Realty Shop, Inc. v. RR Westminster Holding

Citation7 S.W.3d 581
PartiesThe REALTY SHOP, INC., Plaintiff/Appellee, v. RR WESTMINSTER HOLDING, INC., Defendant/Appellant, and John S. Clark Co., Inc.; Senash, Inc.; and Clarendon National Ins. Co., Defendants.
Decision Date04 June 1999
CourtTennessee Court of Appeals

COPYRIGHT MATERIAL OMITTED

Gregory L. Cashion, Carol R. Dunn, Manier, Herod, Hollabaugh & Smith, Nashville, for The Realty Shop, Inc.

John Branham, Donald Capparella, Branham & Day, Nashville, Bryan Cave, Thomas C. Walsh, St. Louis, Missouri, for RR Westminster Holding, Inc.

OPINION

WILLIAM C. KOCH, Jr., Judge.

This appeal involves a problem-plagued commercial development in Nashville called Thompson Station. To shield the project from the developer's financial problems, the principals agreed that a corporation owned by the holding company that owned the contractor would own the project during construction and that the developer would have an option to purchase that corporation upon completion of the work. After the project was completed with substantial cost overruns, the developer attempted to exercise its option without taking the overruns into consideration. The holding company declined to sell the corporation to the developer and eventually sold the project to a group of foreign investors. The developer filed suit in the Chancery Court for Davidson County, alleging that the holding company and the corporation formed to own the project had breached the option agreement and that the contractor and the holding company's parent corporation that had provided the construction financing had procured the breach. The trial court, sitting without a jury, awarded the developer $1,089,674 in damages and $277,866 in prejudgment interest and dismissed the claims against the contractor and the construction lender.1 Both the holding company and the developer have appealed. We affirm the dismissal of the developer's procurement of the breach of contract claims; however, we modify the judgment against the holding company and the corporation formed to own the project because the parties, by their conduct during the course of construction, waived their right to rely on the written change order requirements in both the construction contract and the option agreement.

I.

Ed H. Street, Jr. is a real estate developer headquartered in Johnson City, Tennessee who concentrates on the development and construction of shopping centers. He is a principal of a partnership called Ed Street Company that engages in development and construction, and he is also president of The Realty Shop, Inc. ("The Realty Shop"), a corporation engaged only in real estate development.2 The Realty Shop's corporate charter was issued in 1984, revoked in 1985, and reinstated in December 1991.

In 1991, Mr. Street undertook to develop two shopping center projects each of which included a Lowe's Hardware Center. One was located in Johnson City and the other in Nashville. The Johnson City project ended up placing a great financial strain on Mr. Street's business. The construction lender foreclosed on the project, and The Realty Shop eventually filed for bankruptcy protection in the Eastern District of Tennessee. The bankruptcy proceeding was later dismissed in March 1992 on the ground that it had been brought in bad faith. As a result, Mr. Street became exposed to approximately $500,000 in personal liability and was sued more than ten times for bad debts in 1993. Mr. Street's financial reversals stemming from the Johnson City project caused the Nashville project to assume great significance for him.

Mr. Street initially became interested in the 21-acre site on Nolensville Road in Nashville because of the high traffic volume on Nolensville Road, the population density in the vicinity of the project, and the apparent interest of potential anchor tenants in the location. The site was at the base of a steep rock slope and was occupied at the time by a few rental houses, some small businesses, and an automobile junkyard. Mr. Street obtained options to purchase the property with the idea to develop a $10,300,000 shopping center called Thompson Station containing a Lowe's Hardware Center, a Food Lion grocery store, and a Phar-Mor drug store. His original intention was to begin construction in the summer of 1992 and to complete the project in early 1993.

After obtaining options to purchase the property in April 1991, Mr. Street began negotiating leases with the prospective tenants. He retained an engineer to prepare preliminary site plans and to assist with having the property rezoned. He also retained an architect to adapt the tenants' prototypical plans to the site. As early as March 1992, Mr. Street began discussing the construction of the project with several general contractors, including John S. Clark Company, Inc. ("Clark"), a large North Carolina general contractor with a national reputation for constructing retail space.3 In April 1992, Mr. Street began to push Clark for a quick decision and requested a proposal that included not only the construction of the project but also the construction financing.

