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Grande Properties Development, LLC. v. JP Morgan Chase Commercial Securities Trust

2008-C2, 2011 WL 2669966 (U.S. Dist. Ct. D. N.J. 2011) (Unpublished)

GOOD FAITH AND FAIR DEALING; CONTRACTS — There cannot be a breach of the covenant of good faith and fair dealing when there is no contract.

A commercial real estate developer entered into a lease with a business that wanted to construct a store on the developer’s property. The developer took a loan evidenced by a promissory note, secured by a mortgage, and designed to pay off the developer’s construction financing. As additional security, the developer deposited a portion of the proceeds into a leasing achievement reserve fund, considered the “holdback.” At a later date, the mortgage was modified and then the same portion of the proceeds were placed it into a collateralized mortgage trust.

The tenant and the developer amended their ground lease and expanded the amount of leased space. The developer then gave a copy of the lease to the loan servicer and requested release of the “calculated new lease disbursement.” It then requested release of the balance of the holdback reserve. There were many communications back and forth among the loan servicer, the trust, and the trustee discussing the procedure and status for releasing the holdback money. However, when the special loan servicer did not disburse the calculated new lease disbursement to the developer, the developer filed suit.

In its suit, the developer alleged that the trust, the master servicer of the loan, and the special loan servicer demanded items that were not required by the mortgage and claimed the trustee fabricated pretextual conditions to justify its refusal to disburse the holdback funds. The complaint alleged breach of contract as well as breach of the covenant of good faith and fair dealing. The trust, the master servicer, and special servicer of the loan argued that the leases for the remaining available retail space were not yet signed and certain other conditions precedent had not yet been satisfied by the developer and its tenant.

In addressing the breach of contract claim, the Court looked to the contract and found that none of the defendants were parties to the contract between the developer and its lender. The defendant’s responsibilities were governed by the pooling and servicing agreement among the trust bank, trustee, and the two loan servicers. Additionally, the developer did not do what it was supposed to do under the mortgage. One prerequisite to releasing the funds was that the lender had to receive an estoppel certificate from the tenant. This was not provided by the tenant until much later than when the funds were requested. Additionally, the two loan servicers were justified in denying the release of the holdback funds because the first amendment to the ground lease did not qualify as a new approved lease under the mortgage. Even if the first amendment were to be considered a new approved lease, the developer still did not meet the requirements for release of the holdback funds because the tenant did not meet the approved tenant occupancy conditions in the mortgage. For these reasons, the Court concluded there was no breach of contract.

Next, the Court addressed the breach of covenant of good faith and fair dealing claim. Here, it found that the trust, the master loan servicer, and the special loan servicer had all made good faith efforts toward granting the holdback release. Further, there can’t be a breach of the covenant of good faith and fair dealing when there is no contract. The record in this case evidenced that the servicers had diligently serviced and administered the mortgage loan on behalf of the trust. For these reasons, the Court found no breach of covenant of good faith and fair dealing.

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