IN THE COURT OF APPEALS OF TENNESSEE
AT NASHVILLE
FILED
April 30, 1999
THE REALTY SHOP, INC., )
) Cecil Crowson, Jr.
Plaintiff/Appellee, ) Appellate Court Clerk
)
VS. )
)
RR WESTMINSTER HOLDING, INC., ) Davidson Chancery
) No. 94-293-I
Defendant/Appellant, )
)
and )
) Appeal No.
JOHN S. CLARK CO., INC.; ) 01A01-9609-CH-00418
SENASH, INC.; and )
CLARENDON NATIONAL INS. CO., )
)
Defendants. )
APPEAL FROM THE DAVIDSON COUNTY CHANCERY COURT
AT NASHVILLE, TENNESSEE
THE HONORABLE IRVIN H. KILCREASE, JR., CHANCELLOR
For The Realty Shop, Inc.: For RR Westminster Holding, Inc.:
Gregory L. Cashion John Branham
Carol R. Dunn Donald Cappare lla
Manier, H erod, Ho llabaugh & Smith Branham & Day
Nashville, Tennessee Nashville, Tennessee
Bryan Cave
Thomas C. W alsh
St. Louis, Missouri
AFFIRMED IN PART; MODIFIED IN PART;
AND REMANDED
WILLIAM C. KOCH, JR., JUDGE
OPINION
This appeal involves a problem-plagued commercial development in Nashville called
Thompson Station. To shield the project from the developer’s financial problems, the
principals agreed that a corporation owned by the holding company that owned the contractor
would own the project during construction and that the develope r would h ave an op tion to
purchase that corporation upon completion of the work. After the project was completed
with substantial cost overruns, the developer attempted to exercise its option without taking
the overrun s into consid eration. The holding co mpany declined to sell the corpo ration to
the developer and eventually sold the project to a group of foreign investo rs. The developer
filed suit in the Chancery Court for Davidson County, alleging that the holding company and
the corporation formed to own the project had breached the option agreement and that the
contractor and the holding company's parent corporation that had provided the construction
financing had procured the breach. The trial court, sitting without a jury, awarded the
developer $1,089,674 in damages and $277,866 in prejudgment interest and dismissed the
claims against the contractor and the construction lender. 1 Both the holding company and
the developer have appealed. We affirm the dismissal of the developer’s procurement of the
breach of contract claim s; however, we modify the judgment against the holding company
and the corporation formed to own the project because the parties, by their conduct during
the course of construction, waived their right to rely on the written change order
requirem ents in both th e constructio n contract a nd the optio n agreem ent.
I.
Ed H. Street, Jr. is a real estate developer headquartered in Johnson City, Tennessee
who concentrates on the development and construction of shopping centers. He is a principal
of a partnership called Ed Street Company that engages in development and construction, and
he is also president of The Realty Shop, Inc. (“The Realty Shop ”), a corporation engaged
only in real e state develo pment. 2 The Re alty Shop ’s corporate charter was issued in 1984,
revoked in 1985, and reinstated in December 1991.
1
The trial court also awarded other relief from the corporation that owned the project during
construction. This relief is not at issue on this appeal because the parties have compromised and
settled them. The trial court also granted the corporation formed to own the project a judgment
against the developer for lease payments it has collected and not paid over. This portion of the
judgment has not been appealed.
2
The Realty Shop is Mr. Street's alter ego, even though Mr. Street's wife and a family
corporation own all of the corporate stock. The parties have never disputed Mr. Street's power to
bind The Realty Shop.
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In 1991, Mr. Street undertook to develop two shopping center projects each of which
included a Lowe’s Hardware Cen ter. One w as located in Johnson City and th e other in
Nashville. The Johnson City project ended up placing a great financial strain on Mr. Street’s
business. The construction lender foreclosed on the project, and The Realty Shop eventually
filed for bankru ptcy protec tion in the Ea stern District of Tennessee. The bankruptcy
proceeding was later dismissed in March 1992 on the ground that it had been brought in bad
faith. As a result, Mr. S treet becam e expose d to appro ximately $500,00 0 in person al liability
and was sued m ore than ten times for bad debts in 1993. M r. Street’s financial rev ersals
stemming from the J ohnson C ity project caused the Nashville project to assume great
significance for him.
