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GK Development, Inc. v. Iowa Malls Financing Corp.

Court of Appeals of Illinois, First District, Fourth Division

December 19, 2013

GK DEVELOPMENT, INC., an Illinois Corporation, and
v.
IOWA MALLS FINANCING CORPORATION, a Delaware Corporation, COLLEGE SQUARE MALL ASSOCIATES, LLC, a Delaware Limited Liability Company, and CHICAGO TITLE AND TRUST COMPANY, an Illinois Corporation, Defendants-Appellants COLLEGE SQUARE MALL DEVELOPMENT, LLC, a Delaware Limited Liability Company, Plaintiffs-Appellees,

Appeal from the Circuit Court of Cook County. Nos. 06 CH 3427 and 06 CH 3586, Cons. Honorable Carolyn Quinn, Judge Presiding.

PRESIDING JUSTICE HOWSE delivered the judgment of the court, with opinion. Justices Fitzgerald Smith and Lavin concurred in the judgment and opinion.

OPINION

HOWSE, PRESIDING JUSTICE

¶ 1 The issue presented in this case is whether a provision in a contract for the sale of four shopping centers, which required that $4.3 million of the purchase price be held in escrow from the seller's proceeds then be paid to the seller only if certain conditions are timely met, is enforceable as a liquidated damages clause or is unenforceable as a penalty.

¶ 2 In a $117 million transaction, plaintiffs GK Development, Inc. and College Square Mall Development, LLC (collectively Buyer) purchased from defendants Iowa Malls Financing Corporation and College Square Mall Associates, LLC (collectively Seller) four shopping centers in eastern Iowa, including College Square Mall (Mall). Prior to the sale, Mall tenant Hy-Vee Food Stores, Inc. (Hy-Vee) was in the process of expanding its grocery store (Hy-Vee Expansion) into the space that had been vacated by Wal-Mart after Wal-Mart decided not to renew its lease. Because the parties did not expect the Hy-Vee Expansion to be completed by the time of the closing, Buyer and Seller negotiated to hold $4.3 million of the purchase price in escrow (Hy-Vee Holdback), which represented the present value of the leasehold with regard to the forthcoming Hy-Vee Expansion.

¶ 3 An amendment to the purchase agreement directed defendant Chicago Title and Trust Company (the Escrowee) to release the Hy-Vee Holdback to Seller only after and if all the following events occurred: (1) a new Hy-Vee lease was executed by August 31, 2005; (2) the new Hy-Vee leasehold was delivered by Buyer and accepted by Hy-Vee before October 31, 2005; and (3) Hy-Vee obtained all permits and other governmental approvals necessary to complete the Hy-Vee Expansion prior to October 31, 2005. Hy-Vee did not obtain the necessary permits before October 31, 2005, however, both parties demanded that the Escrowee disperse the Hy-Vee Holdback in their favor. Both Buyer and Seller subsequently filed separate lawsuits seeking a declaratory judgment regarding their entitlement to the Hy-Vee Holdback, and the two lawsuits were consolidated into the instant action. Following a three-week bench trial, the trial court found that the parties intended a "drop-dead deadline" of October 31, 2005 for plan and permit approval, and that Buyer was entitled to the Hy-Vee Holdback as liquidated damages for a breach of contract. The trial court also granted Seller's posttrial motion to "Stay Enforcement of the Circuit Court's order and Judgment and Not Apply Post-Judgment Interest During Appeal." Both parties appealed, and those appeals were consolidated.

¶ 4 Within Seller's appeal (appeal no. 1-11-2802), Seller argues: (1) that the Hy-Vee Holdback is not a valid liquidated damages provision because it amounts to an unenforceable penalty clause; (2) that the trial court erred in finding the parties' agreement ambiguous; (3) that the trial court's interpretation of the parties' contract violates Illinois rules of contract construction; and (4) that the trial court erred as a matter of law in failing to award attorney fees to Seller. In response, Buyer claims: (1) that the Hy-Vee Holdback is a valid and enforceable liquidated damages provision as construed by the trial court; (2) that the trial court's finding that the contract terms were ambiguous and required extrinsic evidence to interpret the parties intent was reasonable; (3) that Seller forfeited several of its arguments concerning the trial court's contract interpretation; and (4) that Seller is not entitled to attorney fees. Within Buyer's appeal (appeal no. 1-12-0432), Buyer argues that the trial court's order denying Buyer post-judgment interest must be reversed. For the following reasons, we reverse the trial court's order directing the $4.3 million be returned to the Buyer because we find that the contract provision under review is unenforceable as a penalty clause.

