Market Street Associates Ltd. v. Frey

941 F.2d 588 (7th Cir. 1991)


J.C Penney entered into a sale and leaseback arrangement with General Electric. Penny sold its properties to the G.E. Pension Trust and then the Trust leased them back to J.C. Penney for a 25-year term. Under paragraph 34 of the lease, the lessee could request the lessor (D) to finance the costs and expenses of improvements to the premises. If the lessor declined that request, the lessee could then purchase the property under a formula in the contract. If the average annual appreciation in the property exceeded 6 percent, a breakdown of the negotiations would entitle Penney to buy back the property for less than its market value. One of these leases was for a shopping center in Milwaukee. In 1987, Penney assigned the lease to Market Street (P). P got an inquiry from a drugstore chain that wanted to open a store in the shopping center. P sought financing from other sources, but those sources were unwilling to lend without a mortgage on the property which P could not give because it was merely the lessee. P then decided to buy the property from D. Their initial calls were not returned and eventually P had to write a letter. Eventually, P did reach D and D quoted a price of $3 million on the property. P then wrote a letter to D requesting funding for $2 million in improvements. That letter made no mention of the lease. D never really responded, and P sent another letter by certified mail, but this time he also referred to the lease though not expressly to paragraph 34. P then got a letter from D turning down the request for funding as D was not interested in making loans for less than $7 million. P informed D that it would seek financing elsewhere. Then over a month later, P sent D a letter indicating that it was exercising the option in paragraph 34. D refused to sell. The formula allowed the purchase to be done at $1 million. P sued D to enforce the sale provision. The District Court denied specific performance on P’s motion but gave it to D on its motion. P appealed. The district court gave the judgment to D on two grounds; P failed to mention paragraph 34 in his correspondence, and this same failure to inform was a violation of the duty of good faith under Restatement 2nd 205. This was premised on evidence that P, in fact, thought that D did not know of paragraph 34 even though this was unlikely. The judge also found that P did not want financing from D but just wanted the opportunity to buy the property at a bargain price.