Genevieve M. Daniels, Genevieve M. Daniels, P.C.
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Commercial Tenant Wins Battle but Loses War in Dispute with Landlord Regarding Option To Purchase Leased Property
This month, the First District, in Fitz 223, LLC v. 225 W. Ontario Corp., 2025 IL App (1st) 210341-U, found that while the tenant, 225 W. Ontario Corp. (Ontario), properly exercised its option to purchase the leased premises from its landlord, Fitz 223, LLC (Fitz), it was not entitled to specific performance because it did not prove that it was “ready, willing, and able to pay the option price.” Fitz 223, LLC v. 225 W. Ontario Corp., 2025 IL App (1st) 210341-U at ¶1. Of course, acknowledging that hindsight is 20/20, the decision also highlights how drafting leases and other transactional materials can impact a parties’ position in the event of a dispute. A few tweaks in the relevant documents of both parties may have put each of them in a better position to argue their respective cases in subsequent litigation.
Facts
In 2011, Ontario leased commercial property from Fitz. The lease agreement included an option to purchase the property. 2025 IL App (1st) 210341-U at ¶2. Barely one year later, the parties agreed to amend the lease in several ways, including revising the terms of the option to purchase. 2025 IL App (1st) 210341-U at ¶7. Under the revised option, if Ontario exercised its option in 2015, the purchase price would be $4.5 million, as opposed to the $6 million purchase price outlined in the original option terms. Id. Part of those lease revisions also included Fitz’s agreement to reduce and settle Ontario’s $500,000 rental delinquency for $175,000, to be paid over time at $3,500 a month. Id. Notwithstanding, the evidence showed that Ontario never made any payments towards the reduced arrearage. Id.
In the fall of 2015, Ontario’s representatives phoned and emailed Fitz several times, expressing interest in exercising its option and representing that it had funds available to purchase the property. 2025 IL App (1st) 210341-U at ¶¶9 – 10. Unbeknownst to Fitz, around this time Ontario had also entered into an agreement with MRR Property Acquisition, LLC (MRR), whereby Ontario’s option to purchase the property would be effectuated by a purchase contract in MRR’s name as the buyer. 2025 IL App (1st) 210341-U at ¶¶12 – 13. Under this agreement, MRR would then negotiate the terms of the contract with Fitz. Id. As consideration for the transfer of purchase rights, MRR would pay Ontario $1.5 million with the prospect of payment of additional funds. Id.
In response to Ontario’s numerous communications regarding the option, Fitz’s attorney demanded that Ontario first satisfy its arrearages before any sale could proceed. 2025 IL App (1st) 210341-U at ¶10. Ontario’s attorney strenuously objected, contending that Fitz was attempting to impose conditions that were not in the option provision. Nonetheless, Ontario also represented that it would satisfy the arrearages within 30 days at closing and demanded a payoff letter. 2025 IL App (1st) 210341-U at ¶11. As a follow-up, Ontario’s attorney sent a letter to Fitz’s attorney formally exercising its option under the lease so there would be “no question that the option [was] being exercised” and requesting a payoff letter regarding the arrearages. 2025 IL App (1st) 210341-U at ¶14. Ontario’s attorney also stressed that “[t]he exercise of the option [was] unconditional” and then provided a copy of the proposed contract with MRR as buyer. Id.
Subsequently, Fitz began heavily negotiating directly with MRR, resulting in many revisions to the proposed purchase contract. 2025 IL App (1st) 210341-U at ¶16. As the closing date approached, Fitz kept pushing back the closing, adding additional conditions and suggesting that payment of the arrearage would help the situation, while Ontario continued to reiterate that it was ready to close. 2025 IL App (1st) 210341-U at ¶17. Although Fitz’s attorney acknowledged that the option had been correctly exercised, Fitz would not commit to a closing date even though Ontario continued to press for one. 2025 IL App (1st) 210341-U at ¶¶20 – 23.
