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November 6, 1981

OLYMPIA & YORK PROPERTIES COMPANY, O & Y Operating Corp., O & Y 1010 Building Corp., Fame Associates, Abraham H. Fruchthandler, Edward J. Minskoff and Fruchthandler Brothers Enterprises, Defendants

The opinion of the court was delivered by: WEINFELD


Plaintiff by this action seeks specific performance of an agreement to lease space in an office building owned by the defendants and also seeks money damages for breach of the agreement. The defendants deny the existence of a valid lease and claim that their agreement was properly terminated in accordance with its terms. Simultaneously with the commencement of this action, plaintiff moved for a preliminary injunction to prohibit the defendants from leasing the space to any other person. In view of the substantial controverted issues of fact raised by defendants' opposition to the motion for preliminary injunctive relief, which required a hearing, *fn1" the Court ordered a trial of the action on the merits advanced and consolidated with a hearing of the application, pursuant to Rule 65(a)(2) of the Federal Rules of Civil Procedure. The principal witnesses at the trial were executives of the respective parties who executed a letter agreement referred to hereafter and were also involved in subsequent events, as well as counsel or solicitors representing the respective parties.

Based upon the Court's trial notes, a word-by-word rereading of the entire trial transcript, an appraisal and evaluation of the credibility of witnesses, the totality of testimonial and documentary evidence, and the reasonable inferences to be drawn therefrom, the Court concludes that plaintiff has failed to sustain its burden of proof that a valid and enforceable lease between plaintiff as tenant and defendants as landlord is in effect; accordingly, defendants are entitled to judgment on the merits dismissing the complaint.

 Plaintiff is a Canadian corporation engaged in operating four restaurant-lounge establishments under the trade name, Mr. Greenjeans ("Greenjeans") in Canada and the United States. The defendant Olympia & York Properties Company is a partnership consisting of other named defendants (collectively "O&Y" or "defendants"), which rehabilitated a midtown office building located between East 45th and East 46th Streets between Park and Lexington Avenues, New York City. The building has twenty-three floors with an interior atrium ("Atrium").

 Greenjeans represented by Maury Kalen, its chief executive officer, and O&Y by Philip Reichmann, its leasing representative, negotiated for the leasing of space in the Atrium. The space was to be located on two levels, the ground and first floors fronting on Park and Lexington Avenues to be operated as a restaurant by Greenjeans, similar to those already in existence. The negotiations extended over a three-month period during which various draft proposals were considered. Finally, on March 31, 1981 a letter agreement ("letter agreement") was entered into by the parties.

 I. The Letter Agreement

 The letter agreement enumerates twenty items, including the location, amount of space, use of the premises, assignment, financing, tenant's and landlord's work, term, renewal rights, and rental, which is based upon a specified percentage of the restaurant's gross sales, with a right to the landlord to terminate in the event annual gross sales are less than a specified amount. Other provisions that are of particular significance in this litigation are:

(18) Standard Lease Form-Tenant shall execute Landlord's standard lease form as amended by mutual agreement of the parties' solicitors, acting reasonably, and incorporating the terms and conditions contained in this Letter Agreement.
(20) ... Landlord shall promptly prepare a form of Lease incorporating the provisions contained herein and submit same to Tenant. If Tenant shall fail, for any reason, save and except the failure of the Landlord to act expeditiously or reasonably, to execute a lease within ninety (90) days after Landlord's first draft is submitted to the Tenant, Landlord may terminate this Letter Agreement.

