CPS Operating Co. LLC v. Pathmark Stores, Inc., 18 N.Y.3d 326 (2011)

When a contract explicitly identifies a potential regulatory obstacle as a “Permitted Exception” to a seller’s warranty, the buyer assumes the risk that the obstacle will prevent the transaction from closing.

Summary

CPS Operating Co. (Extell’s parent) sought to develop property leased by Pathmark. They contracted to acquire Pathmark’s leasehold for $87 million, depositing $6 million. The contract included a clause stating Pathmark was not prohibited from consummating the transaction, except for “Permitted Exceptions,” which included a Land Distribution Agreement (LDA) with the City requiring City approval for lease assignments before January 2009. CPS terminated the deal citing Pathmark’s breach due to the LDA restriction. Pathmark retained the deposit. The New York Court of Appeals held that CPS assumed the risk of the City’s disapproval because the LDA was a “Permitted Exception” to Pathmark’s warranty. Thus, Pathmark was entitled to keep the deposit.

Facts

The City sold property to a sponsor for an urban renewal project in 1981, requiring a Pathmark supermarket for 25 years under an LDA. The LDA mandated City approval for lease assignments before January 2009. The sponsor leased to Pathmark. Extell Development (through CPS Operating) sought to buy Pathmark’s leasehold in 2007 for $87 million for residential development. The Leasehold Assignment Contract contained a clause where Pathmark warranted it wasn’t prohibited from consummating the deal, excluding