2004 McDonald Ave. Realty, LLC v 2004 McDonald Ave. Corp.
Annotate this CaseDecided on June 4, 2007
Supreme Court, Kings County
2004 McDonald Ave. Realty, LLC, Plaintiff,
against
2004 McDonald Avenue Corp., Defendant.
30839/06
Carolyn E. Demarest, J.
Upon the foregoing papers in this action by plaintiff 2004 McDonald Ave. Realty, LLC (plaintiff) for breach of a lease agreement, defendant 2004 McDonald Avenue Corp. (defendant) moves for an order, pursuant to CPLR 3211 (a) (1) and (3), dismissing plaintiff's complaint as against it.
Plaintiff, a limited liability company, entered into negotiations with defendant, a corporation, to lease a building owned by defendant, which is located at 2004 McDonald Avenue, in Brooklyn, New York. A letter (the letter of intent), which listed "the basic terms, conditions, and contingencies of the proposed lease," was drafted by plaintiff's attorney. The letter of intent set forth the location of the premises, and the rental terms of $264,000 per annum for a 15-year term lease with five, five-year options, and a 10% rent increase every five years, including option years. Additionally, the letter of intent listed various other terms and conditions.
The letter of intent expressly provided, in its opening paragraph, that "[t]his Letter is not a binding agreement except to the extent specifically stated below" (emphasis supplied). The letter of intent specified the terms which were binding. Among these terms were those stated in paragraph 15, entitled "Due Diligence," which, inter alia, required plaintiff to indemnify defendant with respect to any claims, damages, and costs incurred by defendant as a result of plaintiff's access to the premises for the purposes of conducting inspections. Another binding provision was that set forth in paragraph 20, entitled "Deposit," which required plaintiff to pay defendant $5,000 upon the signing of the letter of intent, which was to be credited towards the security deposit "upon Lease execution." The only other binding terms were those stated in paragraph 19, entitled "Non Shop," which provided: [*2] "Landlord agrees to negotiate a lease agreement in good faith with Tenant (provided that L[andlord] may terminate negotiations if it is determined that the cost of removal and/or remediation exceeds $50,000 and tenant does not agree to be responsible for the remediation to the extent it would cost over $50,000 to remediate) and to be bound not to market the Premises to other prospective tenants and agrees not to respond to any offers, unsolicited or otherwise, until the date which is the later of (x) sixty (60) days following execution of this Letter and (y) the date that the parties cease lease negotiations. This provision shall be binding upon the parties."
The letter of intent explicitly left certain material terms open for future negotiations. Specifically, paragraph 16, entitled "Alterations," provided that "[t]he Parties shall negotiate the terms under which any alterations may be performed, and paragraph 17, entitled "Guarantor and Financials," provided that "[a]n entity or individual satisfactory to [defendant] after review of financials shall sign a good guy guaranty in favor of [defendant]" with the "[t]erms to be negotiated."
The last paragraph of the letter of intent stated: "In the event that a Lease Agreement is executed and delivered by both parties, the terms of such Lease Agreement shall supersede all prior discussions and negotiations, including by way of example, this letter, and such Lease Agreement shall constitute the entire agreement of the parties."
The letter of intent was executed by plaintiff, by its president Joseph Sutton, on January 18, 2006, and by defendant, by its president, Ida Cooper, on January 23, 2005. Plaintiff also paid defendant a $5,000 deposit in accordance with paragraph 19 of the letter of intent.
Subsequently, during the negotiations between plaintiff and defendant, defendant attempted to renegotiate the rent during the option period by including a term in the lease that the fair market value adjustment shall not be less than the prior year's rent and shall not exceed a percentage (to be negotiated) of the prior year's rent. Plaintiff refused to negotiate with respect to this term, contending that the letter of intent already provided that the rent increase was 10% every five years, including option years, and that this was a binding term, not subject to further negotiations. In addition, a June 12, 2006 letter from defendant's former attorney notes that plaintiff failed to produce the name of a potential guarantor or the financials as required by paragraph 17 of the letter of intent, and it is undisputed that plaintiff never produced a satisfactory guarantor or even provided the name of a possible guarantor, despite requests for such by defendant. Such June 12, 2006 letter also noted that open issues remained with respect to the alteration clause (paragraph 16 of the letter of intent) and the hazardous materials issue (paragraph 14 of the letter of intent). [*3]
Due to plaintiff's unwillingness to negotiate over the rent increase during the option period, as evidenced by the parties' correspondence, the negotiations between the parties as to the terms of lease failed. As a result, the parties did not execute a lease. Consequently, on October 10, 2006, plaintiff filed this action for breach of contract, seeking specific performance, damages, and injunctive relief.
Defendant, in support of its instant motion, initially contends that plaintiff's action cannot be maintained, pursuant to CPLR 3211 (a)(3), due to plaintiff's lack of legal capacity to sue. Defendant asserts that plaintiff lacks such legal capacity due to the procedural defect arising out of plaintiff's failure to publish a copy of its articles of organization in compliance with Limited Liability Company Law § 206.
