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The Implied Covenant of Good Faith and Fair Dealing Can Override an Express Provision Of A Lease

Winter 2006Cole Schotz Docket

In a recent unanimous decision, the New Jersey Supreme Court held that a commercial landlord breached the implied covenant of good faith and fair dealing with respect to a tenant’s exercise of a renewal option, even though the tenant failed to comply with an express condition precedent to the exercise of such option. 

Although New Jersey courts have repeatedly affirmed that every party to contract is bound by a duty of good faith and fair dealing in both the performance and enforcement of the contract, good faith and fair dealing is a concept that defies a precise definition.  Under New Jersey law, good faith has been vaguely defined as “honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade”.  Courts have found that the covenant of good faith and fair dealing calls for parties to a contract to refrain from doing “anything which will have the effect of destroying or injuring the right of the other party to receive the benefit of the contract.”

In the case of Brunswick Hills Racquet Club, Inc. v. Route 18 Shopping Center Associates, 182 N.J. 210 (2005), the tenant, through its attorney, sent a letter to the landlord stating its intention to exercise the option nineteen months prior to the deadline.  The tenant did not, however, deliver the required $150,000 payment with such notice or at any time prior to the expiration of the option deadline.  Despite numerous letters and telephone calls from the tenant’s attorney, the landlord never requested the option payment or advised the tenant that it had not fulfilled an essential term of the contract.  When the deadline to exercise the option expired, the landlord failed to honor the option and, for the first time, pointed out the deficiency to the tenant.

The court found that the landlord, through its agents, “engaged in a pattern of evasion, sidestepping every request . . . to discuss the option and ignoring repeated written and verbal entreaties to move forward. . . .”  The court stated that the tenant’s repeated letters and telephone calls obligated the landlord to respond, and to respond truthfully.   The effect of such ruling imposes upon a party to a contract an “affirmative duty” of disclosure, a duty that lower courts have previously held does not exist. 

As a result of the seemingly broader application of the duty of good faith and fair dealing in New Jersey, real estate professionals should expect to see parties to a lease raising the covenant in many contexts, including changes in use, assignments and subleases, alterations, mitigation of damages, extensions and renewals.   Landlords and tenants alike should consult with an attorney to determine whether their actions (or inactions) may be construed negatively by a court and to establish a strategy that will protect their rights and interests under the circumstances.

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