As Tellium Inc. (Nasdaq: TELM) and Zhone Technologies Inc. forge ahead with plans for their merger, an angry landlord hopes to forestall any positive outcome.

Tellium's involved in a dispute with a New Jersey company called 185 Monmouth Parkway Associates LP, which leased over 93,000 square feet of space in three buildings in its Monmouth Park Corporate Center in West Long Branch, N.J., to Tellium back in 2000. The buildings are near the vendor's corporate headquarters in Oceanport, N.J., which aren't involved in the suit.

In a motion filed with the Superior Court of New Jersey earlier this month, 185 Monmouth says Tellium stopped paying rent after one of the buildings was damaged by flooding in August 2002. The real estate company says Tellium didn't move some of its equipment to facilitate the landlord's repairs and has used the damage as an excuse not to pay the rent on all the leases.

One of the leases, says 185 Monmouth, stipulates that Tellium must get prior written consent from the landlord if its value, once merged with another company, goes below what it was before the merger or on the lease commencement date. The landlord says Tellium's net worth has gone from more than $390 million in 2000 to $203 million today.

The landlord says it has the right to ask the court to stop Tellium's merger with Zhone, and it's asking for a $9 million letter of credit "as a condition to proceeding with its merger."

The real estate firm is concerned that Tellium will virtually disappear once the Zhone deal goes through, nixing potential payments. "[T]he merger will merely make Tellium's remaining cash from its initial public offering available to Zhone, which, based upon its history, will allow the cash to be eaten up by operating costs."

Zhone did not respond to an inquiry about the suit, but Tellium says it plans to fight it. It filed its own statement with the Securities and Exchange Commission (SEC) Monday, in which it states: "Tellium believes that both the claims asserted by 185 Monmouth and its request for injunctive relief to bar consummation of the transaction with Zhone are without merit and intends to vigorously defend against them."

Tellium sued the landlord back in July for breach of contract, breach of covenant of good faith and fair dealing, and fraud. Tellium spokesman Michael Deshaies won't give the specifics behind those accusations, and the vendor's motion was not publicly available at press time. Tellium is seeking a court order that frees it from any further obligation to 185 Monmouth.

The case is scheduled for a court hearing on October 7, according to John McKeegan, a spokesman for 185 Monmouth. Meanwhile, Tellium and Zhone are proceeding apace with the merger. Tellium stipulated in yesterday's SEC filing that it "is unable to predict the outcome of these matters."

— Mary Jander, Senior Editor, Light Reading