Court Opinion

ID: 7803424
Source: CourtListenerOpinion
Date Created: 2022-08-25 00:00:21.637083+00
Date Added: 2024-06-11T16:29:38.354345
License: Public Domain

Case: 21-20396     Document: 00516445992          Page: 1    Date Filed: 08/24/2022

              United States Court of Appeals
                   for the Fifth Circuit                              United States Court of Appeals
                                                                               Fifth Circuit

                                                                             FILED
                                                                       August 24, 2022
                                   No. 21-20396                         Lyle W. Cayce
                                                                             Clerk

   SCD BLK 251 Houston LLC,

                                                            Plaintiff—Appellant,

                                       versus

   Mt. Jefferson Holdings L.L.C.,

                                                            Defendant—Appellee.

                  Appeal from the United States District Court
                      for the Southern District of Texas
                           USDC No. 4:20-CV-3463

   Before King, Elrod, and Southwick, Circuit Judges.
   Per Curiam:*
          SCD BLK 251 Houston appeals from the district court’s grant of
   judgment on the pleadings for Mt. Jefferson Holdings. The district court
   assumed arguendo that an option contract existed to build a connection
   between a future building on a lot owned by SCD BLK 251 and a hotel owned
   by Mt. Jefferson Holdings, but found that SCD BLK 251 was not ready to

          *
            Pursuant to 5th Circuit Rule 47.5, the court has determined that this
   opinion should not be published and is not precedent except under the limited
   circumstances set forth in 5th Circuit Rule 47.5.4.
Case: 21-20396     Document: 00516445992           Page: 2   Date Filed: 08/24/2022

                                    No. 21-20396

   perform its end of the bargain (constructing the connection) within a
   reasonable time of the end date specified in the agreement. We, however, find
   that the agreement at issue was not a binding contract and therefore
   AFFIRM on that ground.
                                         I.
          The facts of this case begin in 2000, when Crescent Real Estate
   Funding (“Crescent”), the predecessor-in-interest to SCD BLK 251, sold
   the Four Seasons Hotel in Houston (the “Hotel”) to HEF Houston LP
   (“HEF”), the predecessor-in-interest to Mt. Jefferson Holdings. As part of
   that agreement, HEF granted Crescent “the future right and option to
   connect a skybridge or tunnel to the Hotel” through a document referred to
   as the “Agreement Regarding Span” (the “Span Agreement”). The
   language of that agreement is as follows:
             Connection Right. HEF hereby grants and conveys to
             Crescent and the successors and assigns in ownership
             (each, a “Block 251 Owner”) of Block 251 S.S.B.B.,
             Houston, Texas (“Block 251”), the future right to connect
             an air bridge or tunnel (a “Connection”) to a point on the
             wall of the Improvements, provided (a) such right shall be
             limited to a Connection located on or below the third floor
             of the Improvements that is mutually agreed upon by the
             owner of the Property (“Property Owner”) and Block 251
             Owner, and (b) the Connection shall not, without the
             consent of Property Owner, interfere with the current
             configuration of the Hotel (for example, the Connection
             will not be permitted to attach at the location of the
             restaurant(s) or banquet rooms of the Hotel without the
             consent of Property Owner). Block 251 Owner and Property
             Owner may each use such Connection for access to and
             from the Improvements to “Class A” improvements to be
             constructed on Block 251, if any, pursuant to an agreement
             which shall generally be in the form of the existing span

