Jeremy's Ale House Also, Inc. v. Joselyn Luchnick Irrevocable Trust

OPINION OF THE COURT

Sullivan, J.P.

The facts are fairly and accurately set forth in the dissent. To recapitulate: under a “last right of refusal” afforded plaintiff tenant, Jeremy’s Ale House Also, Inc., pursuant to a modification of a commercial lease, the landlord, the Joselyn Luchnick Irrevocable Trust, beginning approximately three months before the lease’s expiration, communicated a series of offers. According to the complaint, Jeremy’s accepted two direct offers, the first for $1 million or the appraised value, whichever was higher, and the second for $1.2 million. Later, the Trust advised Jeremy’s that it had received a $2.5 million offer from a third party and that Jeremy’s could, under its right of refusal, purchase the property for $2.7 million. Jeremy’s again accepted the offer. All of the offers were oral, as were Jeremy’s acceptances. Sometime later, the Trust advised Jeremy’s that it had received two other offers, one for $3.2 million and, finally, one for $3 million, as to which, under the right of refusal, the Trust offered Jeremy’s the opportunity to purchase for $3.09 million.

The right of refusal at issue provides:

“Starting January 1, 2000 the rent will be raised five hundred dollars a month. Effective May 1, 2000 the rent will be raised an additional five hundred dollars. In consideration of these increases in the event of a sale to a third party (not an asset transfer in the family) you will have last right of refusal to beat the terms and price by 3% of any bona fide offer” (emphasis added).

Jeremy’s brings this action, seeking, inter alia, to compel specific performance of the Trust’s offer to sell the premises to it for $2.7 million and damages for breach of the implied covenant of good faith and fair dealing.

We all agree that under the right of refusal Jeremy’s is not entitled to specific performance of the September 2003 offer to purchase the subject property for $2.7 million, an offer, which, according to Jeremy’s, it accepted. Unlike the dissent, however, we do not reach the statute of frauds issue. As the complaint alleges, this was only one of several offers submitted to Jeremy’s under its right of refusal, including at least one subsequent offer, submitted on or about December 15, 2003, to sell the property for $3.09 million.

The right of refusal at issue, as it plainly states, is a “last right of refusal to beat the terms and price by 3% of any bona fide offer.” Thus, Jeremy’s is not entitled to specific performance of the $2.7 million offer because it was not the last offer. Contrary to its arguments, Jeremy’s was not entitled to select the offer it considered the most advantageous. Its right was limited to the last offer. That being the case, the Trust could, without breaching its implied covenant of good faith and fair dealing with respect to Jeremy’s right of refusal, by communicating a series of escalating bona fide third-party offers, use Jeremy’s as a stalking horse to prompt it “to beat the terms and price” of those offers so as to induce a higher third-party offer.

In that regard, it must be noted that the implied covenant of good faith and fair dealing arises out of the agreement affording Jeremy’s the last right of refusal and not the separate agreement to sell. Contrary to the view implicit in the dissent’s reasoning, a breach of that covenant stands separate and apart from the enforceability of any agreement to sell to the holder of the right. As the Court noted in Quigley v Capolongo (53 AD2d 714, 715 [1976], affd 43 NY2d 748 [1977]), “While plaintiffs’ right to purchase the property might never have ripened into an absolute one, defendant-owners owed them the obligation of dealing in good faith.”

The complaint alleges that by letter dated November 18, 2003 delivered to Jeremy’s by registered mail on December 15, 2003, the Trust, through its attorney, advised Jeremy’s of the $3 million offer and that, in accordance with the last right of refusal, Jeremy’s could purchase the premises for $3.09 million if it were willing and able to close on or about January 31, 2004 without a financing contingency. As the record shows, despite its assertion of the acceptance of the prior offer from the Trust to sell the premises to it for $2.7 million, Jeremy’s advised the Trust’s attorney on December 16, 2003 that it would respond to the $3.09 million offer within 30 days from the receipt of that offer on December 15, 2003.^* In that letter, Jeremy’s asked for “proof that your clients received the offer set forth in the letter.” From all that appears, the Trust never responded to that request, without which Jeremy’s could not determine if the third party was required to close on January 31, 2004 and without a provision for a financing contingency. The answer to that inquiry would determine whether the offers were identical and whether the Trust was dealing with it in good faith, as was required (see Wieder v Skala, 80 NY2d 628, 637 [1992]).

