NICHOLAS THEODOROU v. JOHN DEFILIPPO, PATRICIA DEFILIPPO, and CHRISTOPHER LYDON.

Introduction

At issue in this case is a right of first refusal to purchase a commercial property — more specifically, whether the right still exists; if so, whether the plaintiff was given an appropriate opportunity to meet the terms of the pending offer; whether he met those terms, at least in material part; and whether the terms he concedes he could not meet were not material and were inserted, in bad faith, with the intent to defeat him.

The case was tried before me, jury-waived. Based on the testimony and exhibits admitted at trial, my assessment of the credibility, weight and appropriate inferences to be drawn from that evidence, and as more fully set forth below, I find and rule as follows.

Facts

These are the facts as I find them after trial.

The property at stake is 12 Central Avenue in Hyde Park, Boston, owned by defendants John and Patricia DeFilippo. On December 3, 2006, the DeFilippos entered into a five year lease (January 1, 2007-December 31, 2011) [Note 1] with plaintiff Nicholas Theodorou under which Mr. Theodorou operated an automobile repair garage from the property. Four aspects of that lease are material to the current dispute: (1) the obligation of Mr. Theodorou to pay rent, consisting of a base amount ($3,300 per month at the start) with annual increases, plus the property's real estate taxes, utilities, and normal repair and maintenance costs, (2) the requirement to pay that rent on the 1st day of each month, with a 3% late charge for any payments made after the 14th, (3) Mr. Theodorou's option to extend the lease for an additional five years, with further rent increases, and (4) a right of first refusal to purchase the property, as follows:

If DeFilippo at any time decides to sell the Premises or Equipment Theodorou has the Right of First Refusal. This Right has to be accepted or rejected within sixty (60) days of written notice from to (sic) DeFilippo. Notice to include all terms and prices for which the Premises is being offered.

Upon such execution of purchase, all installments of rent not yet due shall be terminated and this lease shall be null and void.

Lease, ¶15.

Mr. Theodorou began his tenancy in January 2007 and struggled from the start. The garage was on a side street. Although it was already set up and equipped as a garage, it had been closed for some time and had no existing customer base. Personal issues also arose for Mr. Theodorou, including the death of his son. It was years before the garage broke even, years before it became profitable, and even then profits have varied greatly. In Mr. Theodorou's words, it has been "one battle after another" for him. The result has been erratic rent payments, from the start through the present day. Few, if any, of the rental payments were made on their due date (the 1st of the month), and there was no testimony that any of the payments made after the 14th included the 3% late charge. As Mr. Theodorou candidly admitted, the expenses of the garage exceed $30,000 per month, "the money is not always there", and the rent is typically the last bill he pays. [Note 2] Despite this, not always happily, [Note 3] the DeFilippos let Mr. Theodorou stay and, over the course of the five years, did not implement any of the rent increases to which the written lease entitled them. [Note 4] By mutual agreement, the written lease terms were ignored and the tenancy proceeded on an oral basis independent of those terms.

This was underscored by what happened at the end of the five years (2012). Mr. Theodorou did not give any written notice of renewal. [Note 5] Instead, the DeFilippos dropped off a proposed new five-year lease (for January 1, 2012 – December, 31, 2016) with new rent terms ($3,866.67 per month at the start, plus real estate taxes, utilities, and normal repair and maintenance costs) and a new escalation structure. [Note 6] The document is missing a page, so it is unclear whether it contained a right of first refusal to purchase the building. Mr. Theodorou signed it, but the DeFilippos did not, and Mr. Theodorou does not contend that it is an operative document. [Note 7]

In any event, it too was ignored. According to Mr. Theodorou, up until the time the roof needed replacement three years ago, he simply continued paying the same monthly rent he had been paying since 2007. At that time three years ago, the DeFilippos replaced the roof at their own expense [Note 8] and, at various other times, have also paid to have the water line repaired and, ultimately, replaced. According to Mr. Theodorou, an agreement was reached at the time of the roof replacement for him to pay $4,200 per month in rent, plus an additional $500 per month towards the property taxes (a total of $4,700) — a figure that, so far as I can see, does not match anything that would be owed under either the December 3, 2006 lease agreement or the 2012 document. [Note 9]

In early 2016, Mr. Theodorou discussed his interest in purchasing the building with the DeFilippos. He was willing to pay $500,000, but the DeFilippos were uninterested in anything that low. Instead, they proposed a thirty-year lease. Mr. Theodorou did not want to make a thirty-year commitment, and began looking for another location for his business.

Defendant Christopher Lydon — a real estate investor and developer — owns a bar next to the garage. He spoke with Mr. Theodorou in 2016 to see if he (Lydon) could use part of the land around the garage building as additional parking for his bar. Mr. Theodorou told him that he (Theodorou) did not own the garage and, in August 2016, Mr. Lydon approached the DeFilippos to see if he could purchase it, offering $400,000. This was too low for the DeFilippos who (so far as the record shows) did not even counter, and nothing came of that offer at that time.