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             agreements affecting the Property, except as otherwise
             provided herein. The form of such agreement shall
             incorporate provisions requiring the consent of Property
             Owner to the exact location of the Connection, the design
             of the Connection, the method of construction of the
             Connection, insurance coverage during and after the
             construction of the Connection and the timing of
             construction of the Connection. Property Owner agrees
             that it will not unreasonably withhold, condition or delay its
             consent to the construction of the Connection; however, it
             shall be reasonable for Property Owner to withhold its
             consent in the event Property Owner determines, using its
             reasonable discretion, that such a tunnel or air bridge, once
             constructed and fully functional, would adversely affect the
             operations of the Hotel, other than the imposition of
             increased operating costs resulting from the operation of
             the tunnel or air bridge. All costs of constructing the
             Connection shall be paid by Block 251 Owner, provided that
             fees and expenses incurred by Property Owner in
             negotiating and reviewing the plans for the Connection
             (including without limitation, legal, architectural and
             engineering fees) shall be paid by Property Owner. Block
             251 Owner and Property Owner shall share equally all costs
             thereafter incurred in the operation and maintenance of the
             Connection, but Block 251 Owner shall be solely
             responsible for all capital expenditures required for the
             upkeep of the Connection, except for the exterior doors
             from the Connection to the Hotel. The execution of a span
             agreement between Property Owner and the Block 251
             Owner shall supersede and cancel the retained rights set
             forth in this Agreement.
          The agreement stated that the right “shall run with the land and shall
   inure to the benefit of and be binding upon the heirs, personal
   representatives, successors and assigns in ownership of the Property [i.e., the
   Hotel] and Block 251 respectively.” The agreement additionally included a

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   clause that “[t]he right granted above shall be exercised, if at all, on or before
   December 31, 2020,” and that “[t]ime is of the essence in the performance
   of all obligations under the Agreement.” Along with executing the
   agreement, Crescent and HEF executed a “Recorded Memorandum of Span
   Agreement” that was filed with the Harris County Clerk’s office.
          After purchasing Block 251 in 2019, SCD BLK 251 (“SCD”) began
   discussions with Mt. Jefferson Holdings (“Mt. Jefferson”) (which had
   previously purchased the Hotel) regarding the details of the connection
   described in the Span Agreement and the possibility of entering into the
   secondary agreement contemplated therein. On April 8, 2020, SCD sent Mt.
   Jefferson a letter stating that “SCD has elected to exercise the right to
   connect given to SCD under the Span Agreement.”
          After further negotiations following this letter were unsuccessful,
   SCD sued Mt. Jefferson in state court, seeking “a judicial declaration that
   SCD exercised its right and option to connect a sky bridge from Block 251 to
   the [Hotel] by providing written notice that it exercised such right prior to
   December 31, 2020 [the expiration date included in the Span Agreement].”
   It is undisputed that, as of the filing of the lawsuit, no building existed on
   Block 251, which was instead an empty lot being used for parking.
          After the lawsuit was filed, Mt. Jefferson filed a general denial of
   SCD’s allegations and removed the case to federal court. The parties filed
   cross-motions for judgment on the pleadings. The district court granted
   judgment on the pleadings for Mt. Jefferson. It assumed without deciding
   that the Span Agreement was an enforceable contract and then found that the
   agreement required SCD to physically construct a structure to the Hotel to
   exercise the option and that it had to do so by the time specified in the
   agreement—December 31, 2020. Since, according to the district court, SCD
   had not done so nor demonstrated the ability to do so within a reasonable

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   time of that date, the court granted judgment for Mt. Jefferson. SCD timely
   appeals.
                                         II.
          When considering an appeal, “[w]e need not accept the district
   court’s rationale and may affirm on any grounds supported by the record.”
   McGruder v. Will, 204 F.3d 220, 222 (5th Cir. 2000). We therefore consider
   whether the Span Agreement was enforceable in the first instance, a question
   the district court did not answer.
          In interpreting the Span Agreement, the district court assumed
   arguendo that it was both (1) an enforceable contract, not an unenforceable
   “agreement to agree,” and (2) a unilateral option contract. As to the first
   assumption, “[i]n general, a contract is legally binding only if its terms are
   sufficiently definite to enable a court to understand the parties’ obligations.”
   Fort Worth Indep. Sch. Dist. v. City of Fort Worth, 22 S.W.3d 831, 846 (Tex.
   2000). Therefore, “when an agreement leaves material matters open for
   future adjustment and agreement that never occur, it is not binding upon the
   parties and merely constitutes an agreement to agree.” Id. In determining
   whether an agreement is an enforceable contract or an unenforceable
   “agreement to agree,” we look to see if the agreement “address[es] all of its
   essential terms” and is “sufficiently definite to confirm that both parties
   actually intended to be contractually bound.” Fischer v. CTMI, L.L.C., 479
   S.W.3d 231, 237 (Tex. 2016). “[M]aterial and essential terms are those that
   parties would reasonably regard as ‘vitally important ingredient[s]’ of their
   bargain.” Id. (alteration in original) (quoting Neeley v. Bankers Tr. Co., 757
   F.2d 621, 628 (5th Cir. 1985)). “Whether a term is material or essential is a
   legal question that the court examines on a case-by-case basis.” Coe v.
   Chesapeake Expl., L.L.C., 695 F.3d 311, 320 (5th Cir. 2012).

