Lowe's Home Centers, Inc. v. LL & 127, LLC

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 05a0700n.06
Filed: August 11, 2005
Nos. 04-1787 & 04-1877
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
LOWE’S HOME CENTERS, INC., )
)
Plaintiff-Appellee, )
Cross-Appellant, )
)
v. ) ON APPEAL FROM THE UNITED
) STATES DISTRICT COURT FOR THE
LL&127, LLC; EASTWOOD, LLC, ) WESTERN DISTRICT OF MICHIGAN
)
Defendants-Appellants, )
Cross-Appellees. )
Before: ROGERS and SUTTON, Circuit Judges; FORESTER, District Judge.*
ROGERS, Circuit Judge. In late 2001, Lowe’s Home Centers, Inc. signed an agreement
with Michael Eyde, the principal of LL&127, LLC (“LL”),1 to lease Lowe’s the space for a store on
land that was being developed as a mall in Lansing, Michigan. Unfortunately, the relationship
between the parties soured shortly after the contract was signed, and Lowe’s brought a diversity
breach of contract action in federal court against LL. Following a jury verdict in favor of Lowe’s,
both sides now appeal. LL urges reversal of the judgment on the grounds that: (1) the contract is
unenforceable because essential terms of the agreement were left undefined and reserved for future
*
The Honorable Karl S. Forester, United States District Judge for the Eastern District of
Kentucky, sitting by designation.
1
Eastwood, LLC, also owned by Mr. Eyde, eventually acquired LL’s interests in the
property being developed as a mall, including the contract at issue in this litigation. There is no
meaningful distinction between the entities for purposes of this appeal.
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negotiations; (2) the contract is unenforceable because the agreement lacks mutuality of obligation;
and (3) there is no implied covenant of good faith under Michigan contract law. LL also argues that
the district court abused its discretion by denying in part LL’s motion in limine to exclude evidence
relating to negotiations between LL and Lowe’s prior to the execution of the contract at issue in the
litigation. Lowe’s cross-appeals, arguing the district court abused its discretion by denying Lowe’s
request for specific performance. As none of the arguments raised on appeal has merit, we affirm.
I.
The dispute between LL and Lowe’s stems from the development of a mall in Lansing,
Michigan. The principal of LL, Michael Eyde, owns a 192-acre tract of land near Lake Lansing
Road and U.S. 127. In 1999, Wal-Mart and Lowe’s separately approached Mr. Eyde about
purchasing some of his property at Lake Lansing Road in order to construct stores. Mr. Eyde was
not interested in selling the property, and instead entered into agreements with two real estate
development firms, AIG Baker, Inc., and Jeffrey R. Anderson Real Estate, Inc. (“J.R. Anderson”),
to develop the Lake Lansing Road site. Each firm was to develop a portion of the site, with AIG
Baker developing a “big box” mall on one portion of the site, and J.R. Anderson developing a
“lifestyle” mall with smaller stores on another. Under the agreement with AIG Baker, Mr. Eyde
would lease the site to AIG Baker, and AIG Baker would sublease the site to the mall’s prospective
tenants, Sam’s Club, Wal-Mart and Lowe’s.
Wade Laufenberg, Senior Real Estate Manager for Lowe’s, contacted AIG Baker about the
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Lake Lansing Road site. AIG Baker and Lowe’s eventually executed a letter of intent on June 16,
2000, in which Lowe’s agreed to a ground lease for a store in the big box mall AIG Baker was
developing. In the letter of intent, Lowe’s agreed to pay $800,000 in rent annually for the first five
years of the lease, with the rent to increase thereafter according to a schedule. In May of 2001,
however, Mr. Eyde ended his relationship with AIG Baker and turned over responsibility for the big
box mall to J.R. Anderson. Mr. Eyde instructed J.R. Anderson to negotiate ground lease agreements
with the potential big box tenants on the same terms as AIG Baker. Negotiations proceeded, and
on December 5, 2001, Lowe’s and Mr. Eyde executed an “Agreement to Enter into Ground
Lease”(“the Ground Lease agreement”), the contract at issue in this litigation.
