New York Law Review

Tag: Option Contract

  • SVCare Holdings LLC v. Cammeby’s Equity Holdings LLC, 21 N.Y.3d 432 (2013): Parol Evidence and Enforceability of Option Contracts

    SVCare Holdings LLC v. Cammeby’s Equity Holdings LLC, 21 N.Y.3d 432 (2013)

    A written agreement, clear and unambiguous on its face, must be enforced according to the plain meaning of its terms, and parol evidence is inadmissible to alter or add provisions, especially when the contract contains a merger clause.

    Summary

    SVCare sought to invalidate an option contract, arguing that the consideration was a $100 million loan that was never funded. The New York Court of Appeals held that the option agreement was valid and enforceable. The court reasoned that the contract’s explicit mention of “mutual covenants” as consideration, combined with a merger clause, precluded the introduction of parol evidence to prove that a separate loan agreement constituted the true consideration. The court emphasized the importance of upholding unambiguous written agreements, especially between sophisticated parties represented by counsel.

    Facts

    Leonard Grunstein and Murray Forman (SVCare) sought Rubin Schron’s (Cammeby’s Equity Holdings LLC) participation in acquiring Mariner Health Care, Inc. Schron financed the acquisition. As part of the deal, Cam Equity received an option to acquire 99.999% of SVCare’s membership units, with the consideration stated as “the mutual covenants and agreements hereinafter set forth, and other good and valuable consideration.” A separate loan agreement stipulated Cam III would loan $100 million to SVCare. Cam Equity sought to exercise the option, but SVCare refused, claiming the $100 million loan (allegedly the true consideration) was never paid.

    Procedural History

    SVCare initiated an action (Mich II Holdings LLC v Schron) arguing the option was unenforceable. Cam Equity then sued for specific performance of the option agreement (Schron v Troutman Sanders LLP). Cam Equity moved to exclude parol evidence intended to link the $100 million loan to the option agreement’s consideration. The Supreme Court consolidated the cases and granted Cam Equity’s motions, finding the option and loan were separate agreements. The Appellate Division affirmed. The Court of Appeals granted SVCare leave to appeal.

    Issue(s)

    Whether the lower courts erred in precluding SVCare from introducing extrinsic evidence to show that the phrase “other good and valuable consideration” in the option contract was intended to mean the $100 million loan obligation, and that the loan was never funded.

    Holding

    No, because the option agreement unambiguously provided that the mutually beneficial covenants constituted the consideration, and the introduction of another obligation would violate the parol evidence rule.

    Court’s Reasoning

    The court emphasized that written agreements should be construed according to the parties’ intent, with the best evidence being the writing itself. Parol evidence is only admissible if the contract is ambiguous. Because the option agreement explicitly stated that the “mutual covenants” constituted consideration, it was unambiguous. The court stated, “[A] written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms”. The court also noted the presence of a merger clause, further barring extrinsic evidence. The court reasoned that if the parties intended the loan to be a condition of the option, they could have explicitly included it in the agreement. The court stated: “Such a fundamental condition would hardly have been omitted”. Allowing parol evidence would modify the agreement and negate the merger clause. Thus, the option was deemed a valid, stand-alone contract enforceable upon payment of the $100 million strike price.

  • Jarecki v. Shung Moo Louie, 95 N.Y.2d 665 (2001): Effect of Merger Clause on Option Contract After Exercise

    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).

  • In Re Estate of Fischer, 78 N.Y.2d 88 (1991): Enforceability of Option Contracts with Third-Party Price Determination

    In Re Estate of Fischer, 78 N.Y.2d 88 (1991)

    An option contract for the sale of real property is not void for indefiniteness if it provides a clear method for determining the purchase price through a third party, such as an appraiser, even if the specific appraisal method is not detailed.

    Summary

    This case concerns the enforceability of a three-year option agreement for the purchase of real property. The agreement stipulated that the purchase price would be either the sum offered by a bona fide third-party purchaser or the price determined by three appraisers selected as described in the option. The appellant argued the option was indefinite and unenforceable because it failed to specify the method the appraisers should use to determine the price. The New York Court of Appeals held that the option was not void for indefiniteness, as the parties clearly intended to delegate the price calculation to a third party and agreed to be bound by the result, providing an objective standard for determining the price.

    Facts

    The parties entered into a three-year option agreement for the purchase of real property.

    The agreement stipulated the purchase price would be either a bona fide third-party offer or a price determined by three appraisers.

