GK Dev., Inc. v. Iowa Malls Fin. Corp.

2013 IL App (1st) 112802

3 N.E.3d 804

378 Ill.Dec. 239

GK DEVELOPMENT, INC., an Illinois Corporation, and College Square Mall Development, LLC, a Delaware Limited Liability Company, Plaintiffs–Appellees,

v.IOWA MALLS FINANCING CORPORATION, a Delaware Corporation, College Square Mall Associates, LLC, a Delaware Limited Liability Company, and Chicago Title and Trust Company, an Illinois Corporation, Defendants–Appellants.

Docket Nos. 1–11–2802, 1–12–0432 cons.

Appellate Court of Illinois, First District, Fourth Division.

Dec. 19, 2013.

Kent Maynard, Jr., and Heather Nicole Koffman, both of Kent Maynard & Associates LLC, of Chicago, for appellants.

J. Timothy Eaton and Jonathan B. Amarilio, both of Shefsky & Froelich Ltd., of Chicago, for appellees.

OPINION

Presiding Justice HOWSE delivered the judgment of the court, with opinion.

¶ 1 The issue presented in this case is whether a provision in a contract for the sale of four shopping centers, which required that $4.3 million of the purchase price be held in escrow from the seller's proceeds then be paid to the seller only if certain conditions are timely met, is enforceable as a liquidated damages clause or is unenforceable as a penalty.

¶ 2 In a $117 million transaction, plaintiffs GK Development, Inc., and College Square Mall Development, LLC (collectively Buyer), purchased from defendants Iowa Malls Financing Corporation and College Square Mall Associates, LLC (collectively Seller), four shopping centers in eastern Iowa, including College Square Mall (Mall). Prior to the sale, Mall tenant Hy–Vee Food Stores, Inc. (Hy–Vee), was in the process of expanding its grocery store (Hy–Vee Expansion) into the space that had been vacated by Wal–Mart after Wal–Mart decided not to renew its lease. Because the parties did not expect the Hy–Vee Expansion to be completed by the time of the closing, Buyer and Seller negotiated to hold $4.3 million of the purchase price in escrow (Hy–Vee Holdback), which represented the present value of the leasehold with regard to the forthcoming Hy–Vee Expansion.

¶ 3 An amendment to the purchase agreement directed defendant Chicago Title and Trust Company (the Escrowee) to release the Hy–Vee Holdback to Seller only after and if all the following events occurred: (1) a new Hy–Vee lease was executed by August 31, 2005; (2) the new Hy–Vee leasehold was delivered by Buyer and accepted by Hy–Vee before October 31, 2005; and (3) Hy–Vee obtained all permits and other governmental approvals necessary to complete the Hy–Vee Expansion prior to October 31, 2005. Hy–Vee did not obtain the necessary permits before October 31, 2005; however, both parties demanded that the Escrowee disperse the Hy–Vee Holdback in their favor. Both Buyer and Seller subsequently filed separate lawsuits seeking a declaratory judgment regarding their entitlement to the Hy–Vee Holdback, and the two lawsuits were consolidated into the instant action. Following a three-week bench trial, the trial court found that the parties intended a “drop-dead deadline” of October 31, 2005 for plan and permit approval, and that Buyer was entitled to the Hy–Vee Holdback as liquidated damages for a breach of contract. The trial court also granted Seller's posttrial motion to “Stay Enforcement of the Circuit Court's order and Judgment and Not Apply Post–Judgment Interest During Appeal.” Both parties appealed, and those appeals were consolidated.

¶ 4 Within Seller's appeal (appeal No. 1–11–2802), Seller argues: (1) that the Hy–Vee Holdback is not a valid liquidated damages provision because it amounts to an unenforceable penalty clause; (2) that the trial court erred in finding the parties' agreement ambiguous; (3) that the trial court's interpretation of the parties' contract violates Illinois rules of contract construction; and (4) that the trial court erred as a matter of law in failing to award attorney fees to Seller. In response, Buyer claims: (1) that the Hy–Vee Holdback is a valid and enforceable liquidated damages provision as construed by the trial court; (2) that the trial court's finding that the contract terms were ambiguous and required extrinsic evidence to interpret the parties intent was reasonable; (3) that Seller forfeited several of its arguments concerning the trial court's contract interpretation; and (4) that Seller is not entitled to attorney fees. Within Buyer's appeal (appeal No. 1–12–0432), Buyer argues that the trial court's order denying Buyer postjudgment interest must be reversed. For the following reasons, we reverse the trial court's order directing the $4.3 million be returned to the Buyer because we find that the contract provision under review is unenforceable as a penalty clause.

