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Failure of a Condition Precedent Cannot be Cured and Does Not Yield Damages

Definitions as used in Peterbilt of Baltimore LLC v. Capitol Gateway Properties, LLC, No. 431, Sept. Term, 2021, 2022 WL 833362 (Md. Ct. Spec. App. Mar. 21, 2022)

1.         “A condition precedent has been defined as a fact, other than mere lapse of time, which, unless excused, must exist or occur before a duty of immediate performance of a promise arises.”

“Although no particular form of words is necessary in order to create an express condition, such words and phrases as ‘if’ and ‘provided that,’ are commonly used to indicate that performance has expressly been made conditional . . . .”

“The question whether a stipulation in a contract constitutes a condition precedent is one of construction dependent on the intent of the parties to be gathered from the words they have employed and, in case of ambiguity, after resort to other permissible aids to interpretation.”

“Generally, when a condition precedent is unsatisfied, the corresponding contractual duty of the party whose performance was conditioned on it does not arise.”

So if “a contractual duty is subject to a condition precedent . . . there is no duty of performance and there can be no breach by non-performance until the condition precedent is either performed or excused.”

2.         A covenant ordinarily requires only substantial compliance. 

Breach of a covenant would entitle the non-breaching party to recover attorney’s fees.

When a covenant goes only to a part of the consideration of a contract, is incidental and subordinate to its main purpose, and its breach may be compensated in damages, such a breach does not warrant a rescission of the contract.

There is a preference for interpretating the terms of a contract to be a covenant as opposed to a condition precedent

3.         It is well settled that to be valid, the exercise of an option must be unequivocal and in accordance with the terms of the option.

4.         Material: a matter that goes to “the root of the contract.”

Facts and Background of the Case

In settlement of a federal lawsuit, Capitol Gateway Properties, LLC (Capitol Gateway) leased real property in Landover, Maryland (the Property) to Peterbilt of Baltimore LLC (Peterbilt). The lease contained a purchase option (the Option) with a detailed seven-step procedure for exercising the Option and reaching a purchase price for the Property. The parties started down the prescribed path, but they did not satisfy step six, which required that appraisers appointed by Capitol Gateway and Peterbilt jointly attempt to agree on the fair market value for the Property.

Peterbilt wanted to proceed with the purchase of the Property and sued Capitol Gateway in the Circuit Court for Talbot County for specific performance and damages. The circuit court found that Capitol Gateway’s noncompliance was because of a failure to fulfill a condition precedent, and that there was not a breach of contract. The circuit court said that because Peterbilt failed to satisfy a condition precedent, Capitol Gateway was no longer required to perform under the Option. Since there was no breach, Peterbilt was not entitled to cure under Section 16 of the lease and Capitol Gateway was not entitled to attorney’s fees.

Peterbilt appealed to the Court of Special Appeals (CSA) and Capitol Gateway cross-appealed. The CSA affirmed.

Basic Decision of the CSA

The CSA found that the steps set forth in the Lease for the exercise of the Option were material terms of the agreement and that the steps to exercise the Option were conditions precedent.  Peterbilt had requested a thirty-day extension, but the CSA held that Capitol Gateway was not required to agree to an extension because it had no further duty to perform under the Option. Also, the CSA stated that  Peterbilt had no right to cure.

Decision About Legal Fees – Or Why You Need to Read the Whole Lease

Capitol Gateway objected to the circuit court’s denial of its claim for attorney’s fees. Capitol Gateway first pointed to the clause in the Lease that provided that tenant (Peterbilt) is required to pay landlord (Capital Gateway) its reasonable attorney’s fees after a default.  However, the CSA held that provision was not applicable because there was no default – failure to fulfill a condition precedent is not a default.

Next, Capitol Gateway argued that the indemnification provision of the Lease was broad enough to require that Peterbilt pay its attorney’s fees. The problem was that Capitol Gateway did not raise this argument until the appeal. Had Capitol Gateway considered the application of the indemnification provision when the case was before the circuit court, it may have obtained a favorable decision on this point.

For more information, contact Edward J. Levin.

Ed Levin
410-576-1900 • elevin@gfrlaw.com

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Date

08.05.22

Type

Publications

Authors

Levin, Edward J.

Teams

Real Estate