Mr. Street initially becam e interested in the 21-acre site on No lensville Ro ad in
Nashville because of the high traffic volume on Nolensville Road, the population density in
the vicinity of the project, and the apparent interest of potential anchor tenants in the
location. The site was at the base of a steep rock slope and was occupied at the time by a few
rental houses, so me sm all businesses, and an automobile junkyard. Mr. Street obtained
options to purchase the property with the idea to develop a $10,300,000 shopping cente r
called Thompson Station containing a Lowe’s Hardware Center, a Food Lion grocery store,
and a Phar- Mor d rug stor e. His origina l intention w as to begin construction in the summer
of 199 2 and to comp lete the p roject in early 19 93.
After obtaining options to purchase the property in April 1991, Mr. Street began
negotiating leases with the prospective tenants. He retained an engineer to p repare
preliminary site plans and to assist with having the property rezoned. He also retained an
architect to adapt the tenants’ prototypical plans to the site. As early as March 199 2, Mr.
Street began discussing the construction of the project with several general contractors,
including John S. Clark Company, Inc. (“Clark”), a large North Carolina general contractor
with a national reputation for constructing retail space.3 In April 19 92, Mr. S treet began to
push Clark for a quick decision and requested a proposal that included not only the
constru ction of the pro ject but a lso the c onstruc tion fina ncing.
The elements of the projec t continued to coalesce between June and September 1992.
Mr. Street obtained a permanent loan commitm ent from Life Insurance Comp any of G eorgia
and also fou nd a gro up of G erman investo rs, who had formed a limited partnership called
Tennessee Equity Fund, L. P. (“Tennessee Equity Fund”) a nd who were intere sted in
3
Clark had already constructed more than twenty Food Lion stores and ten Lowe’s stores.
-3-
purchasing the completed project. In July 1992, he finalized a lease with F ood Lion , and in
September 1992 he obtained a lease from Lowe’s. These leases contained deadlines for the
commencement or completion of the major phases of construction and gave the tenants the
right to cancel the leases if these deadlines were not met. Both Lowe’s and Food Lion
expected that construction of the project would commence by no later than December 15,
1992, and Foo d Lion’s lea se also requ ired pourin g footers for th e founda tion to begin by
March 1, 1993.
Clark’s representatives visited the proposed project in June 1992 to discuss the roles
that Clark, its parent company, RR Westminster Holding, Inc. (“RR Westminster”), and the
owner of its parent company, Clarendon National Insurance Company (“Clarend on”), wo uld
play in the deve lopmen t. Following the visit, M onty K. Ven able, Clark’s secretary-treasurer,
informed Mr. Street that Clark “must be careful to structure a package that is fair and
reasonab le to both parties. Certainly we are looking to receive more compensation since we
are taking grea ter risk and p roviding su bstantial add itional services other than just
construction but it still must be fair and reasonable.” In order to assist C lark in prepa ring its
proposal, Mr. Street provided Mr. Venable with a topological map supplied by the current
property owners, the prototype building plans provided by Food Lion and Lowe’s, and a site
plan. The site plan called for the construction of a pre-split rock wall on the side of the
property with a steep rock slope.4
The project suffered several setbacks following Clark’s visit. The principal setback
was Phar-Mor’s decision to withdraw from the project. Without a replacement tenant, Mr.
Street was requ ired to continu e with o nly two tenants . Accordingly, he reduced the size of
the development from twenty-one to fifteen acres, and he reduced the project from
$10,300,000 to approximately $6,500,000. Mr. Street informed Clark o f Phar-Mor’s
withdraw al from the project and requested a proposal b ased on th e revised pr oject.
On September 3, 19 92, Mr. Vena ble informed M r. Street that Clark would accept the
construction portion of the project for $4,430,065 but that the risks were too great for C lark
to accept total responsibility for the construction and financing of the projec t, including the
indirect costs, for $6,5 00,000. W ith reference to Phar-M or’s withdrawal, Mr. Venable stated,
4
The engineer Mr. Street originally retained to prepare the site plan recommended
constructing a retaining wall to prevent the slope from collapsing. After Mr. Street discharged this
engineer following a fee dispute, the second engineer prepared a site plan calling for a pre-split rock
wall (cutting through the rock at a near vertical angle leaving the rock face exposed). This
alternative was considerably less expensive than building a retaining wall. Mr. Street never
informed Clark that the original site plan called for the construction of a retaining wall. This pre-
split rock wall later proved to be one of the many problems encountered during construction.