    The option outlined the procedure for selecting the appraisers.

    The appellant argued the option was indefinite because it did not specify how the appraisers would determine the property’s value.

    Procedural History

    The case originated in a lower court where the option agreement was deemed enforceable.

    The Appellate Division affirmed this decision.

    The case was appealed to the New York Court of Appeals.

    The New York Court of Appeals affirmed the Appellate Division’s order.

    Issue(s)

    Whether an option contract for the purchase of real property is void for indefiniteness if the contract specifies that the purchase price will be determined by a third-party appraiser but does not detail the appraisal method.

    Holding

    No, because the option agreement clearly indicated the parties’ intent to delegate price calculation to a third party, agreeing to be bound by the result, providing an objective standard that renders the option definite and enforceable.

    Court’s Reasoning

    The Court of Appeals relied on its prior holdings in Cobble Hill Nursing Home v Henry & Warren Corp. and Matter of 166 Mamaroneck Ave. Corp. v 151 E. Post Rd. Corp. to support its decision. The court emphasized that the parties intended to commit the calculation of the price to a third party and agreed to be bound by the result. Unlike agreements where parties agree to agree on a price in the future, this option tied the price to an extrinsic event—either a bona fide purchaser’s offer or an appraisal—and provided a method for selecting appraisers.

    The court stated this "provides an objective standard that renders the * * * [option] definite and enforceable." The court distinguished this situation from cases where essential terms were left open for future negotiation, making this option contract enforceable due to the agreed-upon mechanism for price determination. The court found that the clear intent to delegate price determination to a third party provided sufficient definiteness, even without specifying the exact appraisal method.

  • Lippman v. Kaplan, 504 N.E.2d 702 (N.Y. 1986): Statute of Frauds and Exercise of Option Agreements

    Lippman v. Kaplan, 504 N.E.2d 702 (N.Y. 1986)

    The Statute of Frauds applies to the creation of an option contract for the sale of real property, not to the subsequent exercise of that option, provided the original option contract is in writing and signed by the party to be charged.

    Summary

    Lippman and Wengraf, sublessors of a cooperative apartment, appealed a decision that Kaplan, the sublessee, validly exercised an option to purchase the apartment. The sublessors argued that the exercise of the option violated the Statute of Frauds because the sublessee’s attorney lacked written authority to act on the sublessee’s behalf. The court held that the Statute of Frauds was satisfied by the written sublease agreement containing the option, and the sublessees had actual notice of the intent to exercise the option. The court affirmed the order compelling the sublessors to convey their interest.

    Facts

    Lippman and Wengraf sublet a cooperative apartment to a medical corporation (Kaplan). The sublease agreement contained a clause (paragraph 18) granting the sublessee the option to purchase the sublessors’ shares in the cooperative for $30,000. The option required written notice to the lessors at least six months before the option’s termination. The sublessee’s attorney sent a letter to the sublessors’ former attorney notifying them of the intent to exercise the option. Three additional letters were sent to the same attorney without response. Later, another attorney for the sublessee wrote directly to Lippman referring to the prior letters.

    Procedural History

    The sublessee sought to enforce the option. The sublessors argued the exercise of the option was invalid under the Statute of Frauds. The Appellate Division ruled in favor of the sublessee. The sublessors appealed to the New York Court of Appeals.

    Issue(s)

    Whether the exercise of an option to purchase real property is invalid under the Statute of Frauds if the attorney exercising the option on behalf of the client lacks separate written authorization, given that the original option agreement was in writing and signed by the party to be charged.

    Holding

    No, because the Statute of Frauds applies to the creation of the option contract itself, not to the act of exercising the option, provided the original option agreement is in writing and signed by the party to be charged, and because the sublessors had actual notice of the subtenant’s intention to exercise the purchase option.

    Court’s Reasoning

    The court reasoned that an option contract is an agreement to hold an offer open, giving the optionee the right to purchase at a later date. The Statute of Frauds requires that contracts for the sale or long-term lease of property be signed by the party to be charged. In this case, the option agreement was contained in a written sublease agreement signed by the sublessors (the party to be charged). The court stated, “It is the execution of the option agreement, and not the exercise of the option, that is controlling with respect to the application of the Statute of Frauds.” Once the optionee gives notice of intent to exercise the option according to the agreement, the unilateral option agreement becomes a fully enforceable bilateral contract. The court emphasized that the sublessors had actual notice within the specified time period that the subtenant intended to exercise the purchase option. The court distinguished *Ochoa v. Estate of Sarria*, 97 A.D.2d 538, and agreed with the holding in *Stark v. Fry*, 129 A.D.2d 237. The court noted the sublessors’ misunderstanding of the Statute of Frauds, stating, “The Statute of Frauds requires that a contract for the sale or long-term lease of property be signed by the party to be charged, i.e., the party against whom enforcement of the contract is sought. The absence of a signature by the party seeking to enforce the agreement is without legal significance.”