¶ 5 I. Background

¶ 6 In 2004, Seller owned four shopping malls in eastern Iowa, which included College Square Mall in Cedar Falls, Iowa. Wal-Mart and Hy-Vee (a grocery store) were among the larger "anchor" stores in the Mall. The Wal-Mart occupied 160, 128 square feet of space, while the Hy-Vee occupied a smaller 59, 860 square-foot building adjacent to it. Hy-Vee's original lease began in 1976 and was due to expire on December 31, 2010, subject to three, five-year renewal options. The lease provided that Hy-Vee pay a $26, 166.67 monthly rent ($314, 000 annum, or $5.25 per square foot) from January 1, 2006, through December 31, 2010. In addition to this base rent, Hy-Vee paid a pro rata share of real estate taxes and common area maintenance (CAM).

¶ 7 A. The Purchase Agreement

¶ 8 Prior to trial, the parties stipulated to the following in a joint statement of agreed facts.

¶ 9 In June 2004, Seller began marketing the Mall for sale and issued an offering memorandum, which opined that Hy-Vee would relocate to a larger leasehold of 75, 000 square feet in Wal-Mart's former space. The Hy-Vee Expansion would increase its rented square footage by 15, 000 square feet at a cost of $6 per square foot, and the former Hy-Vee space would be divided to accommodate "two new big box anchors." The memorandum contemplated that Hy-Vee would execute a new 60-month lease by March 2005. Buyer then entered into discussions with Seller to purchase the Mall.

¶ 10 In July 2004, Buyer executed a letter of intent to purchase the Mall, as well as the three other Iowa malls, for $117 million. On September 17, 2004, Buyer and Seller entered into a real estate sales contract (Purchase Agreement) to purchase the four malls, and set a closing date of December 17, 2004.

¶ 11 On October 12, 2004, Hy-Vee executed a letter of intent (Letter of Intent) to open a "first class high quality Hy-Vee retail grocery store, " which is described as a "21st century prototype, " in the space formerly occupied by Wal-Mart. The Letter of Intent contemplated that Hy-Vee would lease 78, 337 square feet for a minimum term of 20 years, followed by five, five-year renewal options. The initial base rent would be $7 per square foot and would incrementally rise to $9.35 per square foot beyond the initial 20-year term. In addition to the base rent, Hy-Vee would pay a certain pro rata share of the Mall's real estate taxes and CAM. The parties agreed that the proposed Hy-Vee lease, which would increase the fair market value of the Mall, would not be executed prior to the closing on the sale of the Mall. Seller and Hy-Vee agreed that Hy-Vee would require 270 days to extensively remodel the new leasehold. The Letter of Intent indicated that Hy-Vee's "possession date" would occur upon: (1) execution of the lease; (2) receipt of certain government approvals; and (3) delivery of the space from Buyer.

¶ 12 On October 26, 2004, Buyer's primary negotiator, Thomas Rogers, sent a letter[1] to Seller's broker, George Good of CB Richard Ellis, that outlined certain issues of concern. One issue of concern was the economic impact of the Hy-Vee Expansion because it was not expected that Hy-Vee would sign a new lease before the December 2004 closing. To calculate the present value of the Hy-Vee Expansion, Rogers determined that the new lease would generate a future incremental income of $430, 000 per year. He next calculated that, based on a 10 percent capitalization rate, the present value of the 20-year Hy-Vee Expansion lease was $4.3 million. To resolve the uncertainty of the new lease's impact on the $117 million sale, Rogers suggested that the $4.3 million be held back in escrow until: (1) the new lease was signed; (2) the supermarket was open for business: and (3) the leasehold was lien free.