Thus, while dismissal is required, given the state of the record, we would grant Jeremy’s leave to amend the complaint to plead, if it be so advised, a cause of action for breach of the implied covenant of good faith and fair dealing with respect to the $3.09 million offer and for specific performance with respect to that offer. In that regard, it should be noted, the statute of frauds requirement is satisfied by the existence of a written third-party contract signed by the Trust and, assuming the attorney’s authority, may be satisfied by the November 18, 2003 letter to Jeremy’s advising of the $3.09 million offer (see Scheck v Francis, 33 AD2d 91, 94 [1969], affd 26 NY2d 466 [1970]).

The dissent, having rejected Jeremy’s action for specific performance of the $2.7 million offer on a defense, i.e., the statute of frauds, that, given the Trust’s tender of a subsequent $3.09 million offer, is only of secondary legal significance, argues that the “last right of refusal” is the same, legally, as a right of first refusal and, accordingly, should be treated no differently. This argument misses the mark.

The right of first refusal, a well-accepted term (see e.g. LIN Broadcasting Corp. v Metromedia, Inc., 74 NY2d 54 [1989]; see also Morrison v Piper, 77 NY2d 165 [1990]; 3 Warren’s Weed, New York Real Property § 32.145 [5th ed]; 22 NY Jur 2d, Contracts § 38), is a preemptive right (Metropolitan Transp. Auth. v Bruken Realty Corp., 67 NY2d 156, 163 [1986]; LIN Broadcasting Corp., supra at 60) that “requires the owner, when and. if he decides to sell, to offer the property first to the [holder] so that he may meet a third-party offer or buy the property at some other price set by a previously stipulated method” (Metropolitan Transp. Auth. v Bruken Realty Corp. at 163 [citations omitted]).

Here, in its December 7, 1999 letter to Jeremy’s, the Trust described the right of refusal it was offering, not as a right of first refusal, with its well-known and recognized meaning as a preemptive right, but as a last right of refusal, thus according the right a different meaning. The difference is more than academic, as the dissent seems to suggest. The complaint alleges that after the initial two direct offers to sell, the Trust advised Jeremy’s that it intended to advertise the premises to obtain the highest price that the market would allow. Thus, the last right of refusal provided Jeremy’s with an opportunity it would otherwise not have and that no other bidder enjoyed. It could beat any offer by 3% and the transaction could not close without affording Jeremy’s that opportunity. If nothing else, the last right of refusal would serve as a disincentive to third-party bidding.

In resisting the grant of leave to amend, the dissent points out that Jeremy’s cannot “at the same time treat the contract as broken and as subsisting” (Strasbourger v Leerburger, 233 NY 55, 59 [1922]). That, however, is not what Jeremy’s would be asserting were it to amend its complaint to seek alternative relief with respect to the $3.09 million offer. It has treated the Trust’s refusal to perform under the agreement to sell the property for $2.7 million as a breach of that agreement; its pursuit of the subsequent $3.09 million offer has nothing to do with the earlier agreement. Whatever, if any, inconsistency there may be in Jeremy’s actions, those actions cannot be characterized as treating the same contract as both broken and subsisting. In any event, a party is permitted to plead alternate theories (Wilmoth v Sandor, 259 AD2d 252, 254 [1999]) and leave to amend should be freely given (CPLR 3025 [b]). No legal prejudice in such an amendment is apparent.

We have examined Jeremy’s other contentions and find that they are without merit.

Accordingly, the orders of the Supreme Court, New York County (Marcy S. Friedman, J.), entered April 16, 2004 and April 19, 2004, respectively, which granted defendants’ motion to dismiss the complaint pursuant to CPLR 3211 (a) (5) and (7), denied plaintiffs’ cross motion for leave to amend the complaint to add a cause of action for promissory estoppel, and rescinded the parties’ so-ordered stipulation and restored the summary holdover proceeding commenced by defendants to Civil Court, should be modified, on the law and the facts, and leave granted to plaintiffs to amend the complaint to plead, if they be so advised, a cause of action for breach of the implied covenant of good faith and fair dealing with respect to the $3.09 million offer and for specific performance with respect to that offer, and, except as thus modified, affirmed, without costs or disbursements.

* While it is true that Jeremy’s, on December 16, 2003, had commenced this action for specific performance of the earlier $2.7 million offer and purported acceptance, which Jeremy’s acknowledged in its December 16, 2003 letter, it should be noted that on December 3, 2003, before Jeremy’s receipt of the $3.09 million offer, the Trust had advised it that its rent was increased from $7,500 to $13,000 for the months of December 2003 and January 2004, and demanded that Jeremy’s vacate the premises by January 31, 2004, consent to a judgment of possession and the issuance of a warrant of eviction, and execute a waiver of the right of first refusal.