¶ 5 I. BACKGROUND

¶ 6 In 2004, Seller owned four shopping malls in eastern Iowa, which included College Square Mall (Mall) in Cedar Falls, Iowa. Wal–Mart and Hy–Vee (a grocery store) were among the larger “anchor” stores in the Mall. The Wal–Mart occupied 160,128 square feet of space, while the Hy–Vee occupied a smaller, 59,860-square-foot building adjacent to it. Hy–Vee's original lease began in 1976 and was due to expire on December 31, 2010, subject to three, five-year renewal options. The lease provided that Hy–Vee pay a $26,166.67 monthly rent ($314,000 annum, or $5.25 per square foot) from January 1, 2006, through December 31, 2010. In addition to this base rent, Hy–Vee paid a pro rata share of real estate taxes and common area maintenance (CAM).

¶ 7 A. The Purchase Agreement

¶ 8 Prior to trial, the parties stipulated to the following in a joint statement of agreed facts.

¶ 9 In June 2004, Seller began marketing the Mall for sale and issued an offering memorandum, which opined that Hy–Vee would relocate to a larger leasehold of 75,000 square feet in Wal–Mart's former space. The Hy–Vee Expansion would increase its rented square footage by 15,000 square feet at a cost of $6 per square foot, and the former Hy–Vee space would be divided to accommodate “two new big box anchors.” The memorandum contemplated that Hy–Vee would execute a new 60–month lease by March 2005. Buyer then entered into discussions with Seller to purchase the Mall.

¶ 10 In July 2004, Buyer executed a letter of intent to purchase the Mall, as well as the three other Iowa malls, for $117 million. On September 17, 2004, Buyer and Seller entered into a real estate sales contract (Purchase Agreement) to purchase the four malls, and set a closing date of December 17, 2004.

¶ 11 On October 12, 2004, Hy–Vee executed a letter of intent (Letter of Intent) to open a “first class high quality Hy–Vee retail grocery store,” which is described as a “21st century prototype,” in the space formerly occupied by Wal–Mart. The Letter of Intent contemplated that Hy–Vee would lease 78,337 square feet for a minimum term of 20 years, followed by five, five-year renewal options. The initial base rent would be $7 per square foot and would incrementally rise to $9.35 per square foot beyond the initial 20–year term. In addition to the base rent, Hy–Vee would pay a certain pro rata share of the Mall's real estate taxes and CAM. The parties agreed that the proposed Hy–Vee lease, which would increase the fair market value of the Mall, would not be executed prior to the closing on the sale of the Mall. Seller and Hy–Vee agreed that Hy–Vee would require 270 days to extensively remodel the new leasehold. The Letter of Intent indicated that Hy–Vee's “possession date” would occur upon: (1) execution of the lease; (2) receipt of certain government approvals; and (3) delivery of the space from Buyer.

¶ 12 On October 26, 2004, Buyer's primary negotiator, Thomas Rogers, sent a letter ¹ to Seller's broker, George Good of CB Richard Ellis, that outlined certain issues of concern. One issue of concern was the economic impact of the Hy–Vee Expansion because it was not expected that Hy–Vee would sign a new lease before the December 2004 closing. To calculate the present value of the Hy–Vee Expansion, Rogers determined that the new lease would generate a future incremental income of $430,000 per year. He next calculated that, based on a 10% capitalization rate, the present value of the 20–year Hy–Vee Expansion lease was $4.3 million. To resolve the uncertainty of the new lease's impact on the $117 million sale, Rogers suggested that the $4.3 million be held back in escrow until: (1) the new lease was signed; (2) the supermarket was open for business: and (3) the leasehold was lien free.

¶ 13 B. The Third Amendment

¶ 14 On November 10, 2004, Buyer and Seller entered into the Third Amendment to Real Estate Sale Contract (Third Amendment) to memorialize the parties' holdback agreement. Accordingly, the Third Amendment provided that $4.3 million of the purchase price would be held in escrow and released to Seller when and if: (1) Hy–Vee executes a new lease by August 31, 2005; (2) Buyer delivers and Hy–Vee accepts the new leasehold by October 31, 2005; and (3) Hy–Vee obtains, by October 31, 2005, all permits and other governmental approvals necessary to complete the expansion. Specifically, the Third Amendment provides in relevant part:

“With respect to [the Mall], [the Buyer] and the Seller of said Property agree that at Closing they will enter into a Four Million Three Hundred Thousand and 00/100 Dollar ($4,300,000.00) holdback agreement from the purchase price of said Property * * *. The holdback amount shall not be released until all of the following are satisfied: (1) execution of the lease with Hy Vee, Inc. on terms in accordance with Letter of Intent, dated October 12, 2004, attached hereto as Exhibit C, and in a form that is commercially reasonable; (2) delivery of the premises to [Hy–Vee] in the condition required * * * as specified in the lease; and (3) acceptance by [Hy–Vee] of the premises and the obtaining by [them] of all permits and other governmental approvals necessary to complete the tenant's work. Should the lease not be executed...