-4-
“Certainly the Phar Mor disaster was unexpected and unfortuna te but it still leaves y ou with
a home run of a project although perhaps not a grand slam.” After another two weeks of
negotiations, Mr. Street and Mr. Venable signed a letter agreement on September 22, 1992,
in Mr. Venable’s office in Mount Airy, North Carolina.
In the letter agreement, Clark agreed to provide the “construction and construction
financing”5 for a “guaranteed maximum price” of $6,649,105 plus an allowance of $188,000
for indirect costs and contingencies. To insulate the project from Mr. Street’s growing
financial problem s, the parties agreed to form a new corporation that would own the
development during the construction phase an d would act as the bo rrower of th e interim
construction funds. Mr. Street agreed to convey his interests in the project to the new
corporation in return for an agreement that he could buy back the project when it was
completed. The letter agreemen t also required the new c orporation to furnish (1) a traffic
light at a cost not to exceed $36,000, (2) permanent financing, (3) architectural and
engineering services at a cost not to e xceed $7 0,000, (4) an approve d site development plan
ready for building permit issuance on o r before O ctober 9, 19 92, and (5) a contract to
purchase the property for $1,400 ,000. The parties und erstood tha t the new c orporation would
comply with these conditions when Mr. Street assigned it his contracts with the engineer and
the architect, his permanent loan commitment from Life Insurance Company of Georgia, and
his optio ns to pu rchase the pro perty.
Mr. Street could not provide Clark with the completed site plan or the completed plans
for the Lowe’s or Food Lion stores when they signed the letter agreem ent. In late September,
Clark reminde d Mr. Stre et that “we n eed final ap proved w orking dra wings to maintain your
scheduled dates for your project.” In October, the engineer employed by Mr. Street provided
Clark with a revised site plan reflecting Phar-Mor’s withdrawal from the project. Howev er,
the final plans for the two sto res were still not forthcoming because the tenants had not yet
finalized the design of their spaces.
In early Novem ber 1992 , Mr. Street u rged Clark to begin w ork becau se “Low e’s is
extremely upset with me that Nashville has not started. I have given them a date of
December 15, 1992 as the outside date for ground breaking.” Mr. Street also assured Food
Lion that construction would begin by December 15, 1992 despite the lack of final plans and
even th ough h e had n ot yet ex ercised the optio n to pur chase th e prope rty.
5
The parties understood that Clarendon would provide the construction financing.
-5-
Later in November, Mr. Venable informed Mr. Street that there already was a
$225,000 shortfall stemming from the additional site work costs and that “[i]t is going to be
impossib le to get you a binding commitment until we fully identify all of the costs on the
dynamic and ever changing project.” Elaborating on their September 22, 1992 letter
agreement, Mr. Venable also informed Mr. Street in a fax dated November 20, 1992 that
The Thompson Station development including the outparcel will
be owned in [sic] a new corporation. The stock of the
corporation will be owned by our parent com pany or th eir
wholly-owned subsidiary. You will have the option to acq uire
the stock of this corporation at a pre-determined price for a set
period of time after completion. In the event that you do not
purchase the stock, ob viously then the project an d its
improvements would become the property of our parent
company or its assigns. We will still agree to pay the
developer’s fee over the life of the construction.
Mr. Street re sponded that he wa s prepared to proceed with the co ntract and th at
[w]e must somehow start or break ground by December 15,
1992. Low e’s is very upset with me although we have not had
control over the de lays which Lowe’s has caused. You know
how it goes, it doesn’t matter it is the developer’s/con tractor’s
fault. Le t’s wor k togeth er hard and ge t this starte d.
He also stated that he assumed “the pre-determ ined price fo r us to purch ase the stock would
would [sic] be the agreed price for your turn key construction.”
