Wells Real Estate Inv. Trust Ii Inc. v. Chardon

• Decision Date: 05 August 2010
• Docket Number: No. 09-1969.,09-1969.
• Parties: WELLS REAL ESTATE INVESTMENT TRUST II, INC., Plaintiff, Appellant, v. CHARDON/HATO REY PARTNERSHIP, S.E., Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

615 F.3d 45

WELLS REAL ESTATE INVESTMENT TRUST II, INC., Plaintiff, Appellant,
v.
CHARDON/HATO REY PARTNERSHIP, S.E., Defendant, Appellee.

No. 09-1969.

United States Court of Appeals,First Circuit.

Heard March 2, 2010.
Decided Aug. 5, 2010.

615 F.3d 46

Robert I. Steiner, with whom Damon W. Suden, Kelley Drye & Warren, LLP, Ricardo F. Casellas, and Casellas, Alcover & Burgos, P.S.C., were on brief, for appellant.

Eric A. Tulla, with whom Maritza I. Munich, Lillian Frattallone, José Bagué,

615 F.3d 47

Iris J. Cabrera, and Rivera, Tulla & Ferrer were on brief, for appellee.

Before LYNCH, Chief Judge, TORRUELLA ^* and LIPEZ, Circuit Judges.

LIPEZ, Circuit Judge.

This dispute arose after plaintiff Wells Real Estate Investment Trust, Inc. (Wells) entered into an agreement with defendant Chardón/Hato Rey Partnership, S.E. (Chardón) for the purchase of a commercial building in San Juan, Puerto Rico. Prior to the expected closing date, a large fuel spill occurred at the property, causing significant damage and displacing the building's tenants. Chardón insisted on proceeding to closing over Wells' objections. After Wells failed to appear for the scheduled closing, both parties filed claims for breach of contract.

Wells appeals from the court's grant of summary judgment in favor of Chardón on Wells' claims for breach and resolution of contract and Chardón's counter-claim for breach of contract. After careful review, we affirm the judgment in part, vacate in part, and remand for further proceedings consistent with this opinion.

I.A. The Purchase and Sale Agreement

On January 25, 2008, Wells entered into a Purchase and Sale Agreement (the Agreement) with Chardón by which Wells agreed to purchase the American International Plaza building in San Juan (AI Plaza) for $80 million. Pursuant to the Agreement, Wells placed a $4 million deposit in escrow and agreed to pay the $76 million balance at closing.

Section 2.1 of the Agreement defined the “Property” that Wells agreed to purchase from Chardón:

2.1 Property. Subject to the terms and conditions of this Agreement, Seller agrees to sell to Purchaser, and Purchaser agrees to purchase from Seller, the Real Property, the Improvements, and all of Seller's right, title, and interest in the Leases, in the Tangible Personal Property, in the Intangible Personal Property, and in the Service Contracts (as such terms are defined below) (all of which are collectively referred to as the “ Property ”).

Article 6 of the Agreement addressed “OPERATIONS AND RISK OF LOSS.” Section 6.1.3 set forth Chardón's ongoing maintenance obligations from the effective date of the Agreement, January 25, through closing:

6.1.3. Maintenance of Improvements; Removal of Personal Property. Subject to Sections 6.2 and 6.3, Seller shall maintain or cause the tenants under the Leases to maintain (to the extent provided in such Leases) all Improvements substantially in their present condition (ordinary wear and tear and casualty excepted) and in a manner consistent with Seller's maintenance of the Improvements during Seller's period of ownership. Seller will not remove any Tangible Personal Property except as may be required for necessary repair or replacement.

Section 6.2, entitled “Damage,” set forth the parties' rights and obligations in the event that “prior to Closing the Property is damaged by fire or other casualty.” If such a casualty occurred, “Seller shall estimate the cost to repair and the time required to complete repairs and will provide Purchaser written notice of Seller's estimation

615 F.3d 48

(the ‘Casualty Notice’ ) as soon as reasonably possible....” Section 6.2.1 defined “Material Damage” as “damage which, in Seller's reasonable estimation, exceeds $4,000,000 to repair,” and provided that “[i]n the event of any Material Damage to or destruction of the Property or any portion thereof prior to Closing, Purchaser may, at its option, terminate this Agreement” and recover its deposit. Section 6.2.2 provided that if “the Property is not Materially Damaged, then Purchaser shall not have the right to terminate this Agreement;” instead, Chardón could either repair the nonmaterial damage in a manner reasonably satisfactory to Wells or credit Wells at closing for the reasonable cost to complete the repairs.

