Letter Wasn't Enforceable Lease but Contained Enforceable Requirement

An owner sent a letter containing all of the material terms of a lease to a prospective tenant. The letter said that the term of the lease would be “approximately 20 years.” The letter required the parties to negotiate in good faith toward a final lease and exclusively with each other. But the letter also said that it wasn't binding. The owner and tenant both signed the letter. But the owner later discovered that the tenant had been negotiating with other owners from the beginning. So it sued the tenant for violating the letter, claiming that it was an enforceable lease. The tenant asked the court to dismiss the owner's lawsuit, arguing that the letter was unenforceable.

A New York appeals court ruled that the tenant had violated its promise to negotiate in good faith with the owner. So it must pay the owner's out-of-pocket costs. Although the letter wasn't enforceable as a lease because it was too vague, it provided “an adequate basis for determining whether the negotiations to which the parties had agreed were being conducted in good faith,” said the court. Here, the tenant showed a lack of good faith by negotiating with the other owners [180 Water St. Assocs., LP v. Lehman Bros. Holdings, Inc.].