Market Street Associates Limited Partnership v. Frey

Facts

In 1968, J.C. Penney Company (Penney) entered into a sale contract and leaseback arrangement with General Electric Pension Trust (Defendant) in order to finance Penney’s growth. The arrangement provided that Penney was to sell properties to the Defendant, which the trust then leased back to Penney for a term of 25 years. Paragraph 25 of the lease entitled lessee to request that lessor (pension trust) to finance the costs and expenses of construction of additional improvements provided the amount of the costs and expenses is at least $250,000.00. Upon receiving the request the lessor agrees to give it reasonable consideration and provides that they shall negotiate in good faith. Paragraph 34 also states that if negotiations shall fail the lessee shall be entitled to repurchase the property at a price roughly equal to the price at which Penney sold it to the Defendant plus 6% a year for each year since the original purchase. One of the leases was a shopping center, which in 1987, Penney assigned to Plaintiff. Plaintiff received an inquiry from a drugstore chain a year later to open a store in the shopping center provided that Plaintiff build the store. The lessor of the shopping center sought financing from other sources than the Defendant. They were also unwilling to lend the necessary funds without a mortgage on the shopping center, which Plaintiff could not obtain because it was not the owner of the shopping center. Therefore, Plaintiff tried to buy the property back from the Defendant. Plaintiff contacted the Defendant and finally received an offer to buy the property for $3 million, however, Plaintiff considered this to be too high. Plaintiff then wrote a letter to the Defendant requesting funding for $2 million in improvements to the shopping center. However it made no reference to paragraph 34 of the lease. The Defendant did not respond. Plaintiff sent a second letter with a general reference to the lease and said that if the pension trust was unwilling to provide financing then the wanted to enter into negotiation to amend the round lease. The following day, the pension trust sent a letter refusing the original request for funding. Plaintiff sent a letter in response stating that they would seek financing elsewhere. Then Plaintiff sent another letter to the Defendant stating that they were exercising the option in paragraph 34 to purchase the property in the event that negotiations over financing broke down. The Defendant refused to sell, and this suit was brought by the Plaintiff for specific performance. The district court granted summary judgment for the Defendant on the grounds that by failing to correspond with Defendant to mention paragraph 34 of the lease Plaintiff prevented negotiations over financing that are a condition precedent to the lessee’s exercise of the purchase option from taking place; and on the ground that failure violated the duty of good faith. Plaintiff appeals.