To accomplish the portion of the agreement calling for the creation of a new
corporation to own the development during the construction phase, Mr. Street incorporated
SENASH, Inc. (“SENASH”). 6 All of SENASH’s outstanding stock was owned by RR
Westminster. On December 14, 1992, SENASH and Clark executed a standard form AGC
construction agreement in which Clark agreed to construct the project for $4,669,105.7 The
work included two buildings conforming to the tenant’s specifications, road construction,
parking lot construction, and landscaping. Specifically excluded from the scope of the work
were (1) the demolition and removal of the existing structures on the site, (2) the removal and
clean-up relating to the automob ile junkyard on the site, (3) patching work required to repair
pre-split rock wa lls if irregularity oc curred in the rock seam s, (4) additiona l costs above the
standard Lowe’s and Food Lion prototype buildings, and (5) design coordination. The
6
The name “SENASH” was an acronym. The “S” was the first letter of Mr. Street’s last
name; the “E” stood for Adam Epstein who was working with Mr. Street on the Thompson Station
project; and the “NASH” was an abbreviation of Nashville, the project's location.
7
Mr. Venable executed the contract on behalf of SENASH, and Joe B. Hennings, Clark’s
president, executed the contract on behalf of Clark.
-6-
contract also provided that “Owner’s representative (Ed H. Street) to coordinate and furnish
all desig n. John S. Clark Com pany, In c. to pay for desig n out of stated al lowan ce.”
In addition, the contract obligated SENAS H to be responsible for increases in the
construction costs due to delays not caused by Clark for changes required by the building
codes and to make equitable adjustments in the contract price for delays in the work that
were not Clark’s responsibility. SENASH also agreed to pay Cla rk an add itional 7.5% to
cover m ain office ov erhead an d profit. The contract pro vided that
In order to expedite the project, it may be necessary for
the Contractor to proceed with changes in the W ork based on a
verbal authorization from the owner or owner representative.
As soon as practicab le, the Con tractor will notify the O wner in
writing of the cost of the change in the Work and the additional
time, if any, necessary to complete said change in the Work.
Clark and Jones Bros., Inc., (“Jones Brothers”) began work on the site on December
15, 1992 in order to fulfill Mr. Street’s commitment to Lowe’s and Food Lion. They were
required to obtain the permission of the current property owners because neither Mr. Street
nor SENASH had exercised the option to purchase the property. They were also prevented
from commencing full-scale grading operations because the property still contained several
occupied houses and an automobile junkyard. In addition, Mr. Street’s engineer had still not
provided a final site plan and the plans for the Lowe’s and Food Lion stores had not been
finalized .
The project remained stalled between December 1992 and February 1993. Mr. Street
was unable to obtain approved final plans from Lowe’s and Food Lion, even though he
continued to promise Clark that the plans were im media tely forth comin g. At one point, he
complained to Lowe’s that “I have really stuck my neck out to start Nashville without plans”
and insisted that Lowe’s delay in providing plans “has drastically changed our projected
timing and I hop e you can appreciate a nd unde rstand wh at we are g oing throu gh trying to
meet the time frame.”
The problems caused by the lack of plans were exacerbated by the lack of progress
on the site pre paration w ork. By ea rly February 1993, the site still had not been cleared of
the tenants, the buildings, or the debris from the automobile junkyard. The excavation of the
area where the Food Lion store would be located had also stopped even though the March
1, 1993 deadline for beginning to pour the footings for the store's foundation was fast
approaching. It was at this point that the pace of the site work and the scope and cost of the
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site work erupted into the first of what would become a series of major disputes among the
parties relating to the re sponsibility for the delays and the additional costs being incurred by
Jones Brothers for the site preparation work.
Despite the construction delays, Mr. Street told Clark in February 1993 that he desired
to renegotiate the construction budget in light of the changes in the site plan. He asserted that
these changes wo uld result in $117,700 in ad ditional profit to Clark bu t would ev entually
increase the cost of the site work for Phase II of the project. Accordingly, Mr. Street
proposed that the parties “have an understanding which would b e fair and eq uitable to bo th
of us befo re goin g to the c losing ta ble.” Clark w as unenth usiastic about this proposal. It had
informed Mr. Street in November 1992 that it hoped to increase its profits on the project by
performing the construction for less than it had budgeted in order to give it “more of a