Opinion
Nos. CV-06-5001396, CV-06-5001397
August 11, 2008
MEMORANDUM OF DECISION
Plaintiff Pack 2000 brought two separate actions by Complaints dated June 26, 2006 against Eugene Cushman seeking specific performance of its options to purchase two parcels of land. Trial was held before the Court on June 24, 2008 and July 2, 2008. The parties filed Post-Trial Briefs dated July 25, 2008.
I Findings of Fact
1. In July 2002, plaintiff Pack 2000, Inc., Eugene Cushman (hereinafter "Cushman"), and ARCO, Inc., a corporation controlled by Cushman, participated in a transaction that resulted in the transfer of the management and operation of three Midas Muffler Shops (hereinafter "shops") from ARCO to plaintiff.
2. The shops involved were located in New London, Connecticut, Groton, Connecticut and Westerly, Rhode Island.
3. The Westerly shop subsequently was transferred to plaintiff in March 2005 and is not a subject of this lawsuit.
4. The New London and Groton shops are located on pieces of property owned by Cushman.
5. As part of the aforementioned transaction, plaintiff and ARCO entered into a Management Agreement dated July 2, 2002 pursuant to which plaintiff was to assume management of the shops.
CT Page 13063
6. As part of the aforementioned transaction, plaintiff and Cushman entered into a "Lease with Option" (hereinafter "Lease") for each piece of property dated July 25, 2002.
7. As part of the aforementioned transaction, plaintiff, Cushman, ARCO and two individuals affiliated with plaintiff executed two Promissory Notes and a Letter of Intent.
8. ARCO, Inc. is not a party to this lawsuit.
9. Plaintiff was required to make periodic payments to Cushman and to third parties pursuant to the terms of the aforementioned agreements.
10. Plaintiff was sometimes late in making the aforementioned payments and Cushman frequently contacted plaintiff regarding these late payments.
11. Plaintiff is currently not in arrears on any of its financial obligations to Cushman or any third party relating to this matter.
12. Plaintiff continues to make rental payments under each Lease and continues to manage and operate the New London and Groton shops.
13. Since 2002, plaintiff has paid Cushman in excess of $600,000.00 in rent under the Leases and $700,000.00 on the promissory notes.
14. Each Lease provides plaintiff with an option to purchase the property under essentially identical terms:
Option
2. So long as the Lessee [plaintiff] has been in compliance with the terms and conditions of this Lease, the Letter of Intent, and Management Agreement (all of even date herewith) and is in compliance with such instrument when the option is exercised, Lessee shall have the option to purchase the real estate subject to this lease.
a. The option shall be exercised by Lessee giving Lessor three months advanced notice, in writing. The option may be exercised by giving the aforesaid notice between the date of this Lease and the fifth anniversary of same.
15. The Management Agreement contains the following language as it relates to plaintiff's option to purchase the properties:
10. Option. The Manager [plaintiff] shall be given an option to purchase the real estate upon which the shops are located. Said option shall be by separate agreement and signed by the titleholder and the party designated by the Manager to take title. Such option shall cite separate consideration and shall contain the terms as generally outlined herein.
(a) Such option may be exercised between the date of commencement herein and the fifth anniversary of same;
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(f) Manager must be in full compliance with this agreement and any lease agreement at the time of the exercise.
16. On August 22, 2003, plaintiff's Vice-President Paulina Anderson (hereinafter "Anderson") sent Cushman a fax stating that she wanted "to finalize the purchase of the shops and exercise the option to purchase the real estate by the end of 2003."
At trial, Mr. Cushman testified that he did not recall receiving the August 22nd fax. To his credit, however, he did concede that he could not rule out having received it. Given the fact that the fax is referred to in a letter from plaintiff to Cushman dated one week later and there is no evidence of Cushman having raised the issue of non-receipt at the time, the Court finds by a preponderance of the evidence that the fax was, in fact, sent to and received by Cushman.
17. On August 29, 2003, Anderson sent Cushman a letter that referred to the fax, indicating that plaintiff did not yet have a commitment from a bank and seeking information about a possible appraisal.
18. By letter dated September 2, 2003 Cushman, on behalf of ARCO, informed Anderson that plaintiff was not in compliance with the terms of the Management Agreement:
The installment payment regarding the above-named Management Agreement which was due September 1, 2003 has not been received. Per the provisions of said agreement, the monthly installments are due on the first day of each month.
**************************************************** [You are hereby put on notice that this late payment, and all of the prior late payments, puts you out of compliance with the terms and conditions of the Management Agreement. Subsequent acceptance of the September 2003 payment (or any future payment tendered after the due date) will not cure the non-compliance nor does ARCO Corp. waive any rights or consequences which flow from your non-compliance.
19. There is no record of plaintiff having specifically responded to Cushman's September 2, 2003 correspondence.
20. Cushman testified that while he felt plaintiff was not in sufficient compliance with the agreements in order to exercise the options, he had not declared plaintiff in default at that time nor was plaintiff currently in default.