¶ 13 B. The Third Amendment

¶ 14 On November 10, 2004, Buyer and Seller entered into the Third Amendment to Real Estate Sale Contract (Third Amendment) to memorialize the parties' holdback agreement. Accordingly, the Third Amendment provided that $4.3 million of the purchase price would be held in escrow and released to Seller when and if: (1) Hy-Vee executes a new lease by August 31, 2005; (2) Buyer delivers and Hy-Vee accepts the new leasehold by October 31, 2005; and (3) Hy-Vee obtains, by October 31, 2005, all permits and other governmental approvals necessary to complete the expansion. Specifically, the Third Amendment provides in relevant part:

"With respect to [the Mall], [the Buyer] and the Seller of said Property agree that at Closing they will enter into a Four Million Three Hundred Thousand and 00/100 Dollar ($4, 300, 000.00) holdback agreement from the purchase price of said Property *** . The holdback amount shall not be released until all of the following are satisfied: (1) execution of the lease with Hy Vee, Inc. on terms in accordance with Letter of Intent, dated October 12, 2004, attached hereto as Exhibit C, and in a form that is commercially reasonable; (2) delivery of the premises to [Hy-Vee] in the condition required *** as specified in the lease; and (3) acceptance by [Hy-Vee] of the premises and the obtaining by [them] of all permits and other governmental approvals necessary to complete the tenant's work. Should the lease not be executed by August 31, 2005, or all of the other conditions not be satisfied by October 31, 2005, the holdback amount shall not be released to the Seller, but it shall be forfeited and delivered to [the Buyer]."

¶ 15 Thomas Rogers, Buyer's primary negotiator, testified that he negotiated the $4.3 million figure with Seller's primary negotiator, Michael Fontana. Furthermore, Rogers testified that the October 31, 2005 deadline was proposed by Seller, which was corroborated by the testimony of Gerry Curciarello and Patrick O'Leary, co-managing partners of Seller. Curciarello also testified at trial that the $4.3 million figure and the October deadline were the products of an arm's length negotiation between Buyer and Seller, and that, at the time of the negotiations, he felt that the deadline was sufficiently distant to allow Seller to meet all of its obligations.

¶ 16 C. The Deed and Money Escrow Agreement

¶ 17 Prior to closing, on December 15, 2004, Buyer and Seller entered into a Deed and Money Escrow Agreement (DME), as required by the Third Amendment. The DME instructed the Escrowee to release the Hy-Vee Holdback upon the completion of the following events: (1) execution of a new commercially reasonable lease in conformity with the Letter of Intent; (2) delivery of the space to Hy-Vee; (3) acceptance of the space by Hy-Vee; and (4) Hy-Vee's receipt of all permits and other governmental approvals necessary for Hy-Vee to complete the expansion. Specifically, section VII of the DME, titled "Hy-Vee Holdback, " provides as follows: "

At any time after the Closing Date that [the Seller] shall advise [the Escrowee], in writing, and under oath, that (a) a lease in a commercially reasonable form has been signed by Hy-Vee, Inc. ("Hy-Vee") for the space previously occupied at [the Mall] by Wal-Mart ("the Hy-Vee Space") substantially in accordance with the Letter of Intent dated October 12, 2004, (b) that the Hy-Vee Space has been delivered to Hy-Vee in the condition required by the terms of such lease, (c) that the tenant [Hy-Vee] thereunder has accepted the Hy-Vee Space and (d) that such tenant has obtained all government approvals and permits necessary for it to complete its work, then [the Escrowee] shall advise [the Buyer] in writing of such demand for payment and, unless [the Escrowee] receive objection in writing within five (5) days, the Hy-Vee Holdback shall be made to [the Seller]. If said objection is timely made, [the Escrowee is] to continue to hold the Hy-Vee Holdback subject to the joint direction of the parties or order of court."

Section VII further provides the following deadlines for these four events to occur:

"In the event that the Seller is unable to deliver such a lease signed by Hy-Vee on or before August 31, 2005, or in the event the conditions of Subscriptions (b), (c) and (d) are not satisfied on or before October 31, 2005, without default of [the Buyer], then, and only in such event, the Hy-Vee Holdback shall be paid to [the Buyer]; provided, however, if the plans have not been finalized by reason of any delay in producing, approving or revising such plans (such delay to be determined in accordance with the terms of Hy- Vee's lease), then, and in all such events, the October 31, 2005 date shall be extended by one day for each day of delay in the delivery plan approval. If [the Seller] shall notify Escrowee that it claims a delay and extension, Escrowee shall retain the Hy-Vee Holdback subject to a joint direction of the parties or an order of the court."

Curciarello testified that, at the time the DME was executed, he still believed that the October 31, 2005 deadline was sufficiently distant to allow Seller to complete all of its obligations.