On November 18, 2016, the DeFilippos wrote to Mr. Theodorou. Referring to the 2012 document which Mr. Theodorou had signed but they had not, their letter states as follows:

Dear Nick:

You have not notified us of your plans for remaining at 12 Central Avenue. Sixty days before the end of the lease, we were to be notified, in writing of your decision.

As of January 1, 2017, we will not renew the five-year lease. You may remain as a tenant-at-will for $4700 per month, subject to thirty days notice by either party.

Sincerely,

John DeFilippo/signed

Patricia DeFilippo/signed

Mr. Theodorou never responded to this letter in writing, although he claims to have tried to reach the DeFilippos by telephone. I conclude, and so find, that Mr. Theodorou did not respond because he was looking for another location for his business, did not want to enter into any continuing obligation to stay in this location, was in accord that whatever current obligations or agreements that might be in effect between he and the DeFilippos would terminate as of January 1, 2017, and was content to be a month-to-month tenant-at-will thereafter, unbound by any provisions in any previous writings or oral agreements between them. I further conclude, and so find, that Mr. Theodorou did not believe that any "right of first refusal" he might have had to purchase the garage would continue after the express term of his tenancy ended. Contrary to Mr. Theodorou's current contention, the logic and plain language of the December 3, 2006 lease agreement show that he had to be a tenant in the property, during the express term of that agreement, in order to exercise the right of first refusal. A right without that limitation makes no sense, [Note 10] and the plain language of the right — that "upon such execution of purchase, all installments of rent not yet due shall be terminated and this lease shall be null and void" (emphasis added) — shows that the circumstance contemplated for the exercise of the right was one where the lease term still had time to run.

On February 1, 2017, Mr. Lydon got back in touch with the DeFilippos, telling them that he was still interested in purchasing the garage property and increasing his offer to $600,000. Thereafter, negotiations proceeded in earnest. On March 19, 2017, Mr. Lydon increased his offer to $725,000, contingent on seller financing of $575,000 for three years at 6.25% (i.e., a balloon payment of $575,000 due and payable at the end of the three years) and the payment at closing of a 1% point ($5,750) in addition to the $200,000 down payment. [Note 11] These terms, along with certain additional ones, were contained in the final purchase and sale agreement dated May 11, 2017. Those additional terms included (1) a provision stating that there would be no pre-payment penalty if the $575,000 loan was paid off prior to the three years, (2) a contingency conditioning the sale on the DeFilippos' "approving Buyer's creditworthiness and specifically that Buyer has a credit score over 700 as reported by one of the three major credit bureaus and that he is an accredited investor with assets in excess of $2,000,000", and (3) the requirement that Mr. Lydon would "take title in the name of HP Properties LLC." [Note 12]

Mr. Theodorou had not been provided with a copy of the Lydon offer, but he heard of the negotiations and brought this action on April 25, 2017, claiming a right of first refusal and alleging breach of the covenant of good faith and fair dealing. A memorandum of lis pendens was placed on the property pending the resolution of its merits. By court order, Mr. Theodorou was provided with a copy of the signed purchase and sale agreement as soon as it was finalized and signed.

One week later, on May 18, 2017, the DeFilippos served a "notice to quit" on Mr. Theodorou, terminating his tenancy at will as of June 30, 2017. Since time was of the essence to the parties, trial was scheduled for June 19. In the meantime (May 31), Mr. Theodorou responded to the purchase and sale agreement as follows:

Dear John and Pat:

This is different than my usual letter to you in that I'm not sure my writing is totally legible. I felt if I typed it, it would be easier to read. There is so much I want to say but I'll spare you the drama.

The offer to purchase from Mr. Lydon is a fair offer[.] [A]lthough we [Note 13] can't meet the exact criteria set up in the Purchase and Sale Agreement, I feel we can do better for you. We would propose the same $200,000 up front, with the difference being the additional $525,000 within a year. That would give us plenty of time to deal with surveys, 21E…and get bank financing for close to that amount. I don't have the same resources that Mr. Lydon has but I'm offering a resolution in one year versus his three. Of course we would pay any interest or whatever is agreed upon until the closing.

As always thank you.

s/Nick Theodorou

Enclosed with the letter was his $4700 check for the May rent, which had been due at the beginning of the month. No amount for any late charge was enclosed on this, or any prior, occasion.

