GMH Assoc., Inc. v. Prudential Realty Group

• Decision Date: 01 March 2000
• Parties: GMH ASSOCIATES, INC., Appellee, v. The PRUDENTIAL REALTY GROUP, CB Commercial Real Estate Group and Douglas Joseph, Appellants.
• Court: Pennsylvania Superior Court

752 A.2d 889

2000 Pa. Super. 59

GMH ASSOCIATES, INC., Appellee, v. The PRUDENTIAL REALTY GROUP, CB Commercial Real Estate Group and Douglas Joseph, Appellants.

Superior Court of Pennsylvania.

Argued June 15, 1999.

Filed March 1, 2000.

Reargument Denied April 26, 2000.

David A. Brownlee, Pittsburgh, for appellants.

William H. Lamb, West Chester, for appellee.

Before McEWEN, President Judge, and CAVANAUGH and EAKIN, JJ.

CAVANAUGH, J.:

¶ 1 This is an appeal from the judgment entered on a non-jury verdict in a case involving failed negotiations between the parties to a proposed sale of commercial real estate. Appellee, the prospective buyer, sued appellants, the sellers of the real property in question, for breach of contract and fraud after the property was ultimately conveyed to another purchaser. The trial court concluded, inter alia, (1) that an oral contract for the sale of the real property was formed between the sellers and the prospective buyer; (2) that in procuring the oral contract, the sellers defrauded the prospective buyer; (3) that the sellers breached the oral contract when they sold the property to the actual buyer; and (4) that the sellers were liable to the prospective buyer for compensatory and punitive damages in an aggregate amount of approximately $30.34 million. After careful review, we conclude that the trial court erred in awarding judgment in favor of the prospective buyer. Thus, we conclude that the sellers are entitled to judgment notwithstanding the verdict and, accordingly, we reverse.¹

¶ 2 The record shows that on May 13, 1996, appellant, Prudential Realty Group (hereinafter "Prudential" and/or "Seller"), entered into a Letter of Interest (LOI) with appellee, GMH Associates (hereinafter "GMH" or "Buyer"), for the sale of commercial real estate in Montgomery County known as Bala Plaza (the Property).² The LOI contained certain terms and conditions previously discussed between the parties regarding the contemplated sale of the Property, including the following: the Property would be sold "AS IS" for a purchase price of $109.25 million; Buyer had begun "due diligence" and would complete same by 5 p.m. on July 3, 1996; the parties would endeavor to execute a formal, written contract of sale by that date; and the transaction would close on July 19, 1996.³ The LOI contained the following clause in large, bold print:

NOTWITHSTANDING THAT EITHER OR BOTH PARTIES MAY EXPEND SUBSTANTIAL EFFORTS AND SUMS IN ANTICIPATION OF ENTERING A CONTRACT, THE PARTIES ACKNOWLEDGE THAT IN NO EVENT WILL THIS LETTER BE CONSTRUED AS AN ENFORCEABLE CONTRACT TO SELL OR PURCHASE THE PROPERTY AND EACH PARTY ACCEPTS THE RISK THAT NO SUCH CONTRACT WILL BE EXECUTED.

¶ 3 Immediately below the bold print the LOI stated that "each party shall be free to terminate negotiations with the other for any reason whatsoever, at any time prior to the execution of the Contract without incurring liability to the other[.]" The LOI further stated:

Any Contract which may be negotiated shall not be binding on Seller until it has been approved by the senior corporate officers and the Law Department of Seller and by the Finance Committee of Seller's Board of Directors. Such approvals are conditions precedent to the Seller's obligation to perform under the terms of the Contract, and may be withheld for any reason or for no reason.

¶ 4 At trial, it was established that Seller told Buyer that in exchange for Buyer's execution of the LOI, Seller would take the property "off the market." The record is also clear that both parties were aware, prior to executing the LOI, that Buyer was negotiating a master lease/purchase option agreement with a prospective tenant, the Allegheny Health and Education Research Foundation (hereinafter "Allegheny" or "AHERF"). Under this prospective agreement, on the same day Seller would convey the Property to Buyer, Allegheny would purchase the ground beneath a portion of Bala Plaza from Buyer for $6.2 million and would enter into a long-term lease with Buyer for office space in one of the Bala Plaza buildings.⁴

¶ 5 In late May or early June of 1996, Allegheny informed Buyer that it would be unable to negotiate the lease/purchase transaction for 90 days because Allegheny had failed to disclose the existence of this potential transaction in a recent bond issue. Buyer informed Seller of this "glitch" and assured Seller that it would nonetheless be able to meet the July 19th closing date. At the same time, Buyer notified Seller that its due diligence had uncovered some $3 million in capital improvements the Property required. Thus, Buyer sought to obtain a $3 million credit toward, or reduction below, the stated LOI purchase price.