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          Turning to the second assumption, “[a]n option contract has two
   components: (1) an underlying contract that is not binding until accepted and
   (2) a covenant to hold open to the optionee the opportunity to accept.” N.
   Shore Energy, L.L.C. v. Harkins, 501 S.W.3d 598, 606 (Tex. 2016) (quoting
   Faucette v. Chantos, 322 S.W.3d 901, 908 (Tex. App.—Houston [14th Dist.]
   2010, no pet.)). This first aspect is critical because “once the option is
   exercised and the offer accepted within the time specified, the underlying
   agreement becomes a valid and enforceable bilateral contract.” 1 SAMUEL
   WILLISTON & RICHARD A. LORD, Williston on Contracts § 5:16
   (4th ed. 2007 & Supp. 2022).
          We find that the agreement was not sufficiently definite to serve as an
   enforceable contract but is instead an unenforceable “agreement to agree.”
   There was simply too much left to be determined through future negotiation
   for the agreement to be enforceable. First, there was no agreement on the
   location of the connection between the two structures. Common sense
   suggests, and Texas cases confirm, that location is a material term. See, e.g.,
   Copano Energy, LLC v. Bujnoch, 593 S.W.3d 721, 731 (Tex. 2020) (finding
   location essential in an analogous statute-of-frauds context); Aurora
   Petroleum, Inc. v. Cholla Petroleum, Inc., No. 07-10-0035-CV, 2011 Tex. App.
   LEXIS 1382, at *6 (Tex. App.—Amarillo Feb. 23, 2011, no pet.) (location for
   drilling test wells was an essential term); MPG Petroleum, Inc. v. Crosstex
   CCNG Mktg., Ltd., No. 13-05-609-CV, 2006 Tex. App. LEXIS 8895, at *10
   (Tex. App.—Corpus Christi-Edinburg Oct. 5, 2006, pet. denied) (delivery
   location was an essential term).
          That the agreement put in some specification for location by
   mandating that any connection be on or below the third floor of the Four
   Seasons does not save the agreement. Even given that constraint, the tunnel
   or skybridge could still be located anywhere from twenty feet below ground
   to thirty or forty feet in the air. The structure of the agreement also

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   demonstrates the essential nature of the location of the connection; it used
   conditional language to grant the right to connect, but only so long as that
   connection was in a particular location. And as will become a running theme,
   the agreement provided no framework for how that location would be
   chosen—except for by mutual agreement. That is the exact type of “promise
   to negotiate towards a future bargain” that forms the basis of an
   unenforceable agreement to agree, not an enforceable contract. Dall./Fort
   Worth Int’l Airport Bd. v. Vizant Techs., LLC, 576 S.W.3d 362, 371 (Tex.
   2019).
            The same issue exists for the myriad particularities that would go into
   constructing the connection. The agreement did not specify the design of the
   connection nor answer any questions about how or when it would be
   constructed. It is clear that the agreement left those questions open,
   contemplating that they would be answered in a secondary agreement and
   even specifying that the owner of the Hotel would be responsible for “fees
   and expenses incurred . . . in negotiating and reviewing the plans for the
   Connection.” For a construction agreement, the design of what is to be
   constructed and the manner in which it is to be built are material. DKH
   Homes, LP v. Kilgo, No. 03-10-006-CV, 2011 WL 1811435 (Tex. App.—
   Austin May 11, 2011, no pet.), is instructive. There, the Texas Court of
   Appeals was considering an agreement where the buyers of a lot “agree[d] to
   commence       construction    of    a   single    family    residence . . . on   the
   Property . . . within twelve (12) months” and to use DKH as the contractor.
   Id. at *1. The court found that agreement insufficiently definite because it
   “[did] not include any of the information essential to define the undertaking
   such as the size of the house contemplated, the price of the house on a per-
   square-foot or other basis, or the time for completing the construction.” Id.
   at *3. The same is true here. The Span Agreement does not specify the design
   of the connection, the size of the connection, or even the type of connection

