Clear and accurate contract drafting is critical. Careful drafting helps express the true intent of the parties, makes performance of the contract easier, and leads to fewer lawsuits. One simple way to add clarity and precision is by defining the key terms of the contract. A recent Michigan Court of Appeals case, Holtzman Interests 23, LLC v FFC Sugarloaf, LLC, illustrates this principle.
In Holtman, the plaintiff managed and the defendants owned an apartment community. Two contracts governed the relationship between the parties: an operating agreement and a management agreement. Under the management agreement, the plaintiff would manage the property for one year. The management agreement would automatically be renewed unless notice was given by either party, within 60-days of the end of the term, to not renew the management agreement. Under the operating agreement, the management agreement could be terminated for cause or without cause. If the parties terminated without cause, they must give the other party 90-days written notice of intent to terminate. Moreover, The operating agreement contained a clause allowing the plaintiff to force the sale of the property if the defendants terminated the management agreement. Finally, “terminate” was not defined anywhere in either the management or operating agreement.
The plaintiff sued in order to force the sale of the property because it claimed that the defendants had terminated the management agreement. The defendants claimed that the management agreement merely expired upon notice of nonrenewal. The Court of Appeals, after three pages of trying to determine what “terminate” meant in the agreements, ruled in favor of the defendants. The Court ruled noted that the nonrenewal clause in the management agreement did not use the word “terminate.” Moreover, where the word “terminate” was used, it did not make sense to interchangeably use termination and expiration within the context of the agreements.
Additionally, the Court noted that there are three ways the contract could be brought to an end, (1) nonrenewal with notice; (2) termination with cause; and (3) termination without cause. Only two of those ways actually used the word “terminate.” As a result, ending the contract by giving notice that the management agreement would not be renewed did not constitute “termination” of the agreement and the attempted forced sale of the property was rejected.
This case illustrates an all too common problem with contracts; lack of clarity. Had the parties defined “terminate” or “termination” and stated whether nonrenewal of the contract constituted a termination of the agreement, then the litigation may have been avoided.
