By Victor Metsch
DUE DILIGENCE WAIVERS SURRENDER EVEN THE NOMINAL DEFENSES
In Diplomat Properties L.P. v. Komar Five Associates LLC, 899 N.Y.S.2d 237 (1st Dept. April 29, 2010), the First Department considered the sale of the $620 million Diplomat Hotel and Convention Center and related facilities in Hollywood and Hallandale Beach, Fla.
The defendant purchaser, in connection with an extension of the closing date from Aug. 1, 2007, executed an amendment to the lease acknowledging that its due diligence period had ended on June 4, 2007.
The defendant then failed to close. It argued that the plaintiff had violated numerous contract provisions, the most notable of which was a failure to disclose an alleged agreement with the city of Hallandale that future development of the property be phased in over a 10-year period.
But the city of Hallandale twice confirmed that, notwithstanding discussions of any restrictions, there was no agreement between it and the seller to limit development on the building in any way.1
Given this position by the city, Komar’s claim that its obligations under the contract never came due because of the plaintiff seller’s nonperformance was little more than a nominal defense, thrown up in the slim hope of recovering $30 million in contract deposits.
But by agreeing, in connection with the extension of the closing date, to waive due diligence objections, Komar effectively offered its nominal defense to the court in one hand while offering $30 million to the plaintiff with the other.
The lesson here? Before waiving due diligence objections, consider the whole deal and, if the client might want to back out, keep in mind that the waiver will surrender many nominal defenses.