Contracts—Court Rejected Argument That Contract’s "Best Efforts" Provision Was Unenforceable on the Grounds of Uncertainty and Vagueness—Specific Performance Is an Equitable Remedy for Breach of Contract, Rather Than a Separate Cause of Action—Option Did Not Violate the Rule Against Perpetuities

The plaintiffs planned to develop a mixed use development (project). The defendant owns real estate adjacent to the plaintiffs’ property. The plaintiffs had contracted to purchase the defendant’s unused air rights for $4.6 million and had placed a $460,000 down payment into escrow. The contract provided that the sale of the air rights would close, at the latest, on Dec. 26, 2012. Prior to the closing, the defendant had to obtain a "Waiver and Subordination" (waiver) within 30 days after execution of the contract, from the defendant’s lender (lender), which held the mortgage on the defendant’s property. The contract required the defendant "to use its ‘best efforts’ to obtain the Waiver." If the defendant failed to obtain the waiver, the contract gave the plaintiffs the right to seek the waiver from the lender. The contract also permitted the plaintiffs "to extend the Waiver Contingency Period as needed to obtain the Waiver." The contract specified that the plaintiffs could "unilaterally extend the closing date ‘from time to time, …in [their] sole discretion in which case the Closing, at [Plaintiffs'] election, shall be moved back day for day by the number of days’ necessary for the Plaintiffs to obtain the Waiver."

The plaintiffs alleged that the defendant had waited several weeks after execution of the contract to apply to the lender to obtain the waiver and had "complicated the process…by submitting a ‘sloppy,’ ‘poorly-prepared’ Waiver application to [the lender]."

The defendants asserted that they had "promptly attempted to obtain the Waiver" and that more than a month after the parties had executed the contract, the lender had sent the defendant a proposal requiring that the defendant "pay a pre-payment penalty of $1,800,000 in exchange for the Waiver." The defendant rejected the lender’s proposal.

The plaintiffs further argued that "after rejecting [the lender's] offer, Defendant interfered with Plaintiffs’ ability to exercise their contractual right to attempt to obtain the Waiver by instructing [the lender] not to communicate with Plaintiffs." The defendant had advised the plaintiffs that the defendant was "unable to attain the waiver" and unless the plaintiffs could obtain the waiver, the plaintiffs should advise how the down payment should be returned. The defendant thereafter advised that since neither party had been able to obtain the waiver, the defendant was terminating the contract. Although the plaintiffs stated that they had extended the Waiver Contingency Period and were continuing to work towards obtaining the waiver, the defendant insisted that the "deal is over." The defendant thereafter sent a Notice of Termination to the plaintiffs and sent a letter to the lender, "stating that Defendant had ‘terminated its purchase and sale agreement with [Plaintiffs].’" The defendant advised the lender that the defendant believed that the lender was not obligated "to continue discussing the matter or to engage in further negotiations" with the plaintiffs with respect to the waiver.

The plaintiffs thereafter commenced the subject action, asserting causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, a declaratory judgment, a preliminary injunction, a permanent injunction and "specific performance of the Contract in addition to compensatory damages."

Since the plaintiffs had moved to dismiss pursuant to CPLR 3211, the court was obligated to accept the facts "as alleged in the non-moving party’s pleading as true" and to accord "the non-moving party the benefit of every possible favorable inference."

The defendant argued that the contract was void because "the Contract’s ‘best efforts’ clause…contain[ed] no objective criteria or guidelines against which Defendant’s efforts [could] be measured," i.e., the contract was "unenforceable on the ground of uncertainty and vagueness."

The court noted that the New York Court of Appeals has not directly addressed the issue of best efforts clauses since 1972. The Court of Appeals had enforced a best efforts clause "despite the contract’s lack of objective criteria by which to measure the breaching party’s behavior." The court further noted that at various times, "the First and Second Departments of the Appellate Division have, at times, held that best efforts clauses are only enforceable when accompanied by ‘objective criteria’ or ‘clear guidelines’ for their enforcement."

The court explained that:

Regardless of whether a best efforts clause is express or implied, "[t]he law…does not require that ‘best efforts’ criteria be defined by the contract…. If external standards or circumstances impart a reasonable degree of certainty to the meaning of the phrase ‘best efforts,’ the clause can be enforced"….

A court must interpret and give effect to an express best efforts clause just as it would any other contractual provision. The court’s "role in interpreting a contract is to ascertain the intention of the parties at the time they entered into the contract. If that intent is discernible from the plain meaning of the language of the contract, there is no need to look further."??…If the contract is ambiguous, the court "turn[s] to extrinsic evidence for guidance as to which interpretation should prevail"….

