A property holding firm could be forced to follow through on a hotel sale that fell through 12 years ago, following a District of Columbia Court of Appeals ruling today clarifying the application of specific performance remedies in breach of contract cases.
In the underlying case, a property holding firm was found in breach of contract for failing to negotiate the sale of a downtown Washington hotel in good faith; the contract governing negotiations had a provision triggering the signing of another contract that moved the sale forward. The company hoping to buy the hotel asked the District of Columbia Superior Court to enforce the entire broken contract, including the signing of the second contract.
A trial judge found that the court did not have authority to force the liable company to sign the second contract. But in a written decision (PDF) today, the appellate judges found that the injured company was within its rights when it made the request and remanded the case back for further consideration.
The case stems from the 1997 purchase of a mixed-use complex in Washington, known as L’Enfant Plaza, by Dutch company Sarakreek Holdings NV. Sarakreek created a subsidiary, Potomac Creek LLC, at the time called Potomac Creek Associates LP, to hold the title. The complex included the 370-room Loews L’Enfant Plaza Hotel. To finance the entire purchase, Potomac Creek decided to put the hotel up for sale.
Stanford Hotels Corporation, a private, California-based company, placed the winning bid of about $48 million. According to the appellate judge's opinion, the two parties agreed in a preliminary agreement to negotiate in good faith and sign a definitive agreement for the purchase of the hotel once negotiations were complete.
The trouble began when Potomac Creek refused to sign the definitive agreement in 1998 after negotiations were finished because it was secretly pursuing a “more advantageous” proposal, the appellate judges wrote. Stanford sued in D.C. Superior Court and Potomac Creek was found in breach of contract.
Stanford sought a remedy of specific performance requiring Potomac Creek to sign the definitive agreement, moving forward with the sale of the hotel. The trial judge granted summary judgment to Potomac Creek, finding that the court could not remedy a broken contract by enforcing a separate, albeit related, contract.
The appellate judges disagreed, finding that because the preliminary agreement required both parties to sign the definitive agreement after negotiating in good faith, Potomac Creek’s breach of the preliminary agreement opened the door to a court order forcing Potomac Creek to follow through on the entire arrangement.
“To order Potomac Creek to sign the Definitive Agreement, therefore, does not impose a contractual obligation on an unwilling party by judicial fiat; rather, it holds a party to an obligation it freely undertook, and then proceeded to breach in bad faith,” the appellate judges wrote.
Daniel Katz of Washington’s Williams & Connolly argued for Stanford and Peter Buscemi of Washington’s Morgan, Lewis & Bockius argued for Potomac Creek. Neither could immediately be reached for comment this afternoon.