  • LIN Broadcasting Corp. v. Metromedia, Inc., 73 N.Y.2d 54 (1988): Revocability of First Refusal Offer After Third-Party Deal Fails

    LIN Broadcasting Corp. v. Metromedia, Inc., 73 N.Y.2d 54 (1988)

    A right of first refusal offer, triggered by a contract to sell to a third party, is revocable by the seller during the specified duration of the right if the third-party transaction is abandoned, unless the contract explicitly states otherwise.

    Summary

    LIN Broadcasting and Metromedia had agreements giving each other first refusal rights regarding the sale of their interests in cellular telephone ventures. When Metromedia contracted to sell assets, including these interests, to Southwestern Bell, it notified LIN of its first refusal rights. After negotiations, Metromedia and Bell amended their agreement, excluding the cellular interests. Metromedia then notified LIN that the first refusal offers were no longer valid. LIN attempted to exercise its first refusal rights. The court held that the offers were revocable because a right of first refusal does not create a binding option and the underlying third-party transaction had been abandoned. This case clarifies the distinction between a right of first refusal and an option, emphasizing that a first refusal offer is not irrevocable unless explicitly stated in the agreement.

    Facts

    LIN and Metromedia formed partnerships and corporations to provide cellular telephone service in New York City and Philadelphia. The New York agreement provided LIN a 45-day right of first refusal, and the Philadelphia agreement had a 10-day right to request appraisal of shares with 30 days to purchase at appraised value. In June 1986, Metromedia agreed to sell various assets, including its cellular interests, to Southwestern Bell for $1.65 billion, conditioned on waivers of first refusal rights. Metromedia notified LIN of the proposed sale and its first refusal rights. After some discussion and extensions, Metromedia and Bell amended their agreement in September 1986, with Metromedia retaining the cellular interests and reducing the purchase price by $453 million. Metromedia then notified LIN that the first refusal offers were no longer valid.

    Procedural History

    LIN sued Metromedia for specific performance to compel the sale of the New York interests and initiated a proceeding to expedite the appraisal of the Philadelphia interests. The trial court denied Metromedia’s motions to dismiss and granted LIN’s petition for appraisal. The Appellate Division reversed, concluding that neither agreement conferred an irrevocable right to compel a sale, and that Metromedia could change its mind about selling before the right of first refusal was invoked.

    Issue(s)

    Whether a contractual right of first refusal, triggered by a contract to sell to a third party, may be exercised during the specified duration of the right but after the third-party transaction has been abandoned?

    Holding

    No, because a right of first refusal does not create a binding option requiring the offer to remain open after the third-party transaction is abandoned, unless the contract explicitly states otherwise.

    Court’s Reasoning

    The court emphasized the distinction between a right of first refusal and an option. A right of first refusal requires the owner, when and if they decide to sell, to offer the property first to the holder of the right, allowing them to match a third-party offer. An option, on the other hand, is an offer that is contractually kept open. The court stated that “[t]he effect of a right of first refusal…is to bind the party who desires to sell not to sell without first giving the other party the opportunity to purchase the property at the price specified.” Since neither the New York nor Philadelphia agreement bestowed an irrevocable right to compel a sale, LIN only had a standard right of first refusal. The court reasoned that requiring the selling party to keep the offer open after the third-party sale was abandoned would give the first refusal offer all the attributes of an option, which was not the intent of the agreement. The court noted the clause itself operates as a restriction by preventing a party from making a sale without first making the first refusal offer. The court stated, “When, as here, the selling party has fully complied with its obligations under the first refusal clause by not selling without first making the required offer, the nonselling party has received the bargained-for performance.” The court further reasoned that imposing an irrevocable option on the seller carries substantial risks, as the buyer could wait until the end of the option period to buy only if the price is advantageous. The court concluded that unless the parties explicitly agree to such an allocation of risks and benefits, the law should not impose it. The court found that other jurisdictions supported this conclusion.