Azat v. Farruggio

DAVIS, J. Appellee, Giuseppe Farruggio, sued his commercial landlord, the appellant Jamil Azat, in the Circuit Court for Montgomery County, seeking specific performance of an option to purchase the leased property and consequential damages flowing from appellant’s alleged breach of contract. The trial court granted specific performance after a three-day bench trial, ordering, among other things, that appellant convey the property to appellee, but the court declined to award appellee consequential damages. Appellant noted this appeal, presenting three questions for our review. Appellee filed a cross-appeal, presenting one question; we have rephrased their questions as follows: I. Did the trial court err in finding that the separation agreement between appellee and his former wife assigned to appellee his former wife’s rights in the option to purchase the leased property?

II

Did the trial court, err in ruling that the appellee’s delay in settling on the property was excused by the existence of a building encroachment?

III

Did the trial court err by determining that the lease’s “as is, where is” clause did not apply to the location of the improvements on the property at issue?

IV

Did the trial court err in declining to award consequential damages to appellee? Finding no error, we shall affirm the judgment. BACKGROUND On December 31, 1997, appellant leased to appellee and his former wife the commercial property at 430 North Frederick ⁵⁴³ Avenue, in Gaithersburg, Maryland. The lease had a term of ten years, and included an option for the tenants to purchase the property between the beginning of the fourth and end of the fifth year, for a price of $965,000.

In the purchase option paragraph, the lease stated: “This option shall automatically lapse if not timely exercised or if Tenant shall fail to close on the purchase during the fifth (5th) year of the tenancy,” which, according to the parties’, would have been January 31, 2003. The option required that the tenant give appellant at least ninety days’ notice in exercising the purchase option, and the parties’ agreement stipulated, “Time is of the essence for purposes of this [purchase] option.” Finally, the purchase option clause stated that, if it were exercised, “the Leased Premises shall be delivered in ‘as is, where is’ condition,” and, “the Leased Premises shall be conveyed with good and merchantable title and free of any liens or debts of the Landlord.” Appellee operated an Italian restaurant at the leased premises, through a business called Italy Italy, Inc. That business was not the lessee of 430 North Frederick Avenue, and had no legal interest in the property; appellee and his former wife were the tenants. The couple separated in November 2000, and on June 21, 2001, they signed a Separation and Property Settlement Agreement. Nowhere in that Agreement did the couple specifically refer to their lease or the option to purchase the property.

In the Agreement’s preamble, the parties did expressly declare that they were, desirous of amicably adjusting and fully, finally and completely, settling all rights and obligations arising from the state of matrimony between them, all property rights they may have in the estates of each other, including the rights of dower and curtesy, all claims and rights of custody, alimony, maintenance and support, and all other rights, claims, relationships or obligations between them arising out of their marriage or otherwise, and to record their understanding. ⁵⁴⁴ The Agreement also provided for the settlement of the couple’s business interests: The Husband owns an interest in Italy Italy, Inc.[;] Italpas-ta, Inc.; GMREA, Inc.; Jojo’s L.L.C.; Pizza Re, L.L.C.; GVC and Leopardo Partnership. The Wife waives all of her right, title and interest in the aforesaid business interests. The Wife shall execute any documents necessary to transfer her interest in said businesses to the Husband. The Husband shall assume sole responsibility for all liabilities and expenses in connection with the businesses, and shall indemnify, defend and hold the Wife harmless thereon.

The Husband shall take all steps necessary to release Wife from any and all debts and personal yuaran-tees associated with said business, including but not limited to obtaining releases from financial institutions. (Emphasis added.) Finally, the Agreement included a section disposing of property that the couple owned in the United States and in Italy, which made no mention of the couple’s lease, and the Agreement included a standard integration clause. Although both he and his former wife were the tenants on the lease, appellee purported to exercise the purchase option individually on December 11, 2001. By counsel (not his counsel on appeal), he wrote to appellant stating that he wanted to buy the property, making no mention of his co-tenant.

