Channel Home Centers, Division of Grace Retail Corp. v. Grossman

Brief Fact Summary. Plaintiff, a home improvement store, executed a letter of intent to lease a certain mall premises from Defendant, a real estate developer. The letter helped Defendant obtain financing for purchase of the mall. In return, Plaintiff promised to withdraw the premises from the rental market and negotiate a final lease with Plaintiff.

Synopsis of Rule of Law. Where the parties exchanges promises of value to each other, they can be found to have provided consideration sufficient to support a binding agreement to negotiate in good faith. This is a binding preliminary agreement.

Facts. Defendant was a broker and real estate developer. Plaintiff operates retail home improvement stores in the Northeast. On December 11, 1984, Plaintiff executed a letter of intent setting forth lease terms that included a term that Defendant would withdraw the store from the rental market and only negotiate with Plaintiff to completion of the lease. Defendant signed the letter of intent. Defendant contends that at the time Plaintiff orally promise that a draft lease would be submitted in 30 days. Plaintiff denies such a promise. Plaintiff undertook expensive legal efforts in December to get the lease and various related construction projects on the property approved for its store. Defendant began negotiation with Frank Shea of the parent corporation’s legal department to prepare the lease in early January. In late January, Defendant started showing the property to Plaintiff’s competitor. On February 6, 1985 Defendant notified Plaintiff that negotiations regarding the lease were
terminated.

Issue. Whether under Pennsylvania law a property owner’s promise to a prospective tenant to withdraw the lease premises from the market during negotiation can bind the property owner for a reasonable period of time if the prospective tenant has spent significant time and money on the lease negotiations and preparation.

Held. Parties intended to enter into a binding agreement “to negotiate in good faith.” The agreement of the letter of intent had sufficient specificity to make it an enforceable contract and consideration passed between the parties. The execution of the letter had value to Defendant for obtaining financing to purchase the mall with the promise of an anchor store. In turn, Plaintiff received Defendant promise to withdraw the store from the rental market. Thus, there was consideration to support a binding preliminary agreement to negotiate a lease in good faith. Case was remanded for further fact finds concerning the reasonable time for duration of the negotiations.

Discussion. The exchange of promises facilitated an express agreement to negotiate in good faith. Ordinarily however, judges are reluctant to impose pre-contractual liability this is called “freedom from contract.” In the present case, however, there was an express agreement executed that required both parties to negotiate a lease contract in good faith.