¶ 6 On July 1st, Seller verbally agreed to Buyer's request to extend the closing date to July 31st. At the same time, Buyer suggested an "earn-out" proposal to Seller. Under the terms of this proposal, Buyer would forward to Seller, sometime after closing, a portion of the proceeds Buyer expected to receive as the result of executing the lease/purchase option with Allegheny.⁵ In early July, Buyer's verbal offer for the property was $103 million in cash at closing plus a post-closing "earn out" payment of $3.25 million after Buyer concluded its lease/purchase agreement with Allegheny. The remaining $3 million of the LOI purchase price would be deemed a capital improvements credit. Thus, the unconditional LOI purchase price of $109.25 million would not actually be met. Seller's net receipt of cash would be less than the LOI purchase price by an amount equal to the proposed capital improvements credit despite the provision of the LOI that the property was to be sold "AS IS."

¶ 7 In mid-July, Buyer increased its cash at closing offer to $103.5 million and lowered its capital credit request to $2.5 million. On July 30th, Seller's agent, Devon Glenn, asked Buyer to put the "earn-out" proposal in writing. Upon receiving same, Seller requested Buyer to give "teeth" to the proposal. The trial court found that by "teeth," Seller meant it wanted to be able to realize a percentage of any profit Buyer might get from consummating the Allegheny lease/purchase transaction. Buyer declined to put "teeth" into the "earn-out" proposal and on August 12, 1996, Glenn took the Buyer's purchase offer of $103.5 million cash at closing with a subsequent potential "earn-out" payment of $3.25 million to Prudential's investment committee for approval. The committee rejected Buyer's purchase offer that same date.⁶

¶ 8 From the time the parties executed the LOI, Seller repeatedly assured Buyer that the property was off the market and that Buyer was the only prospective purchaser. The court found that Seller did, in fact, keep the Property "off the market at least from May 13, 1996 until August 12, 1996." After August 12th, Seller continued to negotiate with Buyer and continued to assure Buyer that it was not "shopping the deal" to other prospective purchasers, when, in fact, Seller allowed the Government of Singapore Investment Corporation (GSIC) to tour the Property on August 21st to determine whether GSIC had any interest in purchasing the Property. For a period of approximately three weeks thereafter, Seller conducted negotiations with both prospective purchasers, GMH and GSIC, without telling either entity about its negotiations with the other.

¶ 9 When Seller rejected GMH's latest proposal on August 12th, Seller told GMH that it was not interested in an "earn out" proposal and would require an all cash offer. Thus, on August 16th, GMH made a new oral offer of $105.5 million, all cash at closing. Seller did not immediately act thereon because GSIC was also expected to make an offer. On August 27th, an internal memorandum of Seller stated that "we will have GSIC's offer by the end of the week ... we should be prepared to consider both proposals from GMH and GSIC and respond accordingly by Friday."

¶ 10 On August 30th, GSIC forwarded a letter of intent to Seller offering to purchase the Property for $108.5 million, all cash at closing. That date, Seller rejected GMH's $105.5 million all cash offer, but untruthfully continued to assure GMH that there existed no other bidder. Mr. Holloway, GMH's sole shareholder, was "bewildered" by Seller's rejection of GMH's offer and asked Seller for a counteroffer. Mr. Holloway was told that Seller did not make counteroffers. Mr. Holloway then asked for a number which would represent the final price at which Seller would agree to convey the Property. He was told by Mr. Glenn that a number might be forthcoming the following Tuesday, September 3rd. At that point, Mr. Holloway became irate, and angrily responded that he felt Seller was "re-trading" the deal and that he was so disgusted with the negotiations that he was not sure whether he wanted a number.

¶ 11 During the week of September 3rd, Mr. Holloway contacted Mr. Joseph, CB Commercial's agent, to say he did, in fact, want a number at which the sale would finalize, and asked whether that number might be $106.75 million.⁷ He was told that the number had moved "north" of $107 million because there was "activity in the marketplace" supporting a higher price. Joseph, however, denied that there was a competing bidder. On September 9th, GMH's Chief Financial Officer, Bruce Robinson, spoke with Devon Glenn who told Robinson that "if he wanted to make sure that GMH got the property, he must offer ... $107,250,000 because that was the number Devon Glenn knew he could get the deal approved at[.]" Trial Court Finding of Fact No. 84.

¶ 12 However, the next day, September 10th, Joseph told Robinson that

[t]here were three people interested in the property and he was concerned they were going to put in bids on the property; that he [Robinson] asked Doug Joseph how could anyone else be bidding on the property when GMH was told there was nobody else negotiating, and Mr. Joseph did not respond; that [Robinson] asked if one

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