 Plaintiff contends that the letter agreement constituted a lease in and of itself, whether or not a lease was subsequently executed. This contention is without substance. Under New York law, *fn2" an agreement affecting an interest in real property in which a material term is left for future negotiation is unenforceable. *fn3" The rule applies with special force where the extraordinary remedy of specific performance is sought. *fn4" The letter agreement on its face reflects that Greenjeans and O&Y intended to leave material terms for future agreement and to be bound as landlord and tenant only if they did in fact arrive at a mutually satisfactory agreement as to the open terms. The preamble states that Greenjeans is "proposing to enter into a (lease)," and paragraph 18 provides that it "shall execute" such a lease. The lease to be executed not only must incorporate the terms and conditions of the letter agreement, but also, those of the "(landlord's) standard lease form as amended by mutual agreement of the parties' solicitors, acting reasonably." This is not a case where recourse to objective criteria will enable the Court to fill in the open terms that cannot be found within the four corners of the letter agreement. *fn5" Where, as here, the parties have stated the terms of their agreement in clear and unambiguous language, the construction of the contract is for the Court and evidence of the intention and acts of the parties plays no part in the decision of the case. *fn6" Since the parties did not intend the letter agreement to be their complete agreement, it does not constitute a binding lease.

 And even if, as plaintiff contends, the letter agreement is ambiguous because the intent of the parties cannot be determined from its "four corners" *fn7" and consideration is given to extrinsic evidence *fn8" of the parties' conduct and all surrounding circumstances prior to and contemporaneous with the letter agreement, *fn9" the same conclusion is compelled. The record abundantly establishes that it was not the intention of the parties that the letter agreement by itself constitute a lease or create a landlord-tenant relationship-to the contrary, it was their intention that such relationship would arise only upon agreement on additional terms and the subsequent execution of a formal lease. "Reason, equity, fairness-all such lights on the probable intention of the parties-show what the real agreement was." *fn10" Prior to the execution of the letter agreement, Mr. Kalen, representing Greenjeans, had received a copy of O&Y's standard lease form and was aware that it contained matters of importance to both parties that were not addressed in the letter agreement. Moreover, Ms. Paula D. Stark, a Toronto solicitor representing Greenjeans, had redrafted a proposed letter agreement prior to the execution of the final one on March 31 and was aware of the reference to the landlord's lease form. Surely they must have understood that it contained "significant and serious" matters and that it "(w)as (not) all sound and fury, signifying nothing." *fn11" The cavalier attempt by Mr. Kalen and Ms. Stark in their testimony to brush off the lease form as mere "boiler-plate" disregards the realities of the situation that confronted the parties.

 The standard lease form contained provisions that were of importance to both parties, that were not specified in the letter agreement. These included but were not limited to: (1) restrictive radius covenant in opening another restaurant; (2) structural repairs; (3) insurance and fire damage; (4) depreciation rights with respect to restaurant improvements; (5) who was to bear the cost of compliance with future enacted laws; (6) rights of the parties in the event the state exercises its power of eminent domain; (7) ownership of insurance coverage; and (8) subordination of lease to present and future mortgages or other encumbrances. Plaintiff's own witnesses testified that these terms can have a substantial financial impact on the landlord-tenant relationship. The terms were especially important here in view of the enormity of the parties' undertaking. The contemplated lease was for a ten-year term with two five-year renewal options and committed O&Y, among other matters, to the financing of the construction of the proposed restaurant to the extent of $ 1,000,000. The space to be leased was 10,000 square feet out of 45,000 total square feet available for rent to retail establishments in O&Y's newly rehabilitated large office and commercial building. The cost of its rehabilitation is alleged to have been approximately $ 100,000,000. The tenants of the building include professional and commercial firms of substance. Thus the type and operation of the yet to be constructed restaurant, located at levels in the Atrium where persons leaving or entering the building passed by, was a matter of major concern to O&Y since it could have an adverse or favorable impact, and consequent impairment or enhancement of O&Y's substantial investment. Other apparent business and economic factors strongly suggest a purpose on the part of the landlord to protect its interests in the proposed landlord and tenant relationship as to which the letter agreement was silent. Equally, plaintiff, undertaking a substantial investment in a new venture and seeking to enlarge its operations, desired adequate protective provisions to ensure its tenancy and prospective benefits, and again these are not referred to in the letter agreement. Under the circumstances, to assert, as plaintiff does, that the letter agreement by itself was intended to be the lease between the parties is to disregard reality. Thus we next consider the actions and conduct of the parties in their efforts to reach agreement on the terms of the lease to be executed by plaintiff as required by paragraph 18 of the letter agreement.

 II. Events After the Execution of the ...

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