BLACKBURN FOOD v. ARDI, INC.

OPINION OF THE COURT

ELIZABETH H. EMERSON, J.

On or about January 15, 2012, the plaintiffs entered into an agreement with the defendant Ardi, Inc., and Armand LaMacchia to lease a restaurant owned and operated by the defendant Armand's Restaurant, Inc. (the defendants). The lease was for a term of 10 years. A rider thereto gave the plaintiffs an option to purchase the premises for $975,000 as long as they were not in default of the lease. The rider also gave the plaintiffs credits against the purchase price. The credits consisted of "the amount of the base rent actually paid for Years 1, 2 and 3, exclusive of taxes, insurance and utilities ... together with the total `Key Money' paid ($150,000.00)."1 While the rider initially provided for the option to terminate 30 days prior to the end of year three, a supplemental rider extended the time within which the plaintiffs had to exercise the option until "30 days prior to Year five (5) of the Lease Agreement."2 The supplemental rider was silent, however, on whether the credits against the purchase price were also extended until year five.

The plaintiffs exercised the option to purchase the premises in year four of the lease. On July 21, 2015, their attorney sent notice to the attorney for the defendants that they wished to exercise the option. The letter provided, in pertinent part, as follows: "I request you forward a Contract of Sale to me within seven (7) days with the indicated purchase price of $975,000.00 and credits for the key money of $150,000.00 and for three (3) years of rent payments totaling $144,000.00."

The defendants took the position that the plaintiffs' right to receive credits for the rent paid in years one, two, and three and for the key money expired at the end of year three. Thus, the defendants would not proceed with the sale unless the plaintiffs paid the full purchase price of $975,000. The plaintiffs commenced this action on September 15, 2015 (1) for specific performance of the option at the reduced purchase price of $681,000 and (2) to recover rent paid after they exercised the option. The plaintiffs moved and the defendants cross-moved for summary judgment. By an order dated January 26, 2017, this court found that the option language was reasonably susceptible of more than one meaning. Accordingly, the motion and cross motion were denied.

The matter proceeded to trial on May 8, 9, and 31, and June 19, 2017. The plaintiffs called four witnesses: (1) James Fischer, the attorney who represented the defendants in connection with the drafting of the lease and riders; (2) Deborah Kooperstein, the attorney who represented the plaintiffs in connection with the drafting of the lease and riders; (3) James Going, the attorney who represented the plaintiffs in connection with their exercise of the option; and (4) the plaintiff Brian Blackburn. Although counsel for the defendants represented to the court that Armand LaMacchia would testify, the defendants did not call any witnesses. A total of 23 exhibits, 20 for the plaintiffs and three for the defendants, were introduced into evidence. Posttrial memoranda were received by the court on July 18 and 31, 2017, respectively.

The court finds to be self-serving the testimony of both James Fischer and Deborah Kooperstein. The court also finds that they did not have personal knowledge of the facts underlying the parties' agreement. The testimony of Brian Blackburn reflects that the Blackburns negotiated the terms of the agreement directly with Armand LaMacchia, who was the majority shareholder of the corporate defendants. Moreover, the emails between Fischer and Kooperstein reflect that they were not personally involved in the negotiations between the parties. Kooperstein's email to Fischer dated November 29, 2011, in particular, reflects their lack of involvement in the negotiations. In that email, Kooperstein states:

Accordingly, the court declines to credit the testimony of either James Fischer or Deborah Kooperstein.

James Going represented the Blackburns in connection with their application for a liquor license. In addition, he advised them to form a corporation before signing the lease, which they did. The plaintiff Blackburn Food Corp. is the corporation that they formed. Going continued to represent the Blackburns and the corporation after they executed the lease and riders. Specifically, he represented them in connection with their exercise of the option. Accordingly, the court finds that James Going did not have personal knowledge of the facts underlying the parties' agreement and, therefore, declines to credit his testimony.

