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

argued: January 7, 1986.


On Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. Civ. No. 85-0838)

Author: Becker


BECKER, Circuit Judge.

This diversity case presents the question whether, under Pennsylvania law, a property owner's promise to a prospective tenant, pursuant to a detailed letter of intent, to negotiate in good faith with the prospective tenant and to withdraw the lease premises from the marketplace during the negotiation, can bind the owner for a reasonable period of time where the prospective tenant has expended significant sums of money in connection with the lease negotiations and preparation and where there was evidence that the letter of intent was of significant value to the property owner. We hold that it may. We therefore vacate and reverse the district court's determination that there was no enforceable agreement, and remand the case for trial.


Appellant Channel Home Centers ("Channel"), a division of Grace Retail Corporation, operates retail home improvement stores throughout the Northeastern United States, including Philadelphia and its suburbs. Appellee Frank Grossman, a real estate broker and developer, with his sons Bruce and Jeffrey Grossman, either owns or has a controlling interest in appellees Tri-Star Associates ("Tri-Star"), Baker Investment Corporation ("Baker"), and Cedarbrook Associates, a Pennsylvania Limited Partnership ("Cedarbrook").*fn1

Between November, 1984 and February, 1985, the Grossmans, through Baker, were in the process of acquiring ownership of Cedarbrook Mall ("the mall") located in Cheltenham Township, Pennsylvania, a northern suburb of Philadelphia. During these months, Baker was the equitable owner of the mall, Tri-Star was acting as the mall's leasing agent, and legal title was in Equitable Life Assurance Society. It was anticipated that, upon closing in February, 1985, Baker would become both legal and equitable owner of the mall. App. at 218a-219a, 496a. The Grossmans intended to revitalize the mall, which had fallen on hard times prior to their acquisition, through an aggressive rehabilitation and leasing program.

In the third week of November, 1984, Tri-Star wrote to Richard Perkowski, Director of Real Estate for Channel, informing him of the availability of a store location in Cedarbrook Mall which Tri-Star believed Channel would be interested in leasing. Perkowski expressed some interest, and met the Grossmans on November 28, 1984. After Perkowski was given a tour of the premises, the terms of a lease were discussed. App. at 457a, 496a. Frank Grossman testified that "we discussed various terms, and these terms were, some were loose, some were more or less terms." App. at 364a, 496a-497a.

In a memorandum dated December 7, 1984, to S. Charles Tabak, Channel's senior vice-president for general administration, Perkowski outlined the salient lease terms that he had negotiated with the Grossmans. App. at 97a. On or about the same date, Tabak and Leon Burger, President of Channel, visited the mall site with the Grossmans. They indicated that Channel desired to lease the site. App. at 413a-415a. Frank Grossman then requested that Channel execute a letter of intent that, as Grossman put it, could be shown to "other people, banks or whatever." App. at 366a-367a. Tabak testified that the Grossmans wanted to get Channel into the site because it would give the mall four "anchor" stores. App. at 414a. Apparently, Frank Grossman was anxious to get Channel's signature on a letter of intent so that it could be used to help Grossman secure financing for his purchase of the mall. App. at 366a-367a, 497a.

On December 11, 1984, in response to Grossman's request Channel prepared, executed, and submitted a detailed letter of intent setting forth a plethora of lease terms which provided, inter alia, that

to induce the Tenant [Channel] to proceed with the leasing of the Store, you [Grossman] will withdraw the Store from the rental market, and only negotiate the above described leasing transaction to completion.

Please acknowledge your intent to proceed with the leasing of the store under the above terms, conditions and understanding by signing the enclosed copy of the letter and returning it to the undersigned within ten (10) days from the date hereof.

App. at 31a.*fn2

Frank Grossman promptly signed the letter of intent and returned it to Channel. App. at 499a. Grossman contends that Perkowski and Tabak also agreed orally that a draft lease be submitted within thirty (30) days. App. at 331a-332a, 365-366a. Perkowski and Tabak denied telling Grossman that a lease would be forthcoming within 30 days or any finite period of time. App. at 445a, 473a.

Thereafter, both parties initiated procedures directed toward satisfaction of lease contingencies. The letter of intent specified that execution of the lease was expressly subject to each of the following: (1) approval by Channel's parent corporation, W.R. Grace & Company ("Grace"), of the essential business terms of the lease; (2) approval by Channel of the status of title for the site; and (3) Channel's obtaining, with Frank Grossman's cooperation, all necessary permits and zoning variances for the erection of Channel's identification signs. App. at 30a; see supra note 2.

On December 14, 1984, Channel directed the Grace legal department to prepare a lease for the premises. Channel's real estate committee approved the lease site on December 20, 1984. App. at 472a. Channel planning representatives visited the premises on December 21, 1984, to obtain measurements for architectural alterations, renovations and related construction. App. at 379a. Detailed marketing plans were developed, building plans drafted, delivery schedules were prepared and materials and equipment deemed necessary for the store were purchased. App. at 91a-96a, 99a-135a, 422a-423a, 517a-547a. The Grossmans applied to the Cheltenham Township building the zoning committee for permission to erect commercial signs for Channel and other tenants of the mall. App. at 15a.

On January 11, 1985, Frank Shea, Esquire, of the Grace legal department sent to Frank Grossman two copies of a forty-one (41) page draft lease and, in a cover letter, requested copies of several documents to be used as exhibits to the lease. App. at 43a-44a On January ...

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