The Ground Lease agreement provided that LL and Lowe’s would, at a later date, execute
a ground lease for a Lowe’s store located in the big box mall being developed at the Lake Lansing
Road site, with Lowe’s paying $550,000 a year in rent for the first five years of the lease, with a
schedule of rent increases to follow thereafter. Such agreements are typical in mall developments,
where initial commitments are needed to proceed to later, more specific stages of the development.
Negotiations regarding the Lowe’s Site Development Agreement (“the Site Development
agreement”) proceeded parallel to the negotiation of the Ground Lease agreement. The Site
Development agreement was a more specific contract between the parties setting out the
construction plans for the site and a schedule for the work that LL needed to complete to ready the
site for the Lowe’s store. It appeared at the time the Ground Lease agreement was executed that the
parties were close to finalizing the Site Development agreement.
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Given the preliminary nature of the Ground Lease agreement and the possibility of problems
with the development of the mall, the Ground Lease agreement required a number of events to take
place before the parties executed the lease for the Lowe’s store. These requirements are detailed in
Section 4 of the Ground Lease agreement and are the primary focus of LL’s appeal. Section 4 of
the Ground Lease agreement specifies “[Lowe’s] Requirements,” and begins:
[Lowe’s] shall be under no obligation to lease the Demised Premises or otherwise
perform under this Agreement unless [Lowe’s] determines that the Premises are
suitable for its intended purposes and until each of [Lowe’s] Requirements … are
satisfied. The decision as to whether the Premises are suitable for its intended
purposes and the Requirements have been fulfilled shall be the sole decision of
[Lowe’s], determined in the absolute discretion of [Lowe’s], with [Lowe’s] decision
being final and binding upon the Parties.
The requirements for executing the ground lease are then detailed. Further discretion is vested in
Lowe’s under section 4(l), which provides that Lowe’s must deem its intended use of the premises
to be economically feasible before it will execute the lease.
Section 4(n)(i) of the Ground Lease agreement requires Lowe’s and LL to negotiate certain
collateral documents, including the Site Development agreement, within sixty days of the effective
date of the Ground Lease agreement in order to proceed to execute the lease. With regard to the Site
Development agreement, the Ground Lease agreement provides:
The Lowe’s Site Development Agreement, to be attached hereto as Exhibit
B, shall include among other things, [LL’s] obligation … to obtain all permits and
approvals for completion of certain improvements to serve the entire shopping center
(“Shopping Center”), comprising approximately one hundred and ninety two (192)
acres as shown or designated on the designated Master Site Plan, including without
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limitation storm water facilities, an off site traffic signal, de-acceleration lanes along
[roads near the proposed shopping center], [and] roads internal to the Shopping
Center (…the “Shopping Center Improvements”). [LL] shall also develop or
construct certain improvements for the exclusive use of [Lowe’s] including without
limitation a complete building pad … ready for the construction of [Lowe’s] building
(the “Pad”) in accordance with the specifications and schedule set forth in the
Lowe’s Site Development Agreement. The Lowe’s Site Development Agreement
shall further provide that [Lowe’s] shall contribute its pro-rata share of costs of the
Shopping Center Improvements … and that [Lowe’s] shall reimburse [LL] for the
development costs of the Pad. [Lowe’s] total contribution to the costs of the
Shopping Center Improvements and the Pad shall, in no case, exceed [$2,900,000].
The execution of the Site Development agreement was further made a condition to closing the lease;
neither LL nor Lowe’s was required to consummate the closing unless the Site Development
agreement was executed prior to or simultaneously with the lease. Finally, the Ground Lease
agreement contained an integration clause, which stated in part “[n]o prior written or verbal
Agreement shall survive the execution of this Agreement.”
After executing the Ground Lease agreement, Mr. Eyde discovered that the proposed rent
that he agreed to was substantially less than the rent that Lowe’s had agreed to pay AIG Baker. Mr.
Eyde then contacted Mr. Laufenberg and indicated that he did not intend to proceed under the
Ground Lease agreement. William Tomblin, Mr. Eyde’s and LL’s attorney, contacted Suzanne
Reynolds, Lowe’s attorney for the project, by telephone on January 16, 2002, and told her that Mr.
