Condition or Obligation?

In a previous post on this blog, I discussed the distinction between conditions and obligations. I said that if you express conditions using language associated with obligations, you shouldn’t be surprised if a court concludes that what you had thought was a condition is in fact an obligation.

A recent case, Cumberland Farms, Inc. v. Rian Realty, Ltd., 2007 U.S. Dist. LEXIS 30878 (E.D.N.Y. Apr. 26, 2007), provides an interesting example of the mess that can result from treating a condition like an obligation. (Click here for a copy of this case.)

This case involved a dispute between a landlord and a tenant over assignment of rights under a lease. Article 27(c) of the lease stated as follows:

No assignment shall be effective unless Lessor is furnished with an Estoppel Certificate and Assignment and Assumption Agreement (duly acknowledged), signed by all parties to such assignment, in form reasonably acceptable to Lessor, prior to the effective date of the proposed Assignment, and all insurance requirements are fulfilled by the proposed Assignee.

This case involved a range of issues, but as part of its argument the landlord claimed that under article 27(c) the assigment was invalid because the tenant had failed to furnish an estoppel certificate before the effective date of the assignment. (Black’s Law Dictionary defines an estoppel certificate as “A signed statement by a party (such as a tenant or mortgagee) certifying for another’s benefit that certain facts are correct, as that a lease exists, that there are no defaults, and that rent is paid to a certain date.”)

The tenant eventually provided the landlord with an estoppel certificate during a court-ordered period for tenant cure of defaults. The landlord argued, however, that the tenant’s failure to timely supply the estoppel certificate wasn’t an obligation but instead was a condition, making it incapable of cure.

The court declined to accept this argument, holding that as it wasn’t clear whether article 27(c) constituted a condition or an obligation, it would treat it as an obligation. But article 27(c) clearly expresses a condition—it includes a conditional clause using the subordinator “unless.” (See MSCD 3.88.) Admittedly, article 27(c) uses “shall,” which one associates with obligations (see MSCD 3.90), but even so no dispassionate reader would construe article 27(c) as expressing an obligation.

One factor underlying this court’s counterintuitive decision is that courts clearly dislike enforcing conditions, which represent an all-or-nothing proposition.

But I think that in this case, more important is the way the landlord itself muddied the waters by using in connection with the condition stated in article 27(c) terminology that is better suited to obligations:

For one thing, article 30(a) of the lease stated in pertinent part as follows:

Anything elsewhere herein contained to the contrary notwithstanding, … if the Lessee shall be in default of the performance of, or violate any of the other terms, covenants and conditions of this lease on its part to be kept and performed, and such default or violation shall continue for a period of thirty (30) days after Notice to Cure such default, then … Lessor shall have the right [to terminate the Lease.]

(Emphasis added.)

In other words, this provision states that the tenant could cure a condition that hasn’t been satisfied. That’s highly unorthodox—cure is best considered as a concept that applies only to obligations. For example, Williston on Contracts discusses cure of defaults but makes no mention of cure of conditions. The court noted this provision, stating that “Defendant’s hyper-technical reading of Article 27(c) fails to consider that provision in context with Article 30(a).”

Furthermore, the “notice to cure” that the landlord delivered to the tenant included failure to deliver the estoppel certificate as one of the items that was subject to cure.

Even in its pleadings, the landlord muddled its terminology, claiming that the tenant’s failure to timely provide an estoppel certificate constituted “a default that cannot be cured subsequent to the date of the assignment.” The term “default” applies to obligations that haven’t been performed, not to conditions that haven’t been satisfied.

So although the lease stated that delivery of the estoppel certificate was a condition to effective assignment, how the landlord handled this issue elsewhere in the contract, in its dealings with the tenant, and in its pleadings worked against taking the condition at face value.

A larger question is whether courts are simply unwilling to void an assignment because a tenant is late in delivering an estoppel certificate, no matter how clearly the landlord makes that a condition to valid assignment. The court in Cumberland Farms suggests that that’s the position of New York courts. (I have no views on that issue.)

So realize that in certain contexts, a court might be unwilling to treat a condition as a condition, no matter how carefully the drafter observed the distinction between conditions and obligations.