Section 7.3 required Chardón to deliver certain documents to the escrow agent on or before the closing date, including “tenant estoppel certificates” by which AI Plaza tenants warranted certain information about their leases. ¹ Under Section 7.3.7, Chardón was required to deliver “Tenant Estoppel Certificates for the Leases” executed by tenants such that the tenants who executed estoppel certificates, in the aggregate, “occupy 75% of the leasable space in the Improvements (the ‘Required Estoppels' ).” The Agreement specified that “[i]t shall be a further condition to Purchaser's obligation to close the transaction” that “the Required Estoppels, do not ... reflect any material discrepancies of the terms of the Leases as compared with the terms of the Leases set forth in the copies of the Leases delivered by Seller....” However, this section also stated that Wells' remedies for Chardón's failure to deliver the required estoppels were limited: “If Seller is unable to deliver the Required Estoppels” by the closing date, “then Purchaser's sole remedies and recourses shall be limited to either (A) waiving the requirement for the tenant estoppel certificate(s) in question and proceeding to Closing without reduction of the Purchase Price or (B) terminating this Agreement by immediate notification to Seller” and recovering any deposit.

B. The Fuel Spill

Prior to closing, the transformer for AI Plaza's main electrical service failed on February 10, 2008, and the building's two diesel-powered back-up generators began operating. Late on February 11 or early on February 12, a large diesel fuel spill occurred. About 1,200 gallons of fuel spilled from the maintenance room on the building's top floor into other parts of the building. As a result of the spill, AI Plaza required significant remediation, repair, cleaning and restoration, and its tenants were forced to vacate the building. Chardón obtained the necessary clearances to reopen the building for occupancy on March 26, and the majority of tenants returned by the end of May.

On February 15, Chardón notified Wells by letter that a fuel spill had occurred at AI Plaza and that Chardón's initial estimate of the cost to clean up the spill and repair the damage to repair “the Property” was $650,000. ² Chardón stated that pursuant to Section 6.2.2 of the Agreement, which governed nonmaterial damage, it elected to complete a portion of the

615 F.3d 49

clean-up and repair prior to closing and credit Wells for the remaining costs of repair. The following week, Wells responded with concern that “this estimate may be unduly low, and indeed the Property may have been Materially Damaged, as that term is defined in Section 6.2.1,” and requested further information and documentation supporting Chardón's estimate.

On March 6, Chardón advised Wells that it believed remediation of the fuel spill was “95%” complete. Chardón provided a revised estimate of $2,546,509 for the “expected costs to complete the environmental cleanup, restoration, and subsequent certification relative to the diesel oil spill,” and an additional $100,000 for replacement of the transformer for the building's main electric service. Wells again expressed concern about the reasonableness of Chardón's repair estimate, noting that “we are still reviewing this latest estimate but believe that it too may fall short of fully estimating the substantial damages incurred at the Property” due to the fuel spill.

In the course of litigation, Chardón produced expert evidence that the actual total cost to repair the physical property was $3,606,407. Chardón also incurred additional costs in order to “maintain cordial relations with the tenants,” but did not consider these expenditures to be repair costs within the meaning of the Agreement. These additional costs included $2,343,878 in rent and other abatements to AI Plaza tenants, $671,804 in other “tenant benefits,” and $208,489 in “payments related to tenant benefits.” ³

C. Tenant Estoppel Certificates

Prior to the fuel spill, Chardón delivered tenant estoppel certificates to Wells on February 6, 2008, pursuant to Section 7.3.7 of the Agreement. Several days later, Chardón and Wells representatives had a phone conversation in which Wells raised concerns about apparent discrepancies in several of the estoppel certificates provided, and Chardón attempted to assuage Wells' concerns. On February 11, Wells sent an email to Chardón listing “a few issues arising under the estoppels delivered last week” and stated that “[t]hese matters must be resolved to Wells' satisfaction prior to closing.” ⁴

On March 3, after the fuel spill, Wells reiterated to Chardón that the estoppel certificates delivered on February 6 did not satisfy Section 7.3.7 of the Agreement and that issues related to the estoppels “remain[ed] outstanding.” Wells further noted that in the wake of the fuel spill, local media had reported that some tenants might not return to AI Plaza, and

615 F.3d 50

therefore Wells requested that Chardón provide new, satisfactory estoppel letters from all tenants. In letters dated March 11 and March 12, Wells again stated that the estoppel certificates provided on February 6 were not satisfactory and noted that new estoppels had not been provided after the fuel spill as requested. Chardón did not provide Wells with new estoppel certificates prior to closing. At the same time, Wells did not notify Chardón that it wished to terminate the Agreement due to Chardón's alleged failure to provide satisfactory estoppel certificates.

D. Closing

Following postponement of the original closing date, on March 10, Chardón notified Wells that the new closing date would be March 14. On March...