21. By correspondence from plaintiff's counsel to Cushman dated May 16, 2006, plaintiff sought to exercise its option to purchase the New London and Groton properties.
22. By correspondence from Anderson to Cushman dated May 19, 2006, plaintiff sought to exercise its option to purchase the New London and Groton properties.
23. On May 16, 2006 and May 19, 2006, the payment on the promissory note due May 8, 2006 had not yet been paid.
24. Each of plaintiff's attempts to exercise its options was made within the time frame provided for in the Leases and the Management Agreement.
25. Plaintiff filed suit against Cushman by Complaint dated June 26, 2006 seeking specific performance of its options to purchase the New London and Groton properties.
II Discussion of Law
The Court is faced with three issues: 1) Did plaintiff have the right to exercise the options to purchase the property; 2) If so, did plaintiff effectively exercise these options; and 3) If so, is plaintiff entitled to specific performance?
A Did Plaintiff Have the Right to Exercise the Options?
The first issue is whether plaintiff possessed the right to exercise its options to purchase the New London and Groton parcels. Both the Management Agreement and the Leases contain language regarding plaintiff's level of compliance with the terms of the Management Agreement and the individual Leases that must exist in order for plaintiff to exercise the respective options. The Leases between plaintiff and Cushman require that plaintiff be "in compliance with the terms and conditions of this Lease, the Letter of Intent, and Management Agreement" in order to exercise the options, while the Management Agreement between plaintiff and ARCO requires that plaintiff be in "full compliance with this agreement."
Neither party raises the issue of whether Cushman has the right to enforce the terms of the Management Agreement between plaintiff and ARCO against plaintiff given that Cushman was not a party to that Agreement. The court finds that the parties intended that Cushman have enforceable rights under the Management Agreement as the owner of the parcels on which the shops are located and that Cushman, therefore, has the right to enforce the terms of the Management Agreement as a third-party beneficiary. See, Dow Condon, Inc. v. Brookfield Development Corp., 266 Conn. 572, 580 (2003).
The evidence presented at trial demonstrated that plaintiff frequently did not make payments on the dates they were due and that Cushman repeatedly complained about such tardiness. However, the payments were, on the whole, made within a commercially reasonable time. When questioned about a number of tardy payments, Anderson presented credible explanations, including the instance where the May 2006 payment under the promissory note was more than one month late. The evidence indicates that plaintiff has made payments to Cushman in excess of 1.3 million over the course of the parties' relationship. In addition, Cushman testified that while he felt plaintiff was not in sufficient compliance with the agreements in order to exercise the options, he had not declared plaintiff in default at that time nor was plaintiff currently in default. As a result, the Court finds that while plaintiff was not in strict compliance with the terms of the agreements when it sought to exercise the options at issue, it was in substantial compliance.
The question is whether a standard of strict compliance or substantial compliance applies under these circumstances. "Pursuant to the doctrine of substantial performance, a technical breach of the terms of a contract is excused, not because compliance with the terms is objectively impossible, but because actual performance is so similar to the required performance that any breach that may have been committed is immaterial." Borelli v. HH Contracting, 100 Conn.App. 680, 693, n. 6 (2007), appeal dismissed, 285 Conn. 553 (2008), citing 15 Williston, Contracts (4 Ed. Lord 2000) § 44.52, p. 218.
There is little question that the strict compliance standard is applicable to issues surrounding the actual exercise of an option, see, e.g., Williston, supra, p. 220, but it is less clear whether it applies to issues regarding the right to exercise an option. In Brauer v Freccia, 159 Conn. 289, 290 (1970), the agreement at issue allowed the plaintiffs to exercise their option to purchase the property "if the Lessee shall have duly and punctually fulfilled all of the provisions, agreements, covenants and conditions of this lease." In holding that plaintiffs had failed to comply with the cited provision of the contract because they had failed to make eight monthly rental payments, the Court stated that the cited contractual language "clearly indicates that the defendants' duty was conditioned upon the plaintiffs' punctual performance of their obligations under the lease." At no point, however, does the Court indicate what standard should apply to plaintiffs' level of compliance and the ultimate result leaves no clue because eight missed monthly rent payments do not constitute substantial compliance under even the most elastic definition of the term.
The Brauer opinion does indicate, however, that it is the intention of the parties to the contract that controls the question of whether the right to exercise an option exists. Id., 292. This proves problematic in this case because while the Management Agreement requires "full compliance," the Leases simply require "compliance."
