During contract negotiations, parties often focus more on their verbal discussions than what is ultimately put in writing. However, when the optimism about the agreement fades and one party tries to avoid their obligations under a contract, the lack of attention paid to the details of the written contract can be problematic.
A valid contract must have an offer by one party, acceptance by the other, and consideration, meaning that both sides are either agreeing to do (or not do) something. It is important that the essential terms of a contract be specifically defined, otherwise the agreement may be deemed an unenforceable “agreement to agree,” rather than a binding contract. The problem is that in many small business transactions, the written contract is treated as an afterthought. Instead, the parties rely on a “term sheet” or some other informal memorandum, which is not detailed enough to constitute an enforceable contract. A good example of the consequences of not properly documenting the terms of an agreement is the recent Appellate Division Second Department case of Vizel v. Vitale.
Vizel involved a commercial lease with a 5-year initial term followed by a 5-year renewal option. However, the lease was silent as to the rent to be paid during the renewal term. Before the expiration of the initial term, the tenant advised the landlord that he wanted to exercise the option to renew. After the expiration of the initial term, the landlord sent the tenant an “amended lease,” which included a significantly higher rent schedule. The tenant did not sign the lease and continued to pay rent at the same rate as he had at the end of the prior lease term. The landlord sought to evict the tenant, whereupon the tenant commenced an action seeking a court declaration that the lease extension was valid. The tenant also claimed that the parties “understood” that annual 3 percent rent escalations of the initial term would continue. The landlord counterclaimed on the grounds that the option was not enforceable because of the lack of a price term.
Both the trial court and appellate court agreed that there was no enforceable option because of the lack of a price term. The Courts found that under the “doctrine of definiteness or certainty,” the court “cannot enforce a contract unless it is able to determine what in fact the parties have agreed to.” In some cases, there may be “an objective method for supplying a missing term,” such as a formula contained in the contract, which would make it valid. However, that did not apply in this case and the contract was too indefinite to be enforceable. The tenant’s case was further harmed by the fact that he did not even pay the 3 percent rent escalation he argued applied to the renewal term. However, it is unlikely that paying the higher amount would have impacted the outcome of the case.
The takeaway for any party entering into a contract is to pay attention to the written agreement. It is important to take time when entering into an agreement to do it properly and thoroughly, and with professional advice.
If you are considering a business arrangement or have concerns about an existing contract, contact us for a consultation.