Commercial Division Blog

Posted: November 14, 2013 / Categories Commercial, Contracts, Motion to Dismiss; Motion for Judgment on the Pleadings

Lease Clause Requiring Commercially Reasonable Efforts Strictly Construed Against Plaintiffs

On November 14, 2013, the Court of Appeals issued a decision in JFK Holding Company LLC v. City of New York, Docket No. 196, declining to apply a broad interpretation to a commercially reasonable efforts clause.

In JFK Holding, plaintiff building owners sued the Salvation Army, "which operated" a building leased from plaintiffs "as a homeless shelter under an agreement with the City of New York," for breach of contract, claiming that when the Salvation Army terminated the lease, it returned the building "in bad condition." The complication for plaintiffs was that the lease limited the Salvation Army's obligations in several ways, including that it would "only be liable" for payments due under the lease "to the extent of the amounts paid to" it by the City. However, the lease also required the Salvation Army to "use commercially reasonable efforts to enforce its rights against the" City.  (Emphasis added.)

In 2005, the City terminated its agreement with the Salvation Army and "the Salvation Army in turn terminated the lease," paying "the $10 million termination fee payment called for by the Lease." Plaintiffs accepted the return of the building, but then brought an "action to collect damages for the alleged injury to their building," originally against the City and, after the City was dismissed, against the Salvation Army.  The Salvation Army moved to dismiss, arguing that because the City was not obligated to pay it for damage to the premises, it was in turn not obligated to pay plaintiffs for the damage. The trial court granted the motion, but was reversed by the Appellate Division.

The Court of Appeals held that while the Salvation Army could not rely solely on the City's refusal to pay for the damage, the Salvation Army could not have been reasonably expected to do more than exercise its rights under its agreement with the City, based on its reasonable expectations at the time the lease was in force.  Because it had no contractual right to make the City pay for the damage to the building, the complaint should have been dismissed.

The lesson from JFK Holding (besides, perhaps, that the Salvation Army is a very sympathetic defendant) is that a commercially reasonable efforts clause means just that, and a court should not accept an invitation to rewrite the clause to replace the term "reasonable" with "possible."