contract required Pradera to make its “best efforts” to obtain the waiver within 30 days, though it provided that the plaintiffs could choose to extend the 30-day period and, if Pradera failed to get the waiver, seek it from JPMorgan themselves.
Pradera has not obtained the waiver. In June, the plaintiffs sued Pradera, alleging that it breached the “best efforts” clause in the contract because it waited several wekes to seek a waiver and ultimately submitted a “sloppy” application for a waiver to JP Morgan. The plaintiffs sought a preliminary injunction barring Pradera from selling or otherwise encumbering the air rights.
Pradera moved to dismiss the complaint, arguing, among other things, that the “best efforts” clause was not enforceable because it had no objective standards.
Bransten noted that the case law on best efforts clauses in New York is “far from clear.”The state Court of Appeals, she wrote, last addressed the issue in 1972 in Van Valkenburgh, Nooger & Neville, Inc. v. Hayden Publ’g Co., Inc., 30 N.Y.2d 34, which enforced a best efforts clause despite a lack of objective criteria.
Nonetheless, she said, the First and Second Departments have subsequently declined to enforce best efforts clauses in the absence of objective criteria, citing the First Department’s 2000 decision in Timberline Dev. v. Kronman, 263 A.D.2d 175, 178-80 and the Second Department’s 1999 decision in Strauss Paper Co. v. RSA Exec. Search, Inc., 260 A.D.2d 570, 571.
However, Bransten said, in 1998, the First Department had ruled that best efforts clauses could be enforced in the absence of objective standards, in Non-Linear Trading Co., Inc. v. Braddis Assoc., Inc., 243 A.D.2d 107. She held that, in light of past decisions and general principles of contract interpretation, best efforts clauses without objective standards can be enforceable.
“A court must interpret and give effect to an express best efforts clause just as it would any other contractual provision,” she wrote. If a provision in a contract is ambiguous, Bransten wrote, a court must turn to extrinsic evidence to enforce it.
“Furthermore, Defendant’s interpretation of First Department law regarding best efforts clauses would invalidate innumerable contracts calling for parties to use their best efforts, even if the parties clearly intended to be contractually bound,” Bransten wrote. “For example, contracts for the sale of property frequently require buyers to use their ‘best efforts’ to obtain a mortgage. All of these contracts would be invalid under Defendant’s reading of the law.”
Bransten therefore refused to dismiss the breach of contract claim, though she did dismiss a claim for breach of implied covenant of good faith and fair dealing as duplicative of the contract claim. She granted the plaintiffs’ motion for a preliminary injunction.
The plaintiffs are represented by Fried, Frank, Harris, Shriver & Jacobson partner Gregg Weiner. “We’re gratified by the decision and expect to prevail on the ultimate merits.”
Pradera is represented by Steven Landy.
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