Eyde did not intend to proceed with the deal unless he got substantially more money. Two days
later, Mr. Tomblin called Ms. Reynolds again and informed her that the Ground Lease agreement
was unenforceable; he further indicated that Mr. Eyde had no obligation to proceed in good faith to
negotiate the Site Development agreement.
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In a January 22, 2002, letter to Ms. Reynolds, Mr. Tomblin changed course. He indicated
that there were soil problems at the site, requested the proposed Lowe’s Site Development
agreement, claiming that LL had not seen the document, and accused Lowe’s of defrauding Mr.
Eyde. Mr. Tomblin also indicated that the deadline for negotiating the Site Development agreement
was approaching, and that Mr. Eyde intended to interpret the Ground Lease agreement strictly. Ms.
Reynolds sent a copy of the Site Development agreement to Mr. Tomblin, who made extensive
revisions and sent the document back. In a letter, Ms. Reynolds responded that the changes were
unacceptable. The Site Development agreement was never executed.
After negotiations over the Site Development agreement failed, Lowe’s sued LL for breach
of contract. Lowe’s alleged that LL breached the Ground Lease agreement by refusing to negotiate
the Site Development agreement in good faith. Lowe’s requested specific performance of the
Ground Lease agreement. LL moved for dismissal under Federal Rule of Civil Procedure 12(b)(6),
or alternatively for summary judgment, arguing that the Ground Lease agreement was unenforceable
because: (1) it reserved material terms for further negotiations; (2) it failed to comply with the
statute of frauds; (3) it lacked mutuality of obligation; and (4) Lowe’s failed to satisfy a condition
precedent. LL also asserted a variety of affirmative defenses, including fraudulent inducement.
Lowe’s filed a cross-motion for partial summary judgment, arguing that the Ground Lease
agreement was enforceable and that LL had an obligation to perform the contract in good faith.
The district court granted Lowe’s motion for summary judgment in part and denied LL’s
motions to dismiss and for summary judgment. The district court found that the Ground Lease
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agreement was a valid, enforceable contract and held that LL had a duty to negotiate the Site
Development agreement in good faith. The district court rejected Lowe’s assertion that the only
question that remained was whether specific performance was appropriate. Rather, the district court
concluded, a jury needed to resolve the factual question of whether LL breached the Ground Lease
agreement by failing to negotiate the Site Development agreement in good faith. After further
briefing on the issue of mutuality of obligation, the district court concluded that the contract was not
invalidated by the fact that, under the Ground Lease agreement, Lowe’s had discretion not to
proceed to execute the lease. The district court noted that cancellation clauses do not void an
agreement for lack of mutuality of obligation, so long as the performance of both parties is excused.
LL filed a motion for reconsideration of its motion to dismiss, which was denied. The case then
proceeded to trial on the issue of whether LL breached the Ground Lease agreement by failing to
negotiate the Site Development agreement in good faith.
Prior to trial, LL filed a motion in limine to exclude evidence of the negotiations between
LL and Lowe’s over the Site Development agreement, to the extent that the negotiations occurred
prior to the execution of the Ground Lease agreement. LL argued that the Ground Lease
agreement’s integration clause barred the introduction of evidence regarding the parties’ negotiation
of the Site Development agreement under the parol evidence rule. The district court granted in part
and denied in part LL’s motion in limine. The district court ruled that Lowe’s could introduce
evidence regarding the negotiation of the Site Development agreement to show LL’s lack of good
faith, but could not introduce such evidence to establish that the parties had agreed on the terms of
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the Site Development agreement. The case proceeded to trial, before both a jury and the district
judge sitting in equity. After a five day trial, the jury returned a verdict in favor of Lowe’s, finding
that LL breached the Ground Lease agreement by failing to negotiate the Site Development
agreement in good faith. The jury awarded Lowe’s $3.3 million in damages resulting from the
failure to negotiate the Site Development agreement in good faith, but made no award of future
damages resulting from the failure to lease Lowe’s the space for a store.
