Liberty Prop. Ltd. P’ship v. 25 Mass. Ave. Prop. LLC, (Del. Ch., Jan. 22, 2009), read opinion here.
We are fortunate to have the following review and analysis of this case prepared by Kevin Brady, a partner in the Business Law Group at the Wilmington, Delaware, office of Connolly Bove.
This opinion follows a remand from the Delaware Supreme Court. The Chancery Court’s initial fifty-page decision, prior to remand by the Supreme Court, was highlighted here.
In the trial court’s original post-trial decision about this dispute between a holder of an option to purchase a building and the owner of the building, the Chancery Court began by referring to the “unusual” and “bizarre” question before the Court: does the contract law of the District of Columbia require the owner of a building to accept a lease that no reasonable lessor would ever sign simply to facilitate the lessee’s exercise of a contractual option to purchase the building? In that decision, Vice Chancellor Strine rejected the option-holder Republic’s attempt to exercise the option, finding that lease was not one that a reasonable lessor would have found acceptable and that the building owner, 25 Massachusetts Avenue Property LLC (“25 Mass”), had no contractual duty to accept it. The Court therefore found in favor of 25 Mass and dismissed Republic’s claims. The Court also dismissed 25 Mass’s counterclaim for damages that purportedly arose because Republic had tendered up a non-qualifying lease to insist that it could exercise the option and as a result it breached contractual duties it owed to 25 Mass. The damage that supposedly flowed from this breach was that 25 Mass could not consummate a sale of the Property to a buyer whose identity was never made known to it.
On appeal, 25 Mass argued that the Chancery Court failed to address the arguments 25 Mass made in support of its counterclaims. The Delaware Supreme Court agreed and remanded the case so the Court could address the following issues: (i) did Republic breach its implied duty of good faith and fair dealing when it filed the lis pendens; and (ii) did Republic breach the section of the Option Agreement which required the parties to take all actions as reasonably requested to effect the contemplated transactions.
Implied Covenant of Good Faith and Fair Dealing
Vice Chancellor Strine noted that according to the public policy of the District of Columbia, the filing of a lis pendens that is later lifted only gives rise to consequences such as damages if a stringent sanctions standard is met and that 25 Mass must be presumed to have known about that law when it signed a contract involving a property in the District of Columbia that had an express choice of law provision choosing District of Columbia law. Moreover, the implied covenant of good faith and fair dealing, as recognized in the District of Columbia, prevents a contractual party from acting in bad faith and engaging in unfair dealing, that prevents the other side of the contract from getting its fair bargain. While 25 Mass did not argue that Republic had litigated in bad faith, it did argue that Republic should not have insisted on seeking specific performance and should have let 25 Mass close with its anonymous buyer (assuming that the anonymous buyer turned into an identified buyer with a binding obligation to buy).
Vice Chancellor Strine stated “[i]t was improper for me, as a judge, to simply invent — by the guise of “implication” — a contractual duty on Republic’s part to refrain from making a nonfrivolous claim for specific performance and from filing a lis pendens when: 1) the parties could have included a non-suit clause in the Option Agreement and did not; and 2) the parties chose District of Columbia law and District of Columbia law does not provide for consequences for a lis pendens filing unless the filer engaged in conduct meeting a stringent sanctions standard.”
Did Republic Breach Section 8(c) of the Option Agreement?
25 Mass argued that Republic breached an express provision of the Option Agreement, that Republic’s insistence on litigating its specific performance claim and its refusal to lift the lis pendens until the specific performance claim was adjudicated amounted to a failure to “take action” reasonably requested by 25 Mass in order to allow it to effect a transaction contemplated by the Option Agreement, i.e., the consummation of the sale of the Property. The Vice Chancellor recast the issue by stating: “by refusing to drop a claim that 25 Mass did not contend was brought frivolously, did Republic breach a contractual obligation it supposedly had to affirmatively aid 25 Mass in closing its deal with the anonymous buyer?
The Court stated that the Option Agreement specifically preserves Republic’s right to enforce its Option by seeking an order of specific performance with no mention of consequences for an improvidently brought suit, thus leaving those consequences to be determined by the applicable default law. Had the parties wished to impose contractual liability on Republic for any harm it occasioned to 25 Mass by litigating over its Option rights, the parties could have expressly included an explicit non-suit or liability-shifting clause of some kind that actually mentioned litigation, or at least some provision far less remote than § 8(c).
The Court found that Republic did not engage in conduct that prevented 25 Mass from entering into a binding contract for the sale of the Property with a buyer with commercial patience and the filing of the lis pendens was not at all an absolute bar to the entry of a contract by 25 Mass. As a result, the Vice Chancellor affirmed his original determination that 25 Mass’s counterclaim should be dismissed.