At trial, Mr. Theodorou testified that he has $150,000 currently available to him ($50,000 in savings, $100,000 in funds borrowed from a bank) to put towards the $200,000 down payment, and is confident he can obtain the remaining $50,000 by the time of any closing. His credit scores are 748 (TransUnion) and 743 (Equifax). [Note 14] His offer to pay the $575,000 "balloon" in one year rather than three was intended by him to "improve" upon the Lydon offer, not to vary from it. He agrees that he does not have "the same resources that Mr. Lydon has," but believes he can get bank financing in place to pay the "balloon" when due. What he concedes he does not have is a $2,000,000 net worth, but he contends that that requirement was a "bad faith" addition to the terms of the purchase and sale, specifically intended to ensure he could not match it.

The DeFilippos deny that Mr. Theodorou has a right of first refusal and, even if he does, deny that he has matched the Lydon offer in these critical respects: (1) the $2,000,000 net worth (which they see as assurance that the balloon payment will, in fact, be made in timely fashion), and (2) in overall "creditworthiness", given his history of consistent late rent payments and his concession that his business has been "one battle after another." [Note 15] There is probably also a third, related reason — a fundamental concern at how Mr. Theodorou will treat his obligations to them, even if he has the money to pay those obligations, triggered by his revelations at trial. If Mr. Theodorou has $50,000 in the bank, immediate access to a $100,000 loan, and credit scores of 743 and 748, why has he consistently treated them so badly by making their payments his lowest priority, consistently late, and without any "late payment" compensation? If Mr. Theodorou feels "betrayed" by the DeFilippos, they surely feel the same way about him. The garage is a major asset of the DeFilippos. They are elderly. The $725,000 price for the property — driven, most likely, by the unique value it has to Mr. Lydon, who can use it in conjunction with his neighboring business, perhaps in a larger overall development — is one they are legitimately concerned they may not see again. It is thus vital to them that they collect it in full in timely fashion, and they do not trust Mr. Theodorou's willingness or ability to deliver on his promises.

Further facts are contained in the Discussion section below.

Discussion

Mr. Theodorou argues that the right of first refusal contained in the December 3, 2006 lease agreement is still in effect because he is a month-to-month "holdover tenant", paying the same rent as provided in that agreement and otherwise honoring its terms. I disagree.

First, he is not a "holdover tenant" under that agreement. As noted above, the terms of that agreement have been ignored from the start and superseded by other, oral agreements under which a different amount of rent has consistently been offered and accepted, late, without penalty. As Mr. Theodorou concedes, a holdover tenant-at-will has the benefit of the terms of the written lease only "in the absence of a new agreement." See Boudreau v. Boudreau, 241 Mass. 12 , 16 (1922). The parties have consistently operated under that new agreement.

Second, as discussed above, the plain language of the right of first refusal contemplates its exercise during the express term of the lease. That language — "Upon such execution of purchase, all installments of rent not yet due shall be terminated and this lease shall be null and void" (emphasis added) — shows that the circumstance contemplated for the exercise of the right was one where the lease term still had time to run. See J.A. Sullivan Corp. v. Commonwealth, 397 Mass. 789 , 795 (1986) (citing McMahon v. Monarch Life Ins. Co., 345 Mass. 261 , 264 (1962) & Charles I. Hosmer, Inc. v. Commonwealth, 302 Mass. 495 , 501 (1939)) (contract provisions must be read in their entirety, as a harmonious whole).

Third, I agree with the defendants that, as a matter of law, a purchase option is not a term that carries over into a holdover tenancy. See Glocksine v. Malleck, 372 Mich. 115, 121-124 (1963) and cases cited therein. See also Butz v. Butz, 13 Ill. App. 3d 341, 347 (1973); Nevala v. McKay, 178 Mont. 327, 331–334 (1978); Wright v. Barclay, 151 Neb. 94, 97–99 (1949); Andreula v. Slovak Gymnastic Union Sokol Assembly No. 223, 140 N.J. Eq. 171, 174 (1947).

I further find and rule that, even if the right of first refusal was still effective, Mr. Theodorou has not met the material terms of the purchase and sale agreement, which I find were insisted-upon by the DeFilippos in good faith and not as an intent to frustrate and defeat Mr. Theodorou. They were financing $575,000 of the purchase price, due as a balloon payment in three years, and wanted to be sure of its timely collection and, also, the timely receipt of its monthly interest payments. Requiring a high net worth from the purchaser was not unreasonable. Whether $2,000,000 was the "right" figure is immaterial in the context of this case, given that Mr. Theodorou did not offer any evidence of his own net worth to weigh against it. Mr. Theodorou may have had high credit scores, but they appear to have come at the expense of the DeFilippos who suffered consistent late payments so that Mr. Theodorou could meet his other obligations.

Conclusion

For the foregoing reasons, the plaintiff's complaint, and all claims contained therein, is DISMISSED, WITH PREJUDICE. The Memorandum of Lis Pendens previously endorsed by the court is VACATED AND STRICKEN.

Judgment shall enter accordingly.

SO ORDERED.