Opinion ID: 416545
Heading Depth: 1
Heading Rank: 6

Heading: The ceiling loan: substantial vs. perfect compliance

Text: 30 The loan commitment imposed several conditions on the $1.1 million ceiling loan. Among these was the requirement in paragraph 2.c. for [e]xhibition of signed leases for a term of not less than one year covering not more than 140,449 net rentable square feet at a rental of not less than $714,447 per annum .... The main reason the bank gave for not making the ceiling loan was that Brown-Marx did not meet the $714,447 minimum annual rental requirement. 31 The trial judge submitted the breach of contract claim to the jury with an instruction that plaintiffs had the burden to prove by a preponderance of the evidence that they had substantially performed all of the ultimately agreed upon conditions precedent to the ceiling loan. The court granted a new trial, concluding that this instruction was erroneous because substantial compliance was not applicable to the minimum annual rental clause in the commitment and Brown-Marx was, therefore, required to comply fully with the minimum annual rental requirement. Later the court granted the bank's motion for summary judgment with respect to the ceiling loan, finding there was no genuine issue of material fact as to whether Brown-Marx had failed to satisfy the minimum annual rental requirement. 32 There is no dispute in material facts concerning Brown-Marx's failure to comply fully with the minimum rental requirement, even when the leases brought to New York on closing day are considered. Five of the leases submitted were month-to-month leases rather than for a term of at least a year. Two leases covered space that was not in the building. Another had never been executed, and the supposed tenant had neither paid rent nor occupied the space. The rental amount on one lease was overstated. There was a shortfall in the dollar amount of annual rental. While there was considerable dispute about the size of the deficiency, 4 Brown-Marx does not contend that annual rentals were as much as $714,447, but rather that substantial compliance with the minimum rental provision was adequate. There is a paucity of Alabama case law on this subject. 5 Alabama has applied the substantial performance doctrine in only one situation outside the field of construction contracts and then on facts that it found were analogous to a building contract situation. See discussion of Bruner v. Hines, 295 Ala. 111, 324 So.2d 265 (Ala.1975), below. We conclude that the Alabama courts would hold that substantial performance does not apply to the minimum required rental provision of the loan commitment. 33 Courts have usually treated the terms and conditions of a loan commitment as conditions precedent to the lender's obligation to perform. See e.g., Chambers & Co. v. Equitable Life Assurance Society, 224 F.2d 338 (5th Cir.1955); First Federal Savings & Loan Association v. Mortgage Corp. of the South, 467 F.Supp. 943 (N.D.Ala.1979); Johnson v. American National Insurance Co., 126 Ariz. 219, 613 P.2d 1275 (Ariz.App.1980); Frank's Nursery Sales, Inc. v. American National Insurance Co., 388 F.Supp. 76 (E.D.Mich.1974); North Denver Bank v. Bell, 528 P.2d 413 (Colo.App.1974); Boston Road Shopping Center, Inc. v. Teachers Insurance and Annuity Association, 13 A.D.2d 106, 213 N.Y.S.2d 522 (N.Y.App.Div.1961), aff'd, 11 N.Y.2d 831, 227 N.Y.S.2d 444, 182 N.E.2d 116 (N.Y.1962). The loan commitment fee is paid for the privilege of later borrowing the money if the conditions are met. Chambers & Co., supra. The language of the loan commitment here expressly provides that compliance with the minimum annual rentals provisions is a condition to receiving the loan. Concerning such an express condition, 5 Williston on Contracts (Third Edition), Section 675, states: 34 As a general rule, conditions which are either expressed or implied in fact must be exactly fulfilled or no liability can arise on the promise which such conditions qualify. 35 Id. at 184. 36 The substantial performance doctrine provides that where a contract is made for an agreed exchange of two performances, one of which is to be rendered first, substantial performance rather than exact, strict or literal performance by the first party of the terms of the contract is adequate to entitle the party to recover on it. The intent of the doctrine is equitable: to prevent unjust enrichment or the inequity of one party's getting the benefit of performance, albeit not strictly in accord with the contract's terms, with no obligation in return. The courts will allow recovery under the contract, less allowance for deviations, where a party in good faith has substantially performed its obligation. See generally, 3A Corbin on Contracts, Sections 700-701; 6 Williston on Contracts (Third Edition), Section 842. The doctrine is widely applied to building contracts, though not always limited to them. 37 The doctrine is not primarily concerned with substantial performance of a condition but rather with substantial performance by one party of his obligations arising out of the agreed exchange under the contract. Its object is to prevent forfeiture of work, labor and materials supplied by the substantially performing party. Its application is illustrated in terms of construction contracts in 3A Corbin on Contracts, Section 701: 38 [I]t is not with express conditions or interpretation that we are now primarily concerned. We are now dealing with a contract that consists of two exchanged promises requiring the rendition of two promised performances, without making either promise expressly conditional on anything. The builder promises to build and the owner promises to pay. 39