Tenant Not Obligated to Exercise Lease Option

Facts: A bank tenant entered into two ground leases for properties on which to build a bank branch and parking lot, respectively. The tenant was responsible for procuring all necessary permits. The ground leases provided a contingency period—the “Approval Period”—of six months during which the tenant was required to seek all necessary government approvals and permits to construct and operate the branch. The leases also gave the tenant an option to extend the Approval Period for two three-month terms. The tenant could terminate the lease without penalty if it couldn’t get the necessary permits and approvals within the initial Approval Period.

The tenant applied for the necessary permits and approvals, but encountered several setbacks. Nearing the end of the Approval Period, it was waiting for approvals, but none had been granted. Two days before the expiration of the Approval Period, the tenant notified the owner that it was terminating the lease pursuant to the contingency provisions.

The owner sued the tenant for breach of contract. A trial court ruled in favor of the owner. The tenant appealed.

Decision: A New Jersey appeals court reversed the trial court’s decision.

Reasoning: The appeals court stated that the ground leases explicitly established a six-month Approval Period during which the tenant was required to employ “good faith commercially reasonable efforts” to seek required approvals and permits. The leases further provided options exclusively to the tenant to extend the Approval Period for two additional periods. The leases also allowed for termination if, within the Approval Period, the tenant had been “unable to procure any such required permit or approval.”

The ground leases contained no provision, however, requiring the tenant to prosecute an already-submitted application to its conclusion. The ground leases specifically empowered the tenant to terminate the contracts if the permits and approvals were not procured “within the Approval Period.” While the leases exclusively gave the tenant the option to extend the Approval Period, it wasn’t required to exercise that option if it was still waiting for approvals. Rather, the leases gave the tenant a choice either to terminate or to exercise its option to extend the Approval Period.

“The leases, in effect, exclusively gave the tenant the right to determine whether it wanted to ‘see land use approvals through to the end’ in the event the approvals and permits were not procured during the six-month Approval Period,” stressed the appeals court. But the leases didn’t contractually obligate the tenant to “wait and see if the permits and approvals were granted,” exercising the options in order to do so,” it emphasized.

• Defino v. Wachovia Bank, August 2015