After further briefing, the district court denied Lowe’s request for specific performance. The
district court concluded that the relationship between LL and Lowe’s under the Ground Lease
agreement would require continuing judicial supervision, making specific performance an
inappropriate remedy. The district court further concluded that specific performance was
inappropriate because the district court would have to revise the Ground Lease agreement and, under
the contract, Lowe’ retained the discretion not to perform. LL then filed a post-trial motion for
judgment as a matter of law under Federal Rule of Civil Procedure 50(b), again arguing that the
contract was unenforceable, which the district court denied. Both parties now appeal.
II.
The district court properly concluded that the Ground Lease agreement is an enforceable
contract. LL’s arguments that the Ground Lease agreement omitted material and essential terms of
the Site Development agreement, that the Ground Lease agreement lacked mutuality of obligation,
and that LL was not required to perform the Ground Lease agreement in good faith, lack merit. The
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district court ruled on LL’s arguments regarding the enforceability of the Ground Lease agreement
at various stages of the litigation: in a motion to dismiss for failure to state a claim under Rule
12(b)(6); a motion for summary judgment under Rule 56; and a motion for judgment as a matter of
law under Rule 50(b). In each case the district court’s conclusion is a legal question that we review
de novo. See Cytacki v. AP Parts Mfg. Co., No. 94-2274, 1996 WL 15624 at *4 (6th Cir. Jan. 16,
1996) (Rule 12(b)(6)); Innovative Case, Inc. v. Tweddle Litho Co., No. 04-1445, 2005 WL 1506051
at *4 (6th Cir. June 24, 2005) (Rule 56); K & T Enterprises, Inc. v. Zurich Ins. Co., 97 F.3d 171,
175-77 (6th Cir. 1996) (Rule 50(b)).
A. Section 4(n)(i) of the Ground Lease Agreement Contains the Material and Essential
Terms of the Site Development Agreement
The Ground Lease agreement is an enforceable contract because Section 4(n)(i) contains the
material and essential terms of the Site Development agreement. LL argues that the Ground Lease
agreement is an unenforceable “agreement to agree.” Under Michigan law, it is well recognized that
parties can enter into an enforceable contract that requires them to execute another contract at a later
date. Opdyke Inv. Co. v. Norris Grain Co., 320 N.W.2d 836, 838 (Mich. 1982); Prof’l Facilities
Corp. v. Marks, 131 N.W.2d 60, 63 (Mich. 1964); Hansen v. Catsman, 123 N.W.2d 265, 266 (Mich.
1963). However, a contract that requires the execution of a future agreement will fail for
indefiniteness if the material and essential terms of the future agreement are not included in the
contract executed by the parties. Id.; Socony-Vacuum Oil Co. v. Waldo, 286 N.W. 630, 632 (1939).
Michigan courts have referred to this as the “basic principle [for determining the enforceability of]
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preliminary agreements for the construction and lease of business premises.” Brodsky v. Allen
Hayosh Indus., Inc., 137 N.W.2d 771, 772 (Mich. Ct. App. 1965).
The Ground Lease agreement is enforceable because Section 4(n)(i) of the Ground Lease
agreement sufficiently sets out the material and essential terms of the Site Development agreement.
Section 4(n)(i) details the division of labor and costs between LL and Lowe’s for the construction
of the Lowe’s store and the big box mall. This section provides that, under the Site Development
agreement: (1) LL will secure approval for and construct improvements to serve the mall as a whole,
including storm water facilities, roads, an off-site traffic signal; (2) LL will develop or construct a
complete building pad, ready for the construction of the Lowe’s store; and (3) Lowe’s will reimburse
LL, up to $2.9 million, for a portion of the cost of the common improvements shared by all tenants,
as well as the full cost of developing the pad on which Lowe’s would construct its new store. The
scope of the work each party will perform and each party’s potential liability in terms of cost are the
material and essential terms of the Site Development agreement and are sufficiently stated in the
Ground Lease agreement. See Brodsky, 137 N.W.2d at 773.
LL relies primarily on Hansen v. Catsman in arguing that the Ground Lease agreement does
not provide the material and essential terms of the Site Development agreement. 123 N.W.2d 265
(Mich. 1963). The contract found unenforceable in Hansen: (1) “contemplated” the construction
of a store by the defendant and the lease of the store by the plaintiff; (2) set out approximate
dimensions of the building, but provided that the building “be erected in accordance with plans and
specifications and design not as yet formalized”; and (3) gave both parties the right to cancel the
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agreement “if for any reasonable reason the plans, specifications and design of said building are
unacceptable.” Id. at 266. The terms of the contract at issue in Hansen are less definite than the
terms of the Ground Lease agreement and the Site Development agreement discussed therein.