The transaction never closed. Shortly thereafter, Fitz filed its lawsuit against Ontario. After several amendments to its pleadings, Fitz sought, in part, a declaratory judgment that Ontario did not properly exercise its option and that the 2012 lease amendment should be rescinded. 2025 IL App (1st) 210341-U at ¶¶25 – 26. Ontario counterclaimed, alleging that Fitz committed an anticipatory breach of option contract and that it was entitled to specific performance requiring Fitz to sell the property according to the terms of the option. Id.
During the bench trial, Fitz’s witnesses testified that they never would have told Ontario that it had properly executed the option if Fitz had known about Ontario’s agreement with MRR agreement or understood what MRR was. 2025 IL App (1st) 210341-U at ¶21. Fitz also continued to point to the existence of Ontario’s arrearage under the lease. 2025 IL App (1st) 210341-U at ¶28. In contrast, Ontario continued to maintain that it had properly exercised its option, and MRR testified that it had sufficient funds to purchase the property, had committed to do so, and was otherwise ready, willing, and able to close the proposed transaction. Id.
The trial court held that Ontario properly exercised its option under the lease, basing its reasoning on the plain language of the option and the parties’ actions. 2025 IL App (1st) 210341-U at ¶29. The option did not require that Ontario not be in default of the lease in order to exercise its rights but simply required it to give notice to Fitz that it was exercising the option, which it did. Id. Once the option was exercised, Ontario was not prohibited from putting MRR forth as the buyer to effectuate the purchase, and as a result, Ontario’s actions could not be read as an assignment of its option under the lease. Id. The court also rejected Fitz’s argument that the proposed MRR contract constituted a counteroffer, finding that the proposed contract was requested by Kaufman and Fitz. Id. The trial court further found that Fitz had committed an anticipatory breach of the option contract by refusing to set a closing date and demanding that Ontario fulfill obligations not required by the option. 2025 IL App (1st) 210341-U at ¶30.
Notwithstanding the trial court’s ruling in favor of Ontario, it denied Ontario’s counterclaim for specific performance because it “did not present evidence that it [as opposed to MRR] had control of the $4,500,000 needed to close on the purchase of the property.” 2025 IL App (1st) 210341-U at ¶31. The trial court denied Ontario’s motion for reconsideration, and a timely appeal was filed. 2025 IL App (1st) 210341-U at ¶32. Fitz cross-appealed the trial court’s judgment. Id.
Appellate Court
The appellate court upheld the lower court’s ruling. First, there was no dispute that Ontario sent a letter to Fitz formally exercising its option under the lease. 2025 IL App (1st) 210341-U at ¶47. At the same time, Ontario sent Fitz a proposed contract to effectuate the sale at the price dictated by the option, which the appellate court found was sufficient for Ontario to exercise its option and that nothing more was required under the plain language of the contract. Id. Once the option had been properly exercised, the lease was terminated, and a contract for sale was automatically created. 2025 IL App (1st) 210341-U at ¶45.
Fitz argued that the exercise was not properly effectuated because Ontario was in default on its rental obligations. 2025 IL App (1st) 210341-U at ¶48. The appellate court confirmed that the absence of the existence of defaults was not a condition precedent to Ontario’s exercising its option to purchase under the plain language of the option. Id., citing Cole v. Ignatius, 114 Ill.App.3d 66, 448 N.E.2d 538, 543, 69 Ill.Dec. 820 (1st Dist. 1983). Moreover, the appellate court noted that Fitz did not attempt to invalidate the lease until well after Ontario exercised its option. Id.
