Winchester Gables, Inc. v. Host Marriott Corp.

875 N.E.2d 527, 70 Mass. App. Ct. 585, 2007 Mass. App. LEXIS 1152
CourtMassachusetts Appeals Court
DecidedOctober 30, 2007
DocketNo. 06-P-1209
StatusPublished
Cited by40 cases

This text of 875 N.E.2d 527 (Winchester Gables, Inc. v. Host Marriott Corp.) is published on Counsel Stack Legal Research, covering Massachusetts Appeals Court primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Winchester Gables, Inc. v. Host Marriott Corp., 875 N.E.2d 527, 70 Mass. App. Ct. 585, 2007 Mass. App. LEXIS 1152 (Mass. Ct. App. 2007).

Opinion

Gelinas, J.

In this case the terms of the purchase and sale [586]*586agreement (agreement) between the parties failed to address a contingency that ultimately arose when the buyer later resold the property that was the subject of the agreement; the resale might have triggered additional compensation to the original seller, but the formula contained in the agreement for calculating the additional compensation did not contemplate a portfolio sale of properties.

The plaintiff, Winchester Gables, Inc. (Winchester), sold Winchester Gables, a 124-unit senior retirement community facility (facility), to the defendants, Host Marriott Corporation (Host Marriott), Barcelo Crestline Corporation (Crestline), and LTJ Senior Communities, LLC (LTJ) (sometimes referred to collectively as Host Marriott).2 The agreement conditioned payment of additional sums by the defendants on a formula based on the “actual gross consideration” paid by a third-party purchaser, if the defendants later resold the facility within a specified period of time.

The defendants resold the facility, but did so in a transaction where the facility was part of an undifferentiated portfolio sale of thirty-one different properties for a single price of $606 million. In determining whether additional compensation was due Winchester as a result of the sale, the defendants suggested basing the calculation on the average price of each of the thirty-one properties, which resulted in no additional compensation to Winchester. Winchester rejected the defendants’ approach, and demanded that the full consideration paid for the entire portfolio be used in calculating the “actual gross consideration” paid for the facility itself, which resulted in a claim for $1 million in additional compensation. In the alternative, Winchester claimed that the defendants had breached the agreement, and demanded payment of the amount specified in the liquidated damage clause, also set at $1 million. After a six-day bench trial, a judge of the Superior Court entered judgment of dismissal against Winchester on all claims, and this appeal followed.

Facts. The facts of the underlying transactions are largely undisputed. We summarize the facts as found by the trial judge, adding detail where relevant to the issues on appeal. [587]*587By a written purchase and sale agreement dated December, 1997, Winchester agreed to sell the facility to Host Marriott. The agreement and sale were the culmination of negotiations begun in September, 1997, when John Camella, Host Marriott’s senior vice-president in charge of acquisitions, sent a letter of intent to Edward LeRoux, Jr., who controlled Winchester, proposing that Winchester sell the facility to Host Marriott for $24 million. The letter provided Host Marriott forty days to conduct due diligence. The letter expressly stated that, apart from certain provisions, it was not a binding contract and had no legal force until the agreement was executed by all parties. LeRoux signed the letter of intent on behalf of Winchester.

During the course of conducting its due diligence review, Host Marriott determined that the $24 million offer was excessive, and revised its offer. In oral discussion with LeRoux in October, 1997, and later confirmed by letter, Camella proposed that Host Marriott pay Winchester $21 million in cash, with payment of an additional $1 million contingent on the future performance of the facility. In his letter to LeRoux, Camella set forth the contingencies that would trigger an additional payment (contingent purchase price), which could not exceed $1 million. As proposed by Camella:

1. On the fifth anniversary of the closing, Host Marriott would calculate its internal rate of return (IRR) based upon its aggregate investment in the facility and the actual net operating income (NOI) obtained from the facility. If the facility had not been sold, the calculation would assume a hypothetical sale on the fifth anniversary, with a hypothetical sales price calculated as follows: NOI multiplied by ten, less the customary costs of sale. If the IRR exceeded 13.5%, the excess proceeds, not to exceed $500,000, would be paid to Winchester as an additional purchase price.

2. On the tenth anniversary of the closing, Host Marriott would again perform these IRR calculations and would pay Winchester any proceeds above and beyond the 13.5% IRR, not to exceed an additional $500,000.

3. If the facility were sold before the fifth anniversary, the IRR would be calculated “on the date of sale according to the same procedure, but based upon the actual net sales proceeds.” [588]*588If Host Marriott’s IRR exceeded 13.5%, it would pay Winchester an amount above and beyond the 13.5%, not to exceed $1 million.

4. The IRR in all of these scenarios “would be calculated without reference to federal or state income taxes . . . .”

Camella’s proposal regarding the contingent purchase price and the method of its calculation was acceptable to Winchester, and was incorporated in the agreement as section 1.2.3. The language in section 1.2.3 remained unchanged throughout the negotiation of the agreement. The complete text of section 1.2.3 appears as the Appendix to this opinion.

It is clear from the record that the parties failed to discuss or anticipate the implications of the language of section 1.2.3 in the event of an undifferentiated portfolio sale. On January 12, 1998, Winchester agreed to substitute LTJ for Host Marriott as purchaser of the facility, and the actual conveyance of the facility was to LTJ rather than Host Marriott. The sale closed on January 16, 1998.

At the time of the execution of the agreement, LTJ was a shell, and Host Marriott expected it to be a single purpose entity, with the facility its sole asset. Host Marriott shared this expectation with Winchester during negotiations, but did not commit to it in the agreement. Winchester also did not ask Host Marriott to include such a commitment in the agreement.3

On December 30, 1997, after the execution of the agreement, but before the closing, Host Marriott assigned to LTJ an interest in the property of another retirement community, Leisure Park. As a result, LTJ was no longer a shell when it acquired the facility on January 16, 1998. Following a series of transactions in 1999 through which LTJ shed its other properties, it owned only the facility.

In December, 1998, Host Marriott “spun off” an affiliate, Crestline, and assigned its senior living properties, including the [589]*589facility, to Crestline. LTJ thus became a wholly-owned subsidiary of Crestline. This assignment did not trigger the obligation to calculate the contingent purchase price under section 1.2.3.3 of the agreement, because Crestline was an affiliate of Host Marriott. Crestline ultimately owned thirty-one senior living properties, including the facility. In January, 2002, Crestline sold its entire portfolio of thirty-one properties to Senior Housing Properties Trust (SNH) for a total of $606,474,808. No property in the portfolio, including the facility, was afforded a separate valuation or an individual accounting.

The sale of the facility to SNH triggered Host Marriott’s obligation to Winchester under section 1.2.3.3 of the agreement to prepare a “disposition calculation” within sixty days based on the “actual gross consideration of the Disposition,” in order to determine whether any part of the contingent purchase price should be paid.

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Cite This Page — Counsel Stack

Bluebook (online)
875 N.E.2d 527, 70 Mass. App. Ct. 585, 2007 Mass. App. LEXIS 1152, Counsel Stack Legal Research, https://law.counselstack.com/opinion/winchester-gables-inc-v-host-marriott-corp-massappct-2007.