Defendant's contention is devoid of merit. "A failure to comply with the requirements of [Limited Liability Company Law] § 206 does not constitute a jurisdictional defect warranting dismissal" (Willoughby Rehabilitation & Health Care Ctr., LLC v Webster, 13 Misc 3d 1230 [A], *2; see also Echelon Photography, LLC v Dara Partners, L.P., 11 Misc 3d 1064 [A], *8 [2006]; Acquisition America VI, LLC v Lamadore, 5 Misc 3d 461, 463 [2004]).
Moreover, plaintiff has availed itself of the opportunity to cure afforded by the statute and has represented to the court that publication was completed on February 21, 2007. Thus, since subsequent compliance with Limited Liability Company Law § 206 warrants nunc pro tunc application averting dismissal of the action, plaintiff, upon its compliance with Limited Liability Company Law § 206, has acquired standing to prosecute this action (see Willoughby Rehabilitation & Health Care Ctr., LLC, 13 Misc 3d at *3). Consequently, dismissal of plaintiff's complaint based upon CPLR 3211 (a) (3) is not warranted.
Defendant's motion, however, also seeks dismissal of plaintiff's complaint, pursuant to CPLR 3211 (a) (1), based upon the documentary evidence. Such documentary evidence consists of the letter of intent, which, defendant claims, constitutes a complete defense to plaintiff's action. Defendant asserts that the terms of the letter of intent demonstrate that it is not binding, and, thus, plaintiff cannot assert a breach of contract claim against it.
In addressing defendant's motion, the court notes that it is well established that "when the parties have clearly expressed an intention not to be bound until their preliminary negotiations have culminated in the execution of a formal contract, they cannot be held until that event has occurred" (Brause v Goldman, 10 AD2d 328, 331 [1960], affd 9 NY2d 620 [1961]). In the case at bar, the letter of intent did not provide that it constituted a binding contract until such time as a definitive lease was executed or that the parties would be legally bound once the letter of intent was executed (compare Hajdu-Nemeth v Zachariou, 309 AD2d 578, 578 [2003]). On the contrary, the letter of intent specifically expressed the parties' intention to enter into a lease at a later date, and no where stated that defendant intended to be legally bound to lease the premises to plaintiff until such future agreement was reached (see Aksman v Xiongwei Ju, 21 AD3d 260, 261 [2005]). [*4]
Indeed, as noted above, the letter of intent provided that it was listing the basic terms of a "proposed" lease (emphasis supplied), and expressly stated in clear language that "[t]his Letter is not a binding agreement except to the extent specifically stated below." As discussed above, the terms which were specifically stated below in the letter of intent concerned only the indemnification provision (paragraph 15), the $5,000 deposit (paragraph 20), and the non-shop provision (paragraph 19) which, inter alia, prohibited defendant from marketing the premises for 60 days from the execution of such letter of intent. The letter of intent did not provide that the terms of paragraph 7, regarding rent increases of 10% every five years including the option years, were binding and not subject to further negotiations.
"[A]s a matter of law . . . even where a writing is asserted to be a preliminary agreement to negotiate, a writing which anticipates execution of a final contract and which lacks on express statement that it is to be a binding contract, is unenforceable as a contract" (Ogden Martin Systems of Tulsa v Tri-Continental Leasing Corp., 734 F Supp 1057, 1067 [SD NY 1990]). Here, the express terms of the letter of intent itself contemplated the execution of a formal lease agreement following further negotiations (see Venture Manufacturing [Singapore] Ltd. v Matco Group, 6 AD3d 850, 851 [2004]; Benedict Realty Co. v City of New York, 11 Misc 3d 1086 [A], *5 [2006]). That is, the letter of intent stated that defendant "agrees to negotiate a lease agreement in good faith with [plaintiff]," and noted that plaintiff's attorney "shall prepare and deliver to [defendant] a Lease Agreement that generally conforms to this Letter." In addition, paragraph 15 of the letter of intent, entitled "Due Diligence," provided that "[p]rior to Execution of the Lease, [defendant] shall allow [plaintiff] access to the Premises for the purposes of conducting inspections" (emphasis supplied). Also, paragraph 18 of the letter of intent, entitled "Security," stated that plaintiff "shall, upon final lease execution, conveyto [defendant] a security deposit . . . equal to two (2) months security" (emphasis supplied).
Additionally, "[w]hen the wording and sense of letters exchanged between the parties reveal no present intent to form a binding contract, but rather to continue negotiations with the possible ultimate meeting of minds deferred until some future time, either party may withdraw with impunity prior to that time" (Brause, 10 AD2d at 332). The correspondence between the parties demonstrates that the parties continued to negotiate regarding material terms which would be included in the future lease agreement, at times referring to such lease as a "proposed lease." This evidences that it was the parties' intent not to be bound until a formal lease was finally negotiated and executed.