Brian Blackburn was the only witness to testify who had personal knowledge of the facts leading up to the parties' agreement. He testified that Armand LaMacchia initially offered to sell the Blackburns the business and the building for $975,000, but that they did not want to buy the building at that time. LaMacchia then offered them an option to purchase the building for $975,000 with credits for the key money and the first three years' rent. Although the initial draft of the lease and rider did not include a credit for the key money, it was included in the final version executed by the parties. Paragraph 43 of the rider provides, in pertinent part, as follows:

The supplemental rider extended the time that the Blackburns had to exercise the option from three to five years. It provides, in pertinent part, as follows: "Landlord/seller and Tenants/purchasers agree that the option to purchase is an exclusive option of tenants/purchasers and this exclusive option period shall expire 30 days prior to Year five (5) of the Lease Agreement" (emphasis added).

The Blackburns executed the supplemental rider on December 6, 2011. Brian Blackburn testified that he was confused as to whether the option, as amended by the supplemental rider, included a credit for two more years of rent payments, i.e., for five years of rent payments instead of three. In an email dated December 14, 2011, Deborah Kooperstein advised the Blackburns that Armand LaMacchia would only agree to the first three years of rent being set off against the purchase price, not five years of rent. Kooperstein urged the Blackburns to accept the deal; and, in an email of the same date, Brian Blackburn indicated that they were "ready to sign." The Blackburns re-executed the supplemental rider on December 22, 2011.

Brian Blackburn testified that he believed the option extended to five years the credit for the rent paid in the first three years. The court finds this interpretation to be consistent with the written agreement. Paragraph 43 of the rider gave the Blackburns a three-year option to purchase the premises for $975,000 with credits against the purchase price for the base rent actually paid in the first three years and the key money. The supplemental rider merely extended the option for another two years. There is no language in the supplemental rider regarding the purchase price or the credits, and nothing in the supplemental rider indicates that the Blackburns would not receive the credits if they exercised the option in year four or five of the lease.

A lease, like any other contract, is to be enforced in accordance with the expressed intention of the contracting parties (Goldman v Orange County Ch., N.Y. State Assn. for Retarded Children, 121 A.D.2d 683, 684 [1986]). In the context of real property transactions, where commercial certainty is a paramount concern and where, as here, the instrument was negotiated at arm's length between sophisticated, counseled business people, courts should be extremely reluctant to interpret an agreement as impliedly stating something that the parties have neglected to specifically include (Vermont Teddy Bear Co. v 538 Madison Realty Co., 1 N.Y.3d 470, 475 [2004]). Hence, courts may not by construction add or excise terms, nor distort the meaning of those used, and thereby make a new contract for the parties under the guise of interpreting the writing (id.).

The court finds that the defendants' interpretation of the parties' agreement violates this rule by adding language to the supplemental rider limiting the availability of the credits. Had that been the parties' intent, they could easily have provided for the Blackburns to receive the credits only if they exercised the option in years one, two or three of the lease. In the absence of any such language, the court declines to interpret the supplemental rider as impliedly stating something that the parties have neglected to specifically include (id.).

The court also finds that the defendants' interpretation is inconsistent with the December 14, 2011 email from Deborah Kooperstein. The pertinent part of that email is as follows:

This email makes clear that Armand LaMacchia's only objection to extending the option to five years was increasing the amount of the rent credit. Although LaMacchia did not want to increase the credit from three to five years' rent, he did not object to extending the time within which the credit would be available to year five of the lease.

Armand LaMacchia had personal knowledge of the parties' negotiations and was present in the courtroom during the trial, but did not testify on his own behalf. The failure of a party to a civil case to testify on his own behalf normally gives rise to an unfavorable inference (Prince, Richardson on Evidence § 3-140 at 92 [Farrell 11th ed 1995]). Thus, the court finds that, had he testified, Armand LaMacchia would not have contradicted the testimony of Brian Blackburn, nor would his testimony have supported the defendants' interpretation of the parties' agreement (id. at 91-92). Accordingly, the court finds that the parties' intent was to extend the time within which the Blackburns had to exercise the option with credits to five years.