Appellant responded on December 19, 2001, also by counsel, confirming receipt of appellee’s notice and “pledging] ... cooperation with [appellee] in connection with the upcoming sale.” Then, by a March 1, 2002 letter, appellant’s counsel notified appellee’s counsel that appellant had been contacted on or about July 9, 2001 by the owners of a lot adjacent to 430 North Frederick Avenue, on which a Kentucky Fried Chicken franchise was operated. The adjacent lot owners contended that appellant’s building at 430 North Frederick Avenue encroached upon the adjacent lot by a depth of two and a half feet, for a length of fifty-five feet. ⁵⁴⁵ On March 7, 2002, appellee’s counsel responded by letter to appellant’s counsel, stating that, in his view, the encroachment “is potentially a substantial problem unless we can obtain an easement from the adjacent landowner.” That letter also related that a representative of the title company appellee proposed using had contacted appellant’s mortgagor to determine the outstanding balance on the mortgage; to appellee’s surprise, the mortgagor told the title company representative that appellant had told the mortgagor that he “was not going to sell the property” because “there were too many ‘logistical’ problems for him to proceed with the sale.” The March 15, 2002 response from appellant’s counsel addressed neither of these issues. On March 21, 2002, appellee’s counsel again wrote to appellant’s counsel, this time stating, “assuming that what is shown on the Kentucky Fried Chicken site plan is correct, then [appellant] cannot convey good title to [appellee].” He asked appellant’s counsel to consult with appellant about how he proposed to resolve the dispute and suggested that one of the attorneys contact the adjacent landowner to try to procure an easement from the adjacent landowner. Appellant’s counsel responded by a letter dated March 25, 2002, apparently contending that the “as is, where is” clause of the purchase option absolved appellant of any responsibility for the encroachment.

Appellee’s counsel refuted that claim in an April 18, 2002 letter to appellant’s counsel, adding: Since you have elected not to take steps to mitigate your damages by contacting [the adjacent landowner] about an easement to permit the encroachment of the restaurant building, 1 have done so. We may be fortunate and they may grant an easement without any cost. If not, the cost of obtaining the easement will be the purchaser’s measure of damages for your client’s failure to deliver marketable title to the property. After five and a half months of negotiation, appellee’s counsel updated appellant’s counsel on his efforts in a November 5, 2002 letter.

He wrote: ⁵⁴⁶ It now appears that we are very close to reaching an agreement with [the adjacent landowner] and with his Tenant. It looks like it will cost us some $15,000-$17,000 to obtain the necessary consents from the neighboring owner and tenant. We will look to [appellant] to pay that sum as well as the other damages incurred by our client as a result of [appellant’s] inability to deliver good title.... When we last discussed this issue, you took the position that the encroachment of [appellant’s] restaurant building on the [adjacent] property was not a cloud on [appellant’s] title and he disclaimed any responsibility for his construction error.

That defies common sense and runs contrary to the position taken by all of the major title insurance companies who have addressed the issue. The encroachment renders [appellant’s] title unmarketable. I am writing now to request that you reconsider your position on this matter so we can reach an agreement and proceed to settlement. This problem will not go away.

If we cannot reach an agreement, then we will file suit to recover the sums incurred to make [appellant’s] title marketable. We will prevail in the litigation and [appellant] will be liable for our client’s legal fees and court costs as well as his own. This makes no sense, but we are prepared to go that route if your client makes it necessary to do so. Appellant’s counsel responded a month later, on December 4, 2002, repeating his position that appellant bore no responsibility to resolve the encroachment.

Regarding the proposed easement that appellee’s counsel had negotiated, appellant’s counsel stated that appellee “has no authority to negotiate or interfere with [appellant’s] property rights on this issue.” This last statement contradicted his earlier comment that appellee could “seek to obtain an easement at his expense.” Finally, appellant’s counsel observed: I note that [appellee] is obliged to purchase the property upon ninety (90) days[’] advance notice and that we are now nearly a year past the time in which this notice was given. As you know, the lease further provides that [appellee’s] option to purchase the property shall automatically lapse if ⁵⁴⁷ he fails to close on the acquisition during the fifth year of his tenancy. Please be advised that [appellant] intends to strictly enforce the terms of the [appellee’s] lease agreement in this regard. Appellee’s counsel responded on December 31, 2002, reiterating his position, and adding, in closing: “It appears we will be in court on this matter in any event so [appellant] can see if he can convince a judge that he can rely on his own default as a basis for saying that his tenant has not acted on a timely basis.” On January 30, 2003, appellant’s counsel again wrote to appellee’s counsel, contending that appellant stood “ready, willing and able to convey [the] property to” appellee, and he was merely awaiting notice of the time and place for settlement.

