Breach of Contract for Pre-Construction Development Insufficient Grounds for Developer’s Lost Profits Claim
Citadel Group Ltd. v. Washington Regional Medical Ctr., 692 F.3d 580 (7th Cir. 2012)
United States Court of Appeals, Seventh Circuit: Opinion Delivered Aug. 15, 2012
Citadel Group Limited (“Citadel”), a real estate developer with a focus on the healthcare industry, alleged that Washington Regional Medical Center (“Washington Regional”), a non-profit company that operates medical facilities, breached a contract under which Citadel would design, finance, construct, and own a medical facility while leasing back building space to Washington Regional on a long-term basis.
In its “comprehensive development proposal” to Washington Regional, Citadel included the following economic formula for determining lease rates: total project cost x the capitalization rate ÷ total square feet = average rent per square foot. Accordingly, under Citadel’s proposal, as estimated project costs increased so would Washington Regional’s lease rate. Citadel’s proposal also included a project development fee of 4% of the project costs (which would be included in the project’s budget and refunded to Washington Regional at the time of project funding). Under the proposal, Washington Regional would only be responsible for architectural and engineering fees in the event it did not execute the leases.
While the parties continued negotiating the lease terms, Washington Regional authorized Citadel to proceed with pre-construction development. As the estimates of the project costs continued to increase over time, leading to increases in the lease rate to Washington Regional, Washington Regional decided that it could save $2.46 million by completing the project internally without the use of an outside developer and terminated the relationship with Citadel. At that time, Citadel had completed the development stage of the project and was preparing to commence construction. Upon termination, the parties could not agree on “separation costs”: Citadel sought payment for all of its costs, while Washington Regional would only pay reasonable costs and fees and only if it received the architectural, engineering, and construction plans for the building.
Citadel filed suit while Washington Regional built the medical facility. In its initial complaint filed in state court, Citadel only sought to recover the costs it incurred in the pre-construction phase of the project. However, after the action was removed to federal court under diversity jurisdiction, Citadel amended its complaint to assert additional claims, including breach of contract for the lost profits it would have enjoyed had it completed the project and leased the building back to Washington Regional. The parties settled Citadel’s claim for pre-construction costs and fees and the district court granted summary judgment in favor of Washington Regional on Citadel’s breach of contract claim for lost profits.
The Seventh Circuit affirmed the district court’s dismissal finding that “[t]he evidence in the record simply [did] not support a finding that Washington Regional intended to be bound to complete the project with Citadel before the material terms of the leases had been hammered out and the leases executed,” and thus, Citadel and Washington Regional had entered into a contract only as to pre-construction development. Without a binding contract for the completion of the project, lost profits could not be awarded.
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