Jarecki v. Shung Moo Louie, 95 N.Y.2d 665 (2001)

When parties enter into a formal contract of sale containing a merger clause after an option to purchase real property has been exercised, the terms of the purchase agreement are merged into the written contract, and the bilateral contract to purchase is terminated if the sale is cancelled according to the contract terms.

Summary

Jarecki, a sublessee with an option to purchase, exercised his option with the Louies. They then executed a contract of sale, including an anti-assignment provision and a merger clause, subject to co-op board approval. The board rejected Jarecki, cancelling the contract per its terms. Jarecki claimed the option remained and he could assign it to another buyer. The Court of Appeals held that the subsequent contract of sale, with its merger clause, superseded the initial bilateral contract created by exercising the option. When the sale failed, the entire agreement, including the purchase option, was terminated, preventing Jarecki from assigning a non-existent right.

Facts

Henry Jarecki entered into a three-year sublease agreement with Shung Moo Louie and Shung Mon Louie for a cooperative apartment in Manhattan, which included an option to purchase the apartment for $600,000, subject to the cooperative board’s approval. In February 1998, Jarecki notified the Louies that he was exercising the option. Thereafter, the parties executed a contract of sale, which included an anti-assignment provision and a standard merger clause, and reiterated that Jarecki’s right to purchase was subject to approval by the co-op board. In May 1998, the board rejected Jarecki’s application. Jarecki then tried to assign his “option” to another buyer.

Procedural History

Jarecki sued for specific performance and related claims. The Supreme Court granted the Louies summary judgment, dismissing the complaint, holding Jarecki had no continuing right to purchase after the co-op’s rejection. The Appellate Division reversed, granting Jarecki specific performance, reasoning that the board’s rejection voided the non-assignable contract of sale, but not the original option. The Court of Appeals reversed the Appellate Division and reinstated the Supreme Court’s judgment.

Issue(s)

Whether, after an option to purchase is exercised and a subsequent contract of sale is executed containing a merger clause, the original bilateral contract created by the exercised option survives the cancellation of the contract of sale based on a contingency within that contract.

Holding

No, because the terms of the purchase agreement were merged into the written contract of sale; therefore, the bilateral contract to purchase the apartment was terminated when the contract of sale was cancelled based on the co-op board’s disapproval.

Court’s Reasoning

The Court of Appeals reasoned that while exercising an option creates a bilateral contract, the parties’ subsequent written contract of sale, including a merger clause, superseded the initial agreement. The court stated, ” ‘An option contract is an agreement to hold an offer open; it confers upon the optionee, for consideration paid, the right to purchase at a later date’ ” (Kaplan v Lippman, 75 NY2d 320, 324). Once exercised, it ripens into a bilateral contract. However, the merger clause in the contract of sale indicated the parties’ intent that the written agreement was a complete integration of their understanding. The purpose of a merger clause “is to require the full application of the parol evidence rule in order to bar the introduction of extrinsic evidence to alter, vary or contradict the terms of the writing” (Matter of Primex Intl. Corp. v Wal-Mart Stores, 89 NY2d 594, 599). Since the board disapproved the sale, which terminated the contract per its terms, Jarecki could not rely on a separate agreement that no longer existed. The court emphasized that options in leases are generally not independent of the lease terms and should not create unreasonable results, such as indefinitely undermining the property’s alienability. The court further stated that “It is possible to draft the provision so as to give the lessee an option to purchase as an independent contractual right, separable from the lease, but such a provision would be an unusual one” (Gilbert v Van Kleeck, 284 App Div 611, 616).