Further, in Hansen the Michigan Supreme Court noted that the parties’ use of the word
“contemplates” was meaningful, demonstrating the lack of commitment to the future agreement.
Id. at 267. By contrast, the Ground Lease agreement provides that LL and Lowe’s “shall” agree on
the Site Development agreement.
B. The Ground Lease Agreement is not Void for Lack of Mutuality of Obligation
The Ground Lease agreement does not fail for lack of mutuality of obligation. LL contends
that Section Four of the Ground Lease agreement renders the contract void because Lowe’s is not
obligated to perform. Section Four of the contract provides that Lowe’s is not obligated to lease the
premises if Lowe’s determines that the site is not suitable for its intended purposes. Under Michigan
law, mutuality of obligation is an essential element of a valid contract. Thomas v. Leja, 468 N.W.2d
58, 60 (Mich. Ct. App. 1991). Mutuality of obligation means that both parties to an agreement must
be bound by the contract, or neither is bound. Domas v. Rossi, 217 N.W.2d 75, 77 (Mich. Ct. App.
1974). However, cancellation or termination clauses do not void a contract for lack of mutuality of
obligation, so long as both parties are relieved of their respective obligations in the event the
contract is cancelled or terminated. Jaye v. Tobin, 202 N.W.2d 712, 714-15 (Mich. Ct. App. 1972)
(holding a cancellation clause that releases both parties from their obligations does not render
contract void for lack of mutuality of obligation). The language cited by LL in Section Four of the
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Ground Lease agreement is a valid cancellation or termination clause, the exercise of which would
relieve both LL and Lowe’s of their respective obligations. Therefore, under Jaye, the Ground
Lease agreement does not fail for lack of mutuality of obligation. The termination provision in this
case was clearly contemplated to be exercised, if at all, at a later point in the dealings between the
parties. We cannot read the Ground Lease agreement as imposing no obligation from day one
because of the presence of the termination provision.
C. Michigan Law Requires that the Ground Lease Agreement be Performed and
Enforced in Good Faith
The Ground Lease agreement contained an implied covenant of good faith in the
performance of the contract, and LL’s failure to negotiate the Site Development agreement in good
faith could constitute a breach the Ground Lease agreement. Every contract contains an implied
covenant of good faith in the performance and enforcement of the contract. See Ferrell v. Vic Tanny
Int’l, Inc., 357 N.W.2d 669, 672 (Mich. Ct. App. 1984) (“Where a party to a contract makes the
manner of its performance a matter of its own discretion, the law does not hesitate to imply the
proviso that such discretion be exercised honestly and in good faith.”) (quoting Burkhardt v. City
Nat’l Bank of Detroit, 57 Mich. App. 649, 652, 226 N.W.2d 678 (1975)); see also Pavlovich v.
Arbor Drugs, Inc., No. 223087, 2002 WL 991726 at *5 (Mich. Ct. App. May 10, 2002). As LL
notes, Michigan law does not recognize an action independent of breach of contract for a breach of
the implied covenant of good faith. See Kewin v. Massachusetts Mut. Life Ins. Co., 295 N.W.2d 50
(Mich. 1980); Ulrich v. Fed. Land Bank of St. Paul, 480 N.W.2d 910, 911 (Mich. Ct. App. 1991).
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However, where the manner of performance under a contract is left to the discretion of a party, that
party may breach the contract by exercising its discretion in bad faith. Wedding Belles v. SBC
Ameritech Corp., Inc., No. 250103, 2005 WL 292270 at *1 (Mich. Ct. App. Feb. 8, 2005); Ferrell,
357 N.W.2d at 672; see Gen. Motors Corp. v. New A.C. Chevrolet, Inc., 263 F.3d 296, 334 n.23 (3d
Cir. 2001) (distinguishing breach of contract based on bad faith in performance from independent
tort action for breach of implied covenant of good faith under Michigan contract law). The Ground
Lease agreement obligated Lowe’s and LL to negotiate the Site Development agreement, but the
manner in which the parties negotiated was left to their discretion. Lowe’s contract claim, based on
LL’s bad faith in the negotiation of the Site Development agreement, is therefore recognized by
Michigan law.
