West Willow-Bay Court, LLC v. Robino-Bay Court Plaza, LLC,  Del. Ch., No. 2742-VCN (Feb. 23, 2009), read opinion here.

Danielle Blount, an associate in our Delaware office, prepared the following summary of the case.

In this post-trial opinion, the Delaware Court of Chancery determined the appropriate damage award where Defendant breached a purchase agreement by its failure to secure a third party’s consent.

West Willow Bay Court, LLC (“West Willow”) entered into a Purchase Agreement with Robino-Bay Court Plaza, LLC and Robino-Bay Court, LLC (collectively “Robino”) to acquire a pad site in the Bay Court Plaza Shopping center in Dover, Delaware (the “Property”). West Willow’s only interest in the Property was to develop and lease the Property to Wawa. West Willow entered into a lease agreement with Wawa for the use of the Property (the “Wawa lease”). The Wawa lease was structured as a triple net ground lease, assuring a long term and predictable cash flow. West Willow’s plan upon the Purchase Agreement proceeding to closing was to sell the Property, subject to the Wawa lease, on the Section 1031 exchange market. However, a tenant in the shopping center, Value City, withheld it’s consent to any development of the Property for the purposes proposed by West Willow. Value City’s lease with Robino allowed it to reasonably withhold it’s consent to the proposed development although third party consents were not explicitly addressed in the Wawa lease. Notably, the Wawa lease was amended three times in an attempt to give West Willow and Wawa more time to secure municipal approvals.

During this time, Robino continued to ask for Value City’s consent to develop the site pursuant to the Wawa lease. Although Value City was open to negotiations, these talks faltered. On August 23, 2006, Robino’s counsel sent a letter to West Willow stating that the consent was not obtained. In addition, the letter stated that if West Willow proceeded to closing “it must do so in light of the non-consent” and “provide an indemnification and hold harmless from any claim made or action commenced” by Value City. In response, West Willow refused to agree to any of the conditions outlined by Robino. Once again, Robino commenced negotiations with Value City. West Willow offered to assist Robino in meeting the cost of the tenant’s requested concessions, but the negotiations failed.

Upon Value City’s termination of negotiations with Robino, West Willow was notified that Value City’s consent would not be obtained. Thereafter, West Willow learned that WaWa remained interested in leasing the property. There was evidence that Robino proposed to deal directly with Wawa. Based upon these facts, the Court determined that Robino failed to secure Value City’s consent in breach of the Purchase Agreement. This failure frustrated West Willow’s expectation and effectively precluded consummation of the transaction.

Damage Phase

During the damage phase of the trial, the Court determined that three issues predominated:

1) Date of Breach; 2) Fair Market Value of Damages and 3) Award of Attorney’s Fees Under the Purchase Agreement.

In Delaware, the standard remedy for Breach of Contract is based upon the reasonable expectations of the partie ex ante. Because contract damages are based on the injured party’s expectation interest, the extent of the loss is determined is reference to the plaintiff’s particular circumstances.

I. The Breach Date

The Court determined that Robino repudiated its obligation to secure Value City’s consent on two occasions. The first repudiation occurred on August 23, 2006 when West Willow offered to share some of the cost of the potential concessions to Value City. “As a consequence, West Willow cannot be said to have accepted this first repudiation or materially change its position by relying upon it.”

After learning of the second repudiation on November 6, 2006, West Willow chose not to respond and choose to file suit on February 21, 2007. Since Robino conceded that if a breach occurred, it would have occurred with the commencement of the action. The Court was relieved from considering what effect, if any, West Willows forms of relief (specific performance and damages) may have had in determining the date of breach.

II. The Property’s Fair Market Value

Four experts offered opinions regarding valuation and damages. While various methodologies were submitted for the Court’s review, Vice Chancellor Noble, was “tasked with weighing the experts’ testimony” and determined that the lease fee interest analysis was the most appropriate measure of value. The Court reasoned that West Willow intended to lease the property to WaWa and even negotiated a lease agreement with rent schedules. Further, the Court reasoned that West Willow aimed to close on the property, lease it pursuant to the Wawa lease and sell it quickly on the Section 1031 exchange market.

The Court used the January 2007 valuation of the property of $1,408,450 with a discounted cash flow analysis rate of 9.0% based upon a third quarter 2007 average discount rate of 9.55%.

In sum, the Court determined that the fair market value of the property as it was intended to be used by West Willow was $1,350,000. as of the date of the breach minus the purchase price established by the Purchase Agreement of $725,000 thus totaling $625,000. Although Robino attempted to argue that West Willow failed to mitigate losses, the Court determined that reasonable, although unsuccessful, steps to mitigate were taken.

Attorney’s Fees

Delaware generally follows the American rule where each party is obligated to pay their own attorney’s fees regardless of the outcome. “However, where the parties have determined the allocation of fees by private ordering, departure from this general rule and difference to their agreement are warranted.” Additionally “considerations of justice and equity may inform the analysis.”

Relying on paragraph 22 of the Purchase Agreement which provided “[i]n the event legal action is instituted…the prevailing party will be entitled…reasonable attorney’s fees” the court determined that West Willow prevailed on the substantive breach of contract claim.

Relying on Comrie v. Enterasys Networks, Inc., 2004 WL 936505 at *2-3, the Court determined that whether a party prevailed in a case is determined by reference to substantive issues, not damages. “The crux of the case was the Court’s conclusion that Robino was unconditionally obligated to secure the consent; the form and extent of the remedy were important but decidedly secondary issues.” “Thus, because West Willow prevailed on the litigation’s chief issue the proper interpretation of the Purchase Agreement . . entitled [West Willow] to its reasonable [attorney’s fees] fees.”