Moreover, the last paragraph of the letter of intent (as quoted above) contemplated that no actual lease agreement might be executed by providing that, in such event, the terms of the letter of intent would not be binding except as specifically set forth in the letter of intent, i.e, plaintiff would be required to indemnify defendant for any damages incurred by defendant due to plaintiff's inspection of the premises and defendant was entitled to retain the $5,000 deposit given in consideration for taking the premises off the market for 60 days. [*5]
Furthermore, it is well settled that " a mere agreement to agree, in which a material term is left for future negotiations, is unenforceable'" (F & K Supply v Willowbrook Dev. Co., 288 AD2d 713, 714 [2001], quoting Joseph Martin, Jr., Delicatessen v Schumacher, 52 NY2d 105, 109 [1981]; see also Carmon v Soleh Boneh Ltd., 206 AD2d 450, 450 [1994], Jericho 99 Partners, LLC v Concord Mortgage Corp., 8 Misc 3d 1018 [A], *3 [2005]). Negotiation of what the parties "regard as essential elements" must be completed before a contract can be enforced (Four Seasons Hotels Ltd. v Vinnik, 127 AD2d 310, 317 [1987]).
Plaintiff asserts that defendant's motion should be denied because the letter of intent specified the term of the lease, the rent to be paid by it, and the location of the demised premises. It argues that these terms constitute all of the required material terms of the lease, and are, therefore, sufficient to render the letter of intent a binding contract.
Plaintiff's argument must be rejected as it is not borne out by the documentary evidence. As previously noted, the letter of intent states that (except for certain specified terms), the terms set forth therein were not binding, and, in fact, the parties explicitly left open for future negotiations terms including that of alterations to the property (in paragraph 16), insurance (in paragraph 12), and plaintiff's guarantor (in paragraph 17). Such terms are material and preclude a finding of a final binding agreement (see Weisz v R.M.K. Realty Corp., 68 NYS2d 533, 534 [1947], affd 273 App Div 781 [1947]).
While plaintiff claims that these issues were minor lease terms which could have been easily negotiated if defendant acted in good faith, defendant points out that the issue of a guarantee was of material importance to it because plaintiff was a newly formed entity with no assets or financial history. In addition, it is noted that the letter of intent failed to provide for a definite lease commencement date, providing only, in paragraph 8, that the lease "shall commence 30 days after delivery of premises in vacant broom clean condition" (see Brause,10 AD2d at 334).
Thus, the letter of intent was merely a preliminary non-binding agreement to agree rather than an enforceable contract since it contained open terms, and anticipated future preparation and execution of a lease (see Aksman, 21 AD3d at 261; Venture Mfg. [Singapore] Ltd., 6 AD3d at 851; F & K Supply, 288 AD2d at 714; Carmon, 206 AD2d at 450). There was no full manifestation of mutual assent and a complete meeting of minds was not reached (see F & K Supply, 288 AD2d at 714-715; Brause, 10 AD2d at 331). The necessary finality of assent was lacking (see Brause, 10 AD2d at 332).
At most, the letter of intent constituted "a mutual commitment to negotiate together in good faith in an effort to reach final agreement within the scope that [was] settled in the preliminary agreement" (Arcadian Phosphates v Arcadian Corp.,884 F2d 69, 72 [2d Cir 1989]). In this regard, plaintiff argues that defendant's attempt to renegotiate the rent increases during the option period was in bad faith and breached the agreement in the letter of intent. Such argument is unavailing. As previously noted, no where in the letter of intent (which explicitly specified the terms that were binding) does it state that this was a binding term or preclude the parties from engaging in further negotiations as to this term. [*6]
While defendant agreed to negotiate a lease agreement "in good faith" with plaintiff, there is no clear set of guidelines against which to measure defendant's efforts in negotiation. Therefore, since there was no objective criteria or standards against which defendant's efforts could be measured stated in the letter of intent, and the correspondence demonstrates that defendant did engage in negotiations with plaintiff, but ultimately such negotiations failed, it cannot be said that defendant acted in bad faith (see Bernstein v Felske, 143 AD2d 863, 865 [1988]). Attempts at negotiation and renegotiation of lease terms is not tantamount to bad faith. Thus, inasmuch as the letter of intent did not constitute a binding contract, plaintiff's complaint against defendant must be dismissed based upon the documentary evidence (see CPLR 3211[a][1]; Prospect Street Ventures I, LLC v Eclipsys Solutions Corp., 23 AD3d 213, 213 [2005]; Hollinger Digital v Locksmart, Ltd., 267 AD2d 77, 77 [1999]; Carmon, 206 AD2d at 450).
Accordingly, defendant's motion to dismiss plaintiff's complaint as against it, is granted.
This constitutes the decision and order of the court.
ENTER,
J.S.C.
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