Real Estate Investors Lose Opportunity to Sue Over Property By Waiting Too Long to Notify Defendants: NNN Durham Office Portfolio 1, LLC vs. Grubb & Ellis Co. & Grubb & Ellis Securities, Inc.
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By Jeremy Root

Under North Carolina law, where a contract gives a party a unilateral option to do something, such as excluding claims from a settlement, time is automatically of the essence and the options are construed strictly.

NNN Durham Office Portfolio 1, LLC vs. Grubb & Ellis Co. & Grubb & Ellis Securities, Inc., No. COA17-607 (N.C. App., 9/4/18).

The Property

In 2006, Highwoods Properties, Inc. owned income-producing property in Durham, North Carolina. The office buildings on the property were leased primarily to affiliates of Duke Hospital. In 2007, Highwoods sold the property and the buyers' intention was to remarket the property to small investors who were looking to maintain investments in real estate. The entities that bought the property, including now-defunct broker-dealer Grubb & Ellis Securities, Inc., became Defendants in this case. In early 2007, Defendants found investors through an investment vehicle (the “Security”) that raised sufficient funds to obtain financing and purchase the property. The investors in the security became Plaintiffs in the case. In late 2007, Duke informed Defendants that it would not be renewing its leases when they expired in 2010. When Duke moved out, it created cash flow issues for the property, which was ultimately foreclosed and sold at a loss. Plaintiffs sought to oust Defendants as property managers when they learned of Duke’s intention not to renew the leases.

The Settlement

The parties ultimately agreed to a settlement in March 2010. Pursuant to Section 2.4 of the settlement agreement, the plaintiffs had until July 2, 2010 to provide notice and assert claims that they wished to exclude from the release provisions. If Plaintiffs provided notice and asserted claims, defendants had a right to withdraw from their obligations. If Plaintiffs asserted no claims by July 2, 2010, then all claims of Plaintiffs would be released and Defendants would resign as property managers. On July 1, 2010, Plaintiffs filed a summons with the trial court pursuant to North Carolina rules to describe the nature of the claims they planned to assert. Plaintiffs did not, however, notify Defendants by July 2, 2010. Defendants did not become aware of the assertion of claims until July 12, 2010, when they received the summons that had been mailed on July 7, 2010. The trial court dismissed some, but not all of the Plaintiff’s claims. The non-dismissed claims alleged violations of North Carolina’s securities laws. Defendants appealed to the state Court of Appeals.

Too Late

The judgment is affirmed in part and reversed in part. The Court holds that the 2010 Settlement Agreement bars all of Plaintiffs’ claims. The key provision of the settlement agreement requires Plaintiffs to “give written notice to [Defendants] prior to the Effective Date of the Release, and they shall commence an action or arbitration prior to the Effective Date of the Release.” A plain reading of this provision requires Plaintiffs both to notify Defendants and to file their action by July 2, 2010. Plaintiffs commenced an action, but they did not provide notice by July 2, 2010. Since they failed to fulfill the option to preserve claims in the manner described by the parties, all of the Plaintiffs' claims were released effective July 2, 2010. A contrary interpretation would have allowed the Plaintiffs to take advantage of provisions in the North Carolina rules regarding service of summons to avoid providing actual notice until after the Defendants had fulfilled their obligations to resign as property managers. Essentially, the agreement gave Plaintiffs a unilateral option to exclude claims from the reach of the release. Under North Carolina law, where a contract gives a party such unilateral options, time is automatically of the essence and the options are construed strictly. All of Plaintiffs' claims against Defendant concerning the Property are barred by operation of the release provisions of the settlement agreement.

(J. Root: North Carolina practitioners in particular should take note of this decision. Although the opinion does not discuss the substantive securities law issues, it finds that all state securities law claims were released by operation of the settlement agreement.)

(SOLA Ref. No. 2018-36-08)

NOTICE: The court decision synopsis published above represents an abbreviated description of the actual decision and is re-printed here for its educational value. The author's effort is to report concisely the substance of the decision or a selected portion of the decision; commentary or analysis is generally reserved for the italicized section at the bottom of the summary. Subscribers to SAC's Online Litigation Alert (SOLA), from which this synopsis is excerpted, have immediate access to the full decision, in addition to the synopsis. 

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