[A] best efforts clause imposes an obligation to act with good faith in light of one’s own capabilities. Best efforts requires that plaintiffs pursue all reasonable methods…and whether such obligation has been fulfilled will almost invariably…involve a question of fact. Accordingly, the precise meaning of a best efforts provision and whether the provision is breached are factual issues that cannot be resolved on the face of the complaint.

The court observed that the defendant’s position "would invalidate innumerable contracts calling for parties to use their best efforts, even if the parties clearly intended to be contractually bound. For example, contracts for the sale of property frequently require buyers to use their ‘best efforts’ to obtain a mortgage."

Citing EPTL §9-1.1(d), a provision known as "the savings clause," the court also explained that it was obligated to construe the option in such a way as to avoid invalidating it under the rule against perpetuities. The court stated that the circumstances and the contract indicated that "the parties intended to obtain the Waiver and close on the sale of Defendant’s Air Rights within 21 years."

The court then held that the plaintiffs’ breach of contract claim should not be dismissed because the plaintiffs "failed to adequately plead that they had performed on the Contract." The plaintiffs had argued that they performed all of their obligations and had placed into escrow a $460,000 down payment. The defendant had also argued that the plaintiffs’ admissions undermined their allegation that the defendant had interfered with the plaintiffs’ right to contact the lender. The court found that the defendant’s argument required factual determinations which were inappropriate on a motion to dismiss.

The court dismissed the plaintiffs’ breach of the implied covenant of good faith and fair dealing claim since it was duplicative of the plaintiffs’ breach of contract claim. The court also denied the defendant’s motion to dismiss the plaintiffs’ claim for a declaratory judgment. The court explained that "[d]eclaratory judgments are a means to establish the respective legal rights of the parties to a justiciable controversy. The general purpose of the declaratory judgment is to serve some practical end in quieting or stabilizing an uncertain or disputed jural relation either as to present or prospective obligations."

Although the court dismissed the plaintiffs’ claim for specific performance, the court noted that the plaintiffs may seek specific performance as a remedy. The court explained that "[s]pecific performance is an equitable remedy for a breach of contract, rather than a separate cause of action."

The court then held that the plaintiffs were entitled to a preliminary injunction. The contract required the defendant "to refrain from selling, using or otherwise encumbering the Air Rights." The court found that the plaintiffs had demonstrated that they would "suffer irreparable harm in the absence of a preliminary injunction." They had asserted that the air rights were necessary for completion of the project since "replacement air rights are not available on the market."

The defendant had argued that there was no risk that the air rights could be sold or other encumbered since the defendant’s property is subject to a notice of pendency. However, the defendant had also argued that the court should not enjoin the defendant from encumbering the air rights since the defendant planned "to finance its defense costs in this case by mortgaging its property. By definition, Defendant’s property includes Defendant’s Air Rights. If Defendant were to encumber its property and air rights, such encumbrance would undermine any award of a declaratory judgment or specific performance in this case."

The defendant had asserted that the imposition of a preliminary injunction would be "inequitable because the value of Defendant’s property has skyrocketed with the recent completion of the nearby High Line." The defendant contended that "a preliminary injunction would prevent Defendant from profiting from this stroke of good fortune." The court opined that the defendant undermined "its own assertion that a notice of pendency removes any risk that Plaintiffs’ rights would be irreparably violated." The plaintiffs’ ability to complete the project "could be damaged in the absence of a preliminary injunction if Defendant were to sell or use the Air Rights." At most, if a preliminary injunction were granted, the defendant would be "briefly delayed in selling its property to a theoretical prospective purchaser." Thus, the court held that the plaintiffs were entitled to a preliminary injunction.

The defendant asserted that the plaintiffs should "post an undertaking in the amount of $4.6 million to cover any damages incurred…due to the preliminary injunction." The defendant argued that it would suffer damages because "the market for properties…close to the newly-opened ‘High Line’ park in Chelsea, is booming [and] Defendant’s opportunity to market or utilize its unused [air] rights in such a hot market may never come again." However, the defendant had not substantiated "these claims or offer any other damages it may suffer due to the preliminary injunction." The court ordered that plaintiffs post an undertaking of $230,000, which is approximately five percent of the total contract price. The court then denied the plaintiffs’ request for a permanent injunction since that could be embodied in a final judgment following a trial on the merits.

The court then denied the plaintiffs’ request for a mandatory injunction that the defendant use its best efforts to obtain the waiver and to provide the plaintiffs with the opportunity to seek the waiver itself. The court explained that "[c]ourts are generally reluctant to grant mandatory preliminary injunctions and such relief will be granted only where the right thereto is clearly established.… Where the complainant presents a case showing or tending to show that affirmative action by the defendant, of a temporary character, is necessary to preserve the status of the parties, then a mandatory injunction may be granted…." Here, the plaintiffs had failed to show that "a mandatory injunction, which effectively grants the ultimate relief Plaintiffs seek, is necessary to preserve the status quo." The court believed that a temporary injunction sufficiently protected plaintiffs’ rights under the contract.