Mr. Cushman testified that while he considers plaintiff to have been out of compliance with the agreements to the extent that it could not exercise its options, he does not currently consider plaintiff to be in default and did not exercise his right to declare it in default at any time. In Cimina v. Bronich, 517 Pa. 378, 537 A.2d 1355, (1988), the lessee sought specific performance of an option to purchase real property that lessors had refused to comply with based on the fact that the lessee had not paid the taxes on the property as required by the lease. Two lower courts refused to order specific performance of the transfer based on lessee's nonpayment of the taxes, in spite of their finding it did not constitute a material breach of the contract. In overturning these decisions and ordering specific performance, the Pennsylvania Supreme Court held that there cannot be two separate standards of compliance applied to the same agreement: "If a breach is found to be immaterial under the guise of one action on the contract, it should likewise be immaterial under a collateral action since the basic issue in both instances would be the same, i.e., whether there is a breach of the contract such that the non-breaching party is relieved of his duty to perform." Id., 386.
Other courts have also imposed a substantial compliance standard to the issue of whether a lessee possessed the right to exercise an option. In Panhandle Rehabilitation Center, Inc v. Larson, 205 Neb. 605, 288 N.W.2d 743 (1980), the Court ordered specific performance upon finding that a lessee had substantially performed its duties under the lease, in spite of its failure to list the lessor as an additional insured on an insurance policy: "Plaintiff did breach the insurance covenant; however, it did in all other things promptly and in good faith perform the lease terms for five years." Id., 610. In Vanguard Diversified v. Review Co., 35 A.2d 109, 313 N.Y.S.2d 269 (1970), the Court found that a substantial compliance standard applied where the question involved was whether proof of several industrial safety violations barred lessee from exercising its option in view of a contractual provision requiring lessee to abide by applicable governmental regulations.
Based on the foregoing, the Court finds that a substantial compliance standard applies in this matter, that plaintiff substantially complied with the agreements at issue, and, as a result, plaintiff possessed the right to exercise its options to purchase the New London and Groton properties.
B Did Plaintiff Effectively Exercise the Options?
The next question is whether plaintiff effectively exercised its options. On August 22, 2003, plaintiff sent Cushman a fax stating that it wanted "to finalize the purchase of the shops and exercise the option to purchase the real estate by the end of 2003." Cushman argues that this did not constitute an effective exercise of the options for a number of reasons, including the fact that the real estate is not defined in the fax, that it mistakes the appraisal process, and that since Cushman considered it ineffective, the transfer was never consummated.
In order for the exercise of an option to be effective, it must strictly comply with the contractual requirements regarding its exercise. "To be effective, an acceptance of an offer under an option contract must be unequivocal, unconditional, and in exact accord with the terms of the option." Smith v. Hevro Realty Corporation, 199 Conn. 330, 339 (1986). "[A]n option must be exercised, if at all, in strict accordance with its terms . . ." Williston, supra. In this matter, the Management Agreement and the Leases simply require the exercise of either option be in writing and occur within a given time period. The August 22, 2003 fax clearly fulfills both requirements. There is no requirement in the agreements that the property be specifically identified and Cushman's complaints regarding other issues relate the mechanics of the transfer of the property rather than the actual exercise of the options. As a result, the Court finds that plaintiff's August 29, 2003 fax strictly complied with the contractual terms relating to the exercise of the option and, as a result, plaintiff's exercise of the option was effective.
Cushman's argument that the option expired by its own terms three months after its exercise is particularly unavailing, given the fact that it was his refusal to accept the option that caused the period to lapse.
This decision renders moot the issue of whether the subsequent exercise of the options on May 16, 2006 and May 9, 2006 were, in fact, valid, particularly in view of Cushman's letter dated September 2, 2003 that declared plaintiff out of compliance with the Management Agreement. Given the Court's finding that plaintiff was in substantial compliance with the agreements, the Court finds that plaintiff's subsequent exercise of its options was effective.
C Is Plaintiff Entitled to Specific Performance?
The evidence indicates that Cushman enjoyed, and continues to enjoy, the benefits of the agreements with plaintiff, including the receipt of over $1.3 million since 2002. The Court concludes, based on the fact that plaintiff filed these actions seeking specific performance of the transfer of the New London and Groton properties, that transfer under the terms contained in the agreements does not work to Cushman's financial benefit. "The granting of specific performance of a contract to sell land is a remedy which rests in the broad discretion of the trial court depending on all facts and circumstances when viewed in light of the settled principles of equity." Webster Trust v. Roly, 261 Conn. 278, 284 (2002).
As set forth above, the Court found that plaintiff had the right to exercise the options at issue and that it did so effectively. To allow Cushman to enjoy the benefits of his bargain with plaintiff while avoiding the less financially attractive elements of the transaction would be inequitable. As a result, the Court finds that specific performance of the sale of the New London and Groton parcels pursuant to the terms set forth in the agreements between the parties is the appropriate remedy in this matter.
Order
The parties are hereby ordered to immediately proceed with the appraisal process on both the New London parcel and the Groton parcel pursuant to the terms contained in § 2(b) of each Lease. In the interim or upon completion of the appraisal process, either party may seek any additional orders from the Court it deems appropriate, including orders of transfer.