The elements of the project continued to coalesce between June and September 1992. Mr. Street obtained a permanent loan commitment from Life Insurance Company of Georgia and also found a group of German investors, who had formed a limited partnership called Tennessee Equity Fund, L.P. ("Tennessee Equity Fund") and who were interested in purchasing the completed project. In July 1992, he finalized a lease with Food Lion, and in September 1992 he obtained a lease from Lowe's. These leases contained deadlines for the commencement or completion of the major phases of construction and gave the tenants the right to cancel the leases if these deadlines were not met. Both Lowe's and Food Lion expected that construction of the project would commence by no later than December 15, 1992, and Food Lion's lease also required pouring footers for the foundation to begin by March 1, 1993.

Clark's representatives visited the proposed project in June 1992 to discuss the roles that Clark, its parent company, RR Westminster Holding, Inc. ("RR Westminster"), and the owner of its parent company, Clarendon National Insurance Company ("Clarendon"), would play in the development. Following the visit, Monty K. Venable, Clark's secretary-treasurer, informed Mr. Street that Clark "must be careful to structure a package that is fair and reasonable to both parties. Certainly we are looking to receive more compensation since we are taking greater risk and providing substantial additional services other than just construction but it still must be fair and reasonable." In order to assist Clark in preparing its proposal, Mr. Street provided Mr. Venable with a topological map supplied by the current property owners, the prototype building plans provided by Food Lion and Lowe's, and a site plan. The site plan called for the construction of a pre-split rock wall on the side of the property with a steep rock slope.4

The project suffered several setbacks following Clark's visit. The principal setback was Phar-Mor's decision to withdraw from the project. Without a replacement tenant, Mr. Street was required to continue with only two tenants. Accordingly, he reduced the size of the development from twenty-one to fifteen acres, and he reduced the project from $10,300,000 to approximately $6,500,000. Mr. Street informed Clark of Phar-Mor's withdrawal from the project and requested a proposal based on the revised project.

On September 3, 1992, Mr. Venable informed Mr. Street that Clark would accept the construction portion of the project for $4,430,065 but that the risks were too great for Clark to accept total responsibility for the construction and financing of the project, including the indirect costs, for $6,500,000. With reference to Phar-Mor's withdrawal, Mr. Venable stated, "Certainly the Phar Mor disaster was unexpected and unfortunate but it still leaves you with a home run of a project although perhaps not a grand slam." After another two weeks of negotiations, Mr. Street and Mr. Venable signed a letter agreement on September 22, 1992, in Mr. Venable's office in Mount Airy, North Carolina.

In the letter agreement, Clark agreed to provide the "construction and construction financing"5 for a "guaranteed maximum price" of $6,649,105 plus an allowance of $188,000 for indirect costs and contingencies. To insulate the project from Mr. Street's growing financial problems, the parties agreed to form a new corporation that would own the development during the construction phase and would act as the borrower of the interim construction funds. Mr. Street agreed to convey his interests in the project to the new corporation in return for an agreement that he could buy back the project when it was completed. The letter agreement also required the new corporation to furnish (1) a traffic light at a cost not to exceed $36,000, (2) permanent financing, (3) architectural and engineering services at a cost not to exceed $70,000, (4) an approved site development plan ready for building permit issuance on or before October 9, 1992, and (5) a contract to purchase the property for $1,400,000. The parties understood that the new corporation would comply with these conditions when Mr. Street assigned it his contracts with the engineer and the architect, his permanent loan commitment from Life Insurance Company of Georgia, and his options to purchase the property.

Mr. Street could not provide Clark with the completed site plan or the completed plans for the Lowe's or Food Lion stores when they signed the letter agreement. In late September, Clark reminded Mr. Street that "we need final approved working drawings to maintain your scheduled dates for your project." In October, the engineer employed by Mr. Street provided Clark with a revised site plan reflecting...

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