Litigation

Delaware Chancery Court Interprets Lease Under D.C. Law

By Francis G. X. Pileggi, Esq.

 Liberty Property Limited Partnership  v. 25 Massachusetts Avenue  Property LLC, (Del. Ch., April 7, 2008), read opinion here. Even though the focus of this blog is on business litigation cases that apply Delaware law, I include this recent decision that applies the law of the District of Columbia because this 50-page opinion provides insight into how the Chancery Court might approach a similar type of issue under Delaware law. The court's introductory summary of the issues addressed is much more pithy than I could provide, so I include it here verbatim:

This case presents an unusual question for the Delaware Court of Chancery to
answer: 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?
This bizarre question arises because an option holder’s right to purchase a building
was subject to the prior condition that 85% of the building be under leases meeting
certain contractually specified conditions. When the option holder faced the expiration of
its option — an expiration that began a period when the owner could sell the building free
and clear of any option possessed by the option holder — the option holder tendered up a
last-minute “master lease” whereby it purported to lease the required space itself. As the
option holder has been forced to admit, no reasonable lessor would have ever accepted
the lease, because its terms would have been unpalatable to any actual lessor. The only
purpose of the so-called lease was to permit the option holder to exercise the purchase
option.
Indeed, the plain terms of the supposed lease permitted the option holder to
terminate the lease after a mere twelve days if a sale of the building to the option holder
was not closed for any reason, even if the reason for the failure in the closing was
conduct by the option holder. The lease also contained other commercially suspect
provisions, such as the absence of any security deposit, the requirement that a large
commission be paid to the option holder for securing the lease it itself was proposing, and
a holdback of nearly $10 million premised on the speculative costs that might be required
to improve parts of the building. This holdback would be used to meet the needs of
actual tenants who might someday arise to sublease and occupy (for purposes that would
not be known until then) the vast quantities of space the option holder was supposedly
promising to lease. For these and other reasons, even the option holder’s own testimonial
expert on commercial leases suggested that no reasonable landlord would enter into a
lease of this kind and that the only purpose of the lease was not to act as a lease, but as an
artificial fulfillment of the contractual condition to exercise the option.
District of Columbia contract law imposes no obligation on a party to a contract to
engage in an act of charity by waiving a condition precedent to enable an option holder to
obtain its wishes. In this case, the building owner had the freedom to sell the building to
the highest bidder if the condition to the option exercise was not fulfilled. To require the
building owner to excuse the failure of that condition by accepting a sham lease that no
reasonable landlord would accept would rewrite the parties’ agreement and undercut the
narrow reading given to option contracts. Therefore, I reject the option holder’s demand
that I grant it an order of specific performance permitting it to purchase the building at
the price it set in its purported exercise of the option.

Full post as published by Delaware Corporate and Commercial Litigation Blog on April 17, 2008 (boomark / email).