Fitz also argued that the option was not properly executed because the proposed contract with MRR included various provisions outside the scope of the language of the option provision and, as a result, constituted a rejection of the option and a counteroffer. 2025 IL App (1st) 210341-U at ¶49. The appellate court again rejected Fitz’s arguments, pointing to the language of the option, which was very general, providing “only that Ontario could ‘purchase the premises and terminate this lease’ for a fixed price during a certain time period.” 2025 IL App (1st) 210341-U at ¶50. “In that sense, the various proposed contracts sent by both parties in this case were attempts to fill in important details not spoken to in the option itself [and did not] prevent the formation of a valid contract.” Id. The appellate court also noted that Fitz was involved in heavy negotiations with MRR for an extended period of time and raised no immediate objection to Ontario’s exercise of the option. 2025 IL App (1st) 210341-U at ¶¶51 – 52. To the contrary, Fitz had confirmed in writing that Ontario had properly exercised the option. Id. While Ontario continued to push for closing, Fitz continued to delay and impose conditions not required under the option. As a result, Ontario properly exercised its option and was entitled to specific performance. 2025 IL App (1st) 210341-U at ¶53.
Similarly, the appellate court rejected Fitz’s attempt to rescind the 2012 lease amendment based on Ontario’s failure to pay the reduced arrearage, thereby restoring the higher $6 million option price contained in the original lease provisions. 2025 IL App (1st) 210341-U at ¶56. The appellate court remarked that Fitz did not seek rescission until long after Ontario had exercised its option, noting that “[i]t is well-settled that once an option to purchase is exercised, ‘it becomes a present contract for the sale of the property and the lease agreement extinguishes, thereby transforming the parties’ relationship from lessor-lessee to vendor-vendee.’ ” 2025 IL App (1st) 210341-U at ¶57, quoting Wendy & William Spatz Charitable Foundation v. 2263 North Lincoln Corp., 2013 IL App (1st) 122076, ¶28, 998 N.E.2d 909, 376 Ill.Dec. 199. In other words, the lease ceased to exist once the option had been properly exercised, and Fitz could not seek recission of a lease that no longer existed. Id. As a result, Fitz had lost any rights that it may have had under the lease, and its recission claim was properly denied. Id.
Next, the appellate court turned its attention to Ontario’s request for specific performance. To establish a claim for specific performance, Ontario had to demonstrate, in part, that it was ready, willing, and able to perform its obligations under a valid contract. 2025 IL App (1st) 210341-U at ¶59. The trial court found that Ontario could not meet its burden, as it was deeply in arrears on its obligations to Fitz, had failed to tender any earnest money towards the purchase of the property, and did not have its own money to purchase the property but rather required MRR’s funds to close the purchase, which MRR was not legally bound to supply to Ontario. 2025 IL App (1st) 210341-U at ¶¶60 – 64. Indeed, MRR’s obligation to provide the purchase money was entirely contingent on a number of conditions and left MRR with sole discretion not to fund the transaction for any reason if it was not satisfied with the condition of the property or any documentation related to the property. Id.
Because specific performance is an equitable remedy left to the lower court’s discretion, the appellate court refused to disturb it on appeal in the absence of proof that the trial court abused its discretion, which it did not find in the record. 2025 IL App (1st) 210341-U at ¶¶59, 66. The judgement of the lower court was affirmed. 2025 IL App (1st) 210341-U at ¶¶68 – 69.
Given the large arrearage Ontario had accrued in such a short amount of time, it is surprising that Fitz did not require that Ontario not be in default before it could exercise its option. Such language would have effectively cut off Ontario’s option to purchase in the first place. Similarly, in hindsight, Ontario may have been in a better position if it had been able to contractually secure MRR’s unconditional obligation to provide the purchase money, however unlikely it might have been to obtain such an obligation from MRR. As it stood, whether Ontario perfectly exercised its option had no substantive bearing on whether it was entitled to compel Fitz to perform under the option.
For more information about real estate law, see MORTGAGE FORECLOSURE: CORRESPONDING ISSUES (IICLE®, 2024). Online Library subscribers can view it for free by clicking here. If you don’t currently subscribe to the Online Library, visit www.iicle.com/subscriptions.