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   (which could be either a tunnel or a skybridge). It does not specify the time
   for completing the construction. It does not specify the method of
   construction or questions of how that construction project will be insured.
   Each of these is a material term that is to be agreed upon later, rendering the
   agreement unenforceable.
          In addition, and as with location, the agreement does not determine
   exactly how those decisions are to be made. This is not an agreement where
   a formula has been provided, with only the inputs left to be plugged in later.
   Contra Fischer, 479 S.W.3d at 241 (“[T]he agreement provided a clear
   formula or standard by which to determine the payments[.]”). Instead, the
   agreement requires the parties to negotiate and then mutually agree on the
   answers to these questions; each of these decisions required “the consent of
   [the Hotel] Owner.” It is not enough that the agreement states that the Hotel
   owner “will not unreasonably withhold, condition or delay its consent to the
   construction of the Connection.” Texas courts have consistently found that
   “agreements to negotiate toward a future contract are not legally
   enforceable . . . even if the party agreed to negotiate in good faith.” Dall./Fort
   Worth Int’l Airport Bd., 576 S.W.3d at 371. Nor is it sufficient that the
   agreement stated that the secondary agreement “shall generally be in the
   form of the existing span agreements affecting the [Hotel].” That language
   provides only a shell for what the future agreement will look like in form; it
   still does not provide a method for how the decisions themselves will be
   made. The agreement was an agreement to agree.
          Last, considering the agreement as a purported option contract
   confirms our conclusion. As stated above, an option contract at bottom
   requires an enforceable underlying contract that goes into effect once the
   option is triggered. But in this case, the underlying “contract” is simply more
   negotiations. There is nothing for the court to compel Mt. Jefferson to do
   once SCD decided to elect its “option.” See Jarvis v. Peltier, 400 S.W.3d 644,

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   650 (Tex. App.—Tyler 2013, pet. denied) (“But the option agreement does
   not give [the buyer] a right to compel [the seller] to sell the property.”). And
   there is no way for a court to determine what decisions the parties would
   reach in negotiating the secondary span agreement and “no implication of
   what the parties will agree upon.” Gerdes v. Mustang Expl. Co., 666 S.W.2d
   640, 644 (Tex. App.—Corpus Christi-Edinburg 1984, no writ.) (quoting
   Radford v. McNeny, 104 S.W.2d 472, 475 (Tex. 1937)). A court would be
   unable to ensure that SCD’s election of the option was honored by enforcing
   an underlying contract; all it could order is that the parties come back to the
   negotiating table. See 1 Williston on Contracts § 4:29 (4th ed. 2007
   & Supp. 2022) (“[I]f an essential element is reserved for the future
   agreement of both parties . . . the promise can give rise to no legal obligation
   until such future agreement. Because either party in such a case may, by the
   very terms of the promise, refuse to agree to anything to which the other
   party will agree, it is impossible for the law to affix any obligation to such a
   promise.”). In the end, what the parties to the agreement seemed to have
   sought was leverage in the necessary future negotiations that were required
   to occur, supported by the specter of litigation. Litigation they may have
   gotten; an enforceable agreement, they did not. The agreement lacks the
   material terms necessary for an enforceable agreement and is instead an
   unenforceable agreement to agree.
                                         III.
            For the foregoing reasons, we AFFIRM the judgment of the district
   court.

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