III.
The district court did not abuse its discretion by denying LL’s motion in limine to exclude
evidence regarding the negotiation of the Site Development agreement prior to the execution of the
Ground Lease agreement under the parol evidence rule. The Ground Lease agreement’s integration
clause did not bar the introduction of evidence related to the negotiation of the Site Development
agreement under the parol evidence rule because the evidence was admitted to show LL’s lack of
good faith in the performance of the Ground Lease agreement, rather than to vary the unambiguous
terms of the Ground Lease agreement.
The parol evidence rule bars the introduction of evidence to vary or modify the terms of an
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unambiguous written contract containing an integration clause. UAW-GM Human Res. Ctr. v. KSL
Recreation Corp., 579 N.W.2d 411, 414 (Mich. Ct. App. 1998); Ditzik v. Schaffer Lumber Co., 360
N.W.2d 876, 880 (Mich. Ct. App. 1984). However, evidence is inadmissible under the parol
evidence rule only when the evidence is inconsistent with the unambiguous written agreement.
Union Oil Co. of California v. Newton, 245 N.W.2d 11, 12 (Mich. 1976). The district court allowed
Lowe’s to introduce evidence regarding the negotiation of the Site Development agreement to
demonstrate LL’s lack of good faith and establish that LL breached the Ground Lease agreement.
The evidence that Lowe’s introduced was relevant to the issue of LL’s good faith, consistent with
the unambiguous terms of the Ground Lease agreement, and thus admissible. Therefore, the district
court did not abuse its discretion by denying LL’s motion in limine.
IV.
Finally, the district court did not abuse its discretion by denying Lowe’s request for specific
performance. Specific performance of a contract is an equitable remedy left to the sound discretion
of the district court. See Sheet Metal Workers’ Int’l Ass’n Local 19 v. Herre Bros., Inc., 201 F.3d
231, 249 (3d Cir. 1999); Brotman v. Roelofs, 246 N.W.2d 368, 372 (Mich. Ct. App. 1976) (citing
Smith v. Lawrence, 15 Mich. 499, 501 (1867)). It is a remedy of grace and not a matter of right,
depending on the circumstances of a particular case. Laker v. Soverinsky, 27 N.W.2d 600, 601
(Mich. 1947); Derosia v. Austin, 321 N.W.2d 760, 762 (Mich. Ct. App. 1982). Specific performance
is inappropriate where continuous or long-term judicial supervision would be required, Edidin v.
Detroit Econ. Growth Corp., 352 N.W.2d 288, 291 (Mich. Ct. App. 1984), the terms of the contract
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are not sufficiently certain, Laker, 27 N.W.2d at 601, or the party requesting specific performance
may, through the exercise of discretion, terminate the contract. Rust v. Conrad, 11 N.W. 265, 267
(Mich. 1882) (specific performance inappropriate if “one of the parties might nullify [the court’s]
action through the exercise of a discretion which the contract or the law invests him with”).
It was within the discretion of the district court to conclude that specific performance was
inappropriate in this case. To begin, the mall was in the preliminary stages of development. LL and
Lowe’s would be required to cooperate under the Ground Lease agreement in both the negotiation
of the Site Development agreement and the development of the Lake Lansing Road site. Ordering
specific performance would require court supervision of the parties at least until the mall was
completed and Lowe’s was installed as a tenant. Further, Lowe’s request for specific performance
contemplated modification of the Ground Lease agreement, and the Ground Lease agreement
Lowe’s is seeking to enforce vests Lowe’s with the discretion to avoid performing under certain
circumstances. Finally, the district court’s conclusion that specific performance was inappropriate
is supported by the fact that the jury declined to award future damages for LL breach of contract,
limiting the award to damages incurred as a result of the delay caused by LL’s refusal to negotiate
the Ground Lease agreement in good faith. In sum, given the circumstances of the case, declining
to order specific performance of the Ground Lease agreement was well within the district court’s
discretion.
AFFIRMED
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