Then, after appellee finally secured the easements he believed necessary to clear title to the property and so notified appellant’s counsel, on May 2, 2003, appellant’s counsel wrote to appellee’s counsel that “[appellee] has long since forfeited the right to purchase the property by virtue of his several material breaches of the parties’ lease agreement,” particularly, “[appellee’s] failure to close prior to the expiration of the fifth year of his tenancy, January 31, 2003.” By a letter of June 23, 2003, appellee’s counsel notified appellant’s counsel that settlement was scheduled for the afternoon of June 26, 2003. Appellant did not appear at that time, and appellee filed his complaint in the circuit court on September 24, 2003. After appellee filed suit, he and his former wife executed a document captioned Assignment of Interest in Lease on March 1, 2004. The 2004 Assignment expressly confirmed the parties’ intent that the 2001 Separation and Property Agreement assigned to appellee all rights and liabilities under the lease at issue here.

The case was tried from June 14 to June 18, 2004. The trial judge found that the 2001 Separation Agreement “is ambiguous with respect to whether [appellee’s] wife assigned her interest in the option under the lease to [appellee] through the separation agreement.” Therefore, the court admitted and ⁵⁴⁸ considered parol evidence on the issue of whether the 2001 Agreement was intended to effect such an assignment. This evidence included the former co-tenants’ testimony that it was their intent that the 2001 Agreement assign all the former wife’s interests in the lease to appellee and the 2004 affirmation of their intent to effect such an assignment. “Based upon that,” the trial court found “that it was the intention of the parties that the wife transfer her interest under the lease and the Court [found] that it was, in fact, transferred by virtue of that separation agreement.” 1 Regarding the encroachment, the court found that it did exist, and that appellee’s lender would not have extended financing on the transaction unless that cloud on the title were resolved. The trial judge found that the reason settlement did not occur prior to the end of the fifth year of the lease was that appellee was required to obtain an easement to establish marketable title, and that his efforts cost roughly $15,000.

The court concluded that the encroachment had rendered title unmarketable. The court did not apply a per se rule, i.e., that any encroachment onto a neighboring property would always render title unmarketable; rather, the court considered the following factors in reaching its conclusion: • the adjoining landowner and tenant only consented to a temporary easement, effective until the encroaching building were demolished or substantially renovated; • appellee’s lender would not finance his transaction unless the encroachment were resolved; • the adjoining landowner and tenant required a total of approximately $15,000 to grant even a temporary easement; ⁵⁴⁹ • appellee, whose lawyer, the court noted, referred to as a “cheapskate,” agreed to part with $15,000 plus attorney’s lees to secure the easement. The court then concluded that the “as is, where is” clause “refers only to the condition of the building and ... did not extend to the location of the building on the lot.” The court found that appellant could have cleared the title by expending roughly the same amount of money, and that appellant had a duty to do so, but breached this duty. Further, the court found that appellant’s breach was the cause of the delay in closing on the transaction before the end of the fifth year of tenancy.

Thus, the court found appellee’s failure to close by that time was excused. The court then ordered specific performance. The court awarded appellee $1,863.39 in “incidental damages,” representing appellee’s cost of obtaining a survey to procure the easement. The court declined to award “delay damages,” however, reasoning that even if appellant had performed as he was obligated to perform, the same delay would have resulted from his attempts to procure the easement, and thus, the court reasoned, the delay damages did not result from appellant’s breach.

LEGAL ANALYSIS In reviewing the trial judge’s decision in this case, we will “review the case on both the law and the evidence,” but we will “not set aside the judgment of the trial court on the evidence unless clearly erroneous, and will give due regard to the opportunity of the trial court to judge the credibility of the witnesses.” Md. Rule 8-131(c). I Appellant first contends that the trial court erred in finding that appellee’s former wife assigned to appellee her interest in the lease and its option to purchase the premises. This argument implicitly assumes that appellant could not have unilaterally exercised the option in the absence of his former ⁵⁵⁰ wife’s authorization and, because appellee does not challenge the assumption, we will also assume that to be the case. Appellant first argues that parol evidence should not have been admitted to clarify the Separation Agreement’s meaning because the Agreement unambiguously did not include a provision assigning the purchase option to appellee.

The Agreement is subject to general contract law, Mustek v. Mustek, 144 Md.App. 494, 501 , 798 A.2d 1218 (2002), and whether a contract is ambiguous is a question of law that we review de novo. Towson Univ. v. Conte, 384 Md. 68, 78 , 862 A.2d 941 (2004). If the contract was ambiguous and extraneous evidence was considered to interpret the ambiguity and discern the parties’ intent, that factual determination is