A condition precedent to exercising the option was that the Blackburns not be in default of the lease. The defendants' contention that the Blackburns did not comply with the insurance requirements found in the lease is supported by the testimony of James Fischer, who had no personal knowledge of the underlying facts, and is contradicted by the testimony of Brian Blackburn. Blackburn testified that Armand LaMacchia wanted the plaintiffs to pay for building insurance, which they were not required to obtain under the lease. Blackburn also testified that a tenant cannot obtain insurance for a building he does not own. The court credits the testimony of Brian Blackburn, the only witness to testify with knowledge of the underlying facts. The defendants' contention that the Blackburns failed to pay the property taxes for the premises is contradicted by the documentary evidence and by the testimony of Brian Blackburn. The record reflects that James Fischer did not send the Blackburns a bill for the property taxes due on June 1, 2012, until July 13, 2012. Brian Blackburn testified that, once he received the bill, he immediately paid it and all subsequent property tax bills. Accordingly, the court finds that the Blackburns were not in default of the lease when they exercised the option.

It is well settled that, in order to validly exercise an option to purchase real property, one must strictly adhere to the terms and conditions of the option agreement (Weissman v Adler, 187 A.D.2d 647, 648 [1992]). The court finds that the plaintiffs fully complied with the terms and conditions of the option to purchase the premises. They, therefore, validly exercised the option (see Tsoulis v Abbott Bros. II Steak Out, Inc., 82 A.D.3d 1612, 1613 [2011]).

To prevail on the first cause of action for specific performance, the plaintiffs must establish that they have the financial ability to purchase the property in order to demonstrate that they are ready, willing, and able to perform (see Grunbaum v Nicole Brittany, Ltd., 153 A.D.3d 1384, 1385 [2017], citing Kaygreen Realty Co., LLC v IG Second Generation Partners, L.P., 78 A.D.3d 1010, 1015 [2010]). The plaintiffs submitted a term sheet from Bridgehampton National Bank dated April 20, 2015, and a letter from the same bank dated April 18, 2017, both of which indicate that the bank is willing to lend them $700,000 to complete their purchase of the premises. Thus, the plaintiffs have demonstrated that they are ready, willing, and able to purchase the premises at the reduced purchase price of $681,000. Accordingly, the court finds for the plaintiffs on the first cause of action for specific performance.

The second cause of action seeks to recover rent paid by the plaintiffs after they exercised the option. The plaintiffs argue that they were purchasers in possession and, as such, no longer obligated to pay rent after July 21, 2015.

When, as here, a tenant exercises an option to purchase real property pursuant to a lease, the relationship between the parties is converted to that of a vendor and vendee, and the landlord-tenant relationship merges with the vendor-vendee relationship (In re Bayside Marina, Inc., 282 B.R. 285, 289 [ED NY 2002]; see also Kaygreen Realty Co., LLC v IG Second Generation Partners, L.P.). When a merger has occurred, the owner of the property is not entitled to an award for use and occupancy of the premises from the vendee in possession unless the parties clearly intended a contrary result (Fulgenzi v Rink, 253 A.D.2d 846, 848 [1998]; Barbarita v Shilling, 111 A.D.2d 200, 201-202 [1985]). An intention to deviate from the general rule and to avoid a merger may be directly expressed in the agreement or may be inferred from a medley of factors such as the terms of the agreement, the circumstances of its making, and the subsequent behavior of the parties (Barbarita at 202).

The court finds that an intention to deviate from the general rule and to avoid a merger may be inferred from the language of the rider and the parties' subsequent behavior. In paragraph 42 of the rider the plaintiffs agreed to pay rent "in equal monthly installments in advance on the first (1st) day of each month during the entire lease term" (emphasis added). The plaintiffs also agreed, in paragraph 46 of the rider, to pay the real estate taxes as additional rent "with respect to every lease year or part thereof during the time of this Lease Agreement" (emphasis added). Moreover, the plaintiffs acknowledged in the parties' stipulated statement of facts dated May 5, 2017, that "[r]ent and obligations under the lease have been paid either directly to Ardi, Inc. or to court per order of court (emphasis added).3 The court finds that, under these circumstances, the landlord-tenant relationship continued even after the plaintiffs exercised the option. Accordingly, the court finds for the defendants on the second cause of action to recover rent paid after July 21, 2015.