¶ 18 Section VII also provides that Buyer will perform certain parking lot improvements and that Seller will later reimburse Buyer for the construction costs. If the parking lot improvements are the sole reason for Hy-Vee not fulfilling its obligations prior to the October 31, 2005 deadline, then Seller will not be determined to have failed to meet the deadline. In such event, 105% of the parking lot construction costs (determined by competitive bidding) will be paid to Buyer out of the Hy-Vee Holdback, and the remainder of the Hy-Vee Holdback will be released to Seller.

¶ 19 D. The New Hy-Vee Lease

¶ 20 Closing took place on December 17, 2004, and Buyer purchased the four Iowa malls for $117 million, including the Mall, which accounted for $38.5 million of the purchase price. The Mall was divided into two parcels: Parcel 1, which was valued at $33.5 million and included the entire Mall property except for the Hy-Vee and former Wal-Mart leaseholds, and Parcel 2, which was valued at $5 million and included only the Hy-Vee and former Wal-Mart leaseholds. Of the $5 million paid for Parcel 2, $4.3 million was held in escrow pending the requirements laid out in the Third Amendment and DME.

¶ 21 After closing, Seller engaged Hy-Vee in negotiating a new lease. While the new lease was being negotiated, Seller contracted and paid for an asbestos abatement in the former Wal-Mart space, which was completed in June 2005. Hy-Vee signed the new lease (Hy-Vee Lease) on June 16, 2005. The Hy-Vee Lease provided for 79, 750 square feet of the former Wal-Mart space at a price of $7 per square foot, and contemplated a minimum 20-year term, followed by five successive five-year options, which would run for a total term of 45 years. The Hy-Vee Lease provided that the original Hy-Vee store would operate while the new leasehold was remodeled, and that the 20-year term would begin to run on the date of possession, with rent becoming due on the rent commencement date.

¶ 22 Upon receiving the Hy-Vee Lease, Buyer requested that Hy-Vee make two revisions. Although Hy-Vee refused to make the suggested revisions, Buyer signed the Hy-Vee Lease on July 15, 2005.

¶ 23 Section 3(A) of the Hy-Vee Lease provides that Hy-Vee has 75 days following the execution of the lease, or until September 28, 2005, to submit "detailed plans and specifications for the Hy-Vee Expansion" to Buyer for approval. Buyer would then have 10 business days to approve the plans. If Buyer disapproves of the final plans, then Hy-Vee would have until 10 business days thereafter to submit revised plans, followed by an additional seven business days for Buyer to approve them. More specifically, section 3(A)(1) provides in relevant part:

"(1) Plans and Approvals. Landlord [the Buyer] and Tenant [Hy-Vee] have reviewed and approved Tenant's preliminary site plan for the Hy-Vee Expansion attached hereto as Exhibit B (the "Site Plan"). On or before the 75th day following the date of this lease, Tenant at its expense shall submit to Landlord detailed plans and specifications for the Hy-Vee Expansion (the "Final Plans and Specifications"), prepared by Tenant for Landlord's approval, which approval Landlord shall not unreasonably withhold, condition or delay. *** Landlord shall within ten (10) business days after receipt of all of said Final Plans and Specifications notify Tenant in writing of its approval or disapproval thereof, with any such disapproval to be specifically explained. If Landlord does not approve the Final Plans and Specifications as initially submitted, Tenant shall within ten (10) business days thereafter submit for approval revised Final Plans and Specifications addressing any objections. Landlord shall then have seven (7) business days after receipt of said revised Final Plans and Specifications to approve or disapprove same."

Also, section 3(A)(1) of Hy-Vee Lease (titled "Plans and Approvals") provides certain "Construction Conditions" that must be met. Subsection (a) provides for the mutual agreement between Buyer and Hy-Vee on final plans and specifications within the time frame set forth in section 3(A)(1). Subsection (d) provides that Hy-Vee must promptly submit an application for building permits, and that it shall obtain those permits and other governmental approvals within 30 days after Buyer's approval of the final plans and specifications. Subsection (d) also contains a delay provision, which provides that if Hy-Vee submits permit applications and diligently pursues obtaining them prior to the deadline, then it could, upon its written request, obtain a 60-day extension. Specifically, section 3(A)(1) of the Hy-Vee Lease provides the following construction conditions:

"The construction of the Hy-Vee Expansion shall be further subject to the satisfaction of the following conditions (the ...

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