Comment: Given the defendant’s argument that the bond should be high because of the "booming" and "hot" market for property near the High Line, it may have appeared to the plaintiffs that the defendant deliberately sabotaged the subject deal in order to obtain a higher price in a rapidly rising market.

Maestro West Chelsea SPE LLC v. Pradera Realty, 652142/2012, NYLJ 1202577415860, at *1 (Sup., NY, Decided Oct. 9, 2012), Bransten, J.

Landlord-Tenant—Illegal Lockout—"Waiver of Tenant Rights" Executed by Occupant of Rehabilitation Residence Program Held to Be Unenforceable

This decision involved an order to show cause to be restored to the subject premises. The petitioner had been an occupant of a transitional support residence (residence) for men with mental impairment and substance abuse issues. The premises provided housing for 26 men who were referred through the courts, parole officers and various government agencies. A typical client stayed at the premises for an average of eight to twelve months and then moved to independent living. The residence is not "licensed, regulated or funded by the State of New York, or any other governmental agency."

The petitioner had moved into the premises on Aug. 2, 2012 and had paid his monthly rent of $215.00 through the Department of Social Services. On Aug. 15, 2012, the petitioner signed a residency agreement (agreement). The agreement included, together with a rider entitled "Waiver of Tenant Rights" (waiver). The waiver provided that "the resident is NOT a tenant of an [sic] room, apartment, house or dwelling space" and that the resident did "not have ANY claim of further stay to rights unto the property, if the resident is asked to leave the program for any reason." The petitioner was removed on Oct. 22, 2012, "without prior notice or court order permitting a New York City marshal or sheriff to execute upon a warrant of eviction. The removal occurred three days after respondents cashed petitioner’s rent check for October 2012."

The residence argued that the petitioner had executed the waiver and the waiver permitted the residence "to remove any occupant that fails to comply with the House Rules." The residence cited three incidents that occurred at the building, whereby the petitioner "had engaged in prohibited conduct that warranted [the residence] engaging in self help, including yelling at a fellow resident and failing to report back to the facility as required under the program." The residence emphasized its need "to keep ‘a safe environment…help the residents…and provide a tool to guide them to get their life back together." The residence also argued that "people pay for a bed and the service of rehabilitation assistance" and "residing at the premises does not create a typical landlord-tenant relationship." Thus, the residence argued that the waiver was "enforceable and respondents are imbued with the right to evict people without summary proceeding or court order."

The petitioner contended that the waiver was unenforceable pursuant to RPAPL §711 and NYC Admin. Code §26-521. Those provisions provide that "an individual who has resided at a premises for thirty consecutive days or longer may not be removed from the premises without a special proceeding, warrant of eviction or court order." The petitioner also argued that waiver "is an unconscionable contract of adhesion; a contract drafted by a party with superior bargaining power and is offered to a party who does not have the option of negotiating the terms." The petitioner further contended that "he did not violate the House Rules…and needlessly received incident reports from respondents for otherwise lawful actions."

The salient issue was "whether petitioner could effectively waive his rights under the RPAPL and NYC Administrative Code to a lawful eviction, even had he violated the House Rules." The court found that the waiver was unenforceable and that the petitioner had been illegally evicted without due process of law. The court explained that "RPAPL §711 and NYC Administrative Code §26-521 are clear that any individual who resided at a premises for more than thirty days is entitled to due process of law prior to eviction." The respondents had not cited any authority who indicated that their particular housing accommodation was "a special class of housing that is exempt from following these laws." Moreover, "a similar agreement had been deemed unconsionable [sic] and rejected by the court in Wright v. Lewis, 21 Misc.3d 1120(A) (Supp. Ct. Kings Co. 2008)." The court emphasized that the subject waiver provided for an eviction with "no legal process, no opportunity to challenge basis for eviction, and permits respondents to perform illegal evictions in clear violation of two statutes" and that rendered the waiver unenforceable.

Finally, the court opined that "[t]o accept respondent’s contention would create a special class of tenancy by virtue of the House Rules and rider that is not supported by law." Since the petitioner had resided at the premises "for more than thirty days prior to being removed from the premises without due process of law as required by the RPAPL and New York City Administrative Code," the court awarded the petitioner a judgment restoring him to possession of the premises.

Davidson v. House of Hope, 19600/12, NYLJ 1202579307267, at *1 (Civ., KI, Decided Nov. 15, 2012), Scheckowitz, J.

Scott E. Mollen is a partner at Herrick, Feinstein and an adjunct professor at St. John’s University School of Law.