Market Street Associates Ltd. Partnership v. Frey

Facts

In 1968, J.C. Penney entered into a sale and leaseback agreement with the Pension Trust wherein Penney sold the property to the Pension Trust with a 25 year leaseback to Penney. Under Paragraph 34 of the lease, the lessee was entitled to “request Lessor to finance the costs and expenses of construction for additional Improvements upon the premises” provided the costs were at least $250,000. The Pension Trust agreed “to give reasonable consideration to providing the financing of such additional Improvements and Lessor and Lessee” and to “negotiate in good faith.” In the event negotiations failed, the lease provided that the lessee could repurchase the property at roughly the same price Penney sold it to the Pension Trust plus 6 percent a year for each year since the sale.

In 1987, Penney assigned its lease for a shopping center in Milwaukee, WI to Market Street. In 1988, Market Street received an inquiry from a drugstore to open a store in the center. Improvements were needed for the store to open, but Market Street was unable to obtain financing from a bank without holding the mortgage on the center. Market Street then decided to attempt to purchase the shopping center from the Pension Trust. Market Street’s general partner, Orenstein, unsuccessfully tried to contact Erb of the Pension Trust via phone. In June 1988, Orenstein sent Erb a letter expressing interest in purchasing the shopping center. Erb’s associate called Orenstein and indicated an interest in selling the property for $3 million. On July 28, 1988, Orenstein sent another letter requesting $2 million in funding for improvements. Orenstein sent a follow-up letter on August 16 because he had not received a response, but later received a letter from Erb dated August 10 denying the financing request.  On August 22, Ornstein responded that Market Street would find financing elsewhere. However, on September 27, 1988, Orenstein sent Erb a letter stating that Market Street was exercising its option to purchase pursuant to Paragraph 34 of the lease. The Pension Trust refused to sell.