Ysiem Corp. v. Commercial Net Lease Realty, Inc., 02-1625.

• Decision Date: 01 May 2003
• Docket Number: No. 02-1625.,02-1625.
• Citation: 328 F.3d 20
• Parties: YSIEM CORPORATION, Plaintiff, Appellant, v. COMMERCIAL NET LEASE REALTY, INC., Defendant, Appellee. OFFICEMAX, INC., Defendant.
• Court: U.S. Court of Appeals — First Circuit

Page 20

328 F.3d 20

YSIEM CORPORATION, Plaintiff, Appellant, v. COMMERCIAL NET LEASE REALTY, INC., Defendant, Appellee.

OFFICEMAX, INC., Defendant.

No. 02-1625.

United States Court of Appeals, First Circuit.

Heard January 6, 2003.

Decided May 1, 2003.

Eugenio C. Romero with whom Eugenio C. Romero Law Offices was on brief for appellant.

Verónica Ferraiuoli-Hornedo with whom Néstor Durán and McConnell Valdés were on brief for appellee.

Before BOUDIN, Chief Judge, SELYA and LIPEZ, Circuit Judges.

BOUDIN, Chief Judge.

Ysiem Corporation ("Ysiem") is a Puerto Rico corporation that owns a parcel of land in Rio Piedras, Puerto Rico. In late 1997, Ysiem inquired through a broker whether the office supply chain OfficeMax would be interested in building a store on a portion of the site. OfficeMax replied that it does not acquire or develop property itself; it will only lease (or sublease) sites that are fully developed. The broker put Ysiem in contact with Commercial Net Lease Realty, Inc. ("Commercial Net"), a company that develops commercial properties that are then leased to major retail businesses under long-term leases. Commercial Net had developed sites for OfficeMax in the past.

Commercial Net and Ysiem began to negotiate a ground lease agreement in February 1998. During these negotiations, Commercial Net had no assurance from OfficeMax that the latter would be interested in subleasing the site from Commercial Net: OfficeMax usually does not negotiate with the developer at all until it has received a pro forma budget, for the developer will ordinarily first need at least a tentative agreement with the landowner as to the ground rent.

Representatives from Ysiem and Commercial Net met in March 1998. Ysiem understood that Commercial Net hoped to lease the land from Ysiem and build a retail store to OfficeMax specifications that OfficeMax would then sublease from Commercial Net. On March 26, 1998, Commercial Net and Ysiem signed a letter of intent specifying the lease term, annual ground rent, and other contemplated provisions including a statement that the effective date of the ground lease would be the date that OfficeMax opened its doors or six months after the start of construction, whichever came later. The letter also stated: "The parties shall enter into negotiations for the completion of documentation incorporating the above. This transaction shall not be binding until final execution and delivery of such mutually agreeable documentation."

After signing the letter of intent, Commercial Net and Ysiem began to negotiate the ground lease agreement and, in May 1998, the parties settled upon final language incorporating many of the terms laid out in the letter of intent. But unlike the deferred effective date for the lease contemplated in the letter of intent, the ground lease stated (conventionally) that the lease was "made, entered into and effective as of" a specific date — which was left blank in the draft. Section 7.6 of the ground lease gave Commercial Net the right to terminate the agreement if it was not able to enter into a sublease agreement with OfficeMax within 60 days:

Within sixty (60) days of the Effective Date, Tenant shall have obtained a sublease with OfficeMax, Inc., an Ohio corporation ("OfficeMax"), in a form satisfactory to Tenant in its sole and absolute discretion. If Tenant does not obtain the sublease within such 60-day period, Tenant, at Tenant's option, by written notice to Landlord within five (5) days after the expiration of such 60-day period, may terminate this Lease. If Tenant does not give the aforesaid notice to Landlord prior to the expiration of the applicable 5-day period, Tenant shall be deemed to have waived this condition. If Tenant terminates this Lease under this Section 7.6, this Lease shall become null and void, and neither party shall have any further obligations hereunder.

On May 6, 1998, Commercial Net sent Ysiem four copies of the ground lease agreement for execution. The accompanying letter instructed Ysiem's representative to execute the four copies and return them to Commercial Net for Commercial Net's execution. Ysiem signed the copies, leaving the execution date blank, and returned them to Commercial Net on May 12. In early June, Commercial Net asked Ysiem for a resolution from Ysiem's board of directors stating that the Ysiem employee who had signed the ground lease had authority to do so; Commercial Net said this was necessary for the ground lease "to be effective and binding against the landlord and in order to record the Lease." Ysiem's board quickly passed this resolution.

Commercial Net did not execute the lease after it received notice of this resolution; instead it began negotiating the sublease agreement with OfficeMax. At the end of June, Commercial Net submitted to OfficeMax a pro forma budget stating that OfficeMax's rent would be $23.09 per square foot. OfficeMax said this figure was too high, so Commercial Net asked Ysiem for a reduction in the rent, explaining OfficeMax's position. Ysiem refused. Commercial Net attempted to salvage the deal by lowering its own return rate and reducing the annual rent increases, thereby reducing OfficeMax's annual rent to $22.42 per square foot. OfficeMax still found the rent too high.

Ysiem's own broker then sent a letter to an OfficeMax representative justifying the ground lease rent as comparable to other rents in the area. Mentioning various possible tenants, the letter also said that Ysiem had instructed the broker for the property to find an alternate lessee but to hold off doing so until Ysiem reached a final resolution with Commercial Net and OfficeMax. In late July 1998, Commercial Net made one last effort to make a deal with OfficeMax, which the latter rejected because it still found the rent too high.

At the end of August, Ysiem requested from Commercial Net an executed copy of the ground lease. Ysiem's letter, plainly a predicate to litigation, stated that "[a]lthough such formal requirement is not strictly necessary under Puerto Rico contract law, it would seem compelling to have an original copy of the Agreement available in our files." The letter ended by noting, "[i]n view of the foregoing, we hereby reiterate YSIEM's emphatic position that the Ground Lease Agreement is a valid, effective, and enforceable contract with [Commercial Net]." Commercial Net responded that there was no contract because Commercial Net had never executed the ground lease agreement. It also returned the original four copies without its own signature.

Ysiem filed this diversity action against Commercial Net and OfficeMax in federal district court in Puerto Rico in December 1998, seeking specific performance or damages. Ysiem alleged that the defendants had breached the ground lease agreement and that their actions had been wrongful. After discovery, Ysiem voluntarily dismissed the claims against OfficeMax. The remaining parties then cross-moved for summary judgment. After receiving a recommendation from the magistrate judge, the district court dismissed the remaining claims, and Ysiem has appealed. We review a grant of summary judgment de novo, construing the record in the light most favorable to the non-moving party. Motorsport Eng'g, Inc. v. Maserati SPA, 316 F.3d 26, 28 (1st Cir.2002).

The district court gave two bases for rejecting Ysiem's contract claim that the ground lease between it and Commercial Net is binding. Its first reason was that the ground lease agreement was not binding because...