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January 6, 1994

THOMAS McBRIEN and MARIE McBRIEN, husband and wife, Plaintiffs

The opinion of the court was delivered by: LOUIS H. POLLAK

 This diversity action, sounding in contract, was the subject of a bench trial. This opinion constitutes my findings of fact and conclusions of law.

 Plaintiffs Thomas and Marie McBrien, husband and wife, own a large tract of land located along the Delaware River in Bucks County, Pennsylvania. Defendant Master Development, Inc. ("MDI") is a New Jersey corporation engaged in the business of investment and speculation in real estate. On April 18, 1989, plaintiffs and MDI signed a Letter of Intent which provided that, if certain conditions were met, the parties would in the next 120 days sign an agreement of sale by which plaintiffs would sell the tract of land to MDI. Although the parties never signed the agreement of sale contemplated by the Letter of Intent, plaintiffs now seek damages for MDI'S failure to make payments allegedly required by the Letter of Intent.

 Part I of this opinion outlines the factual background and procedural history of this case. Part II analyzes the legal issues raised by this action.


 The tract of land owned by plaintiffs consists of various parcels of real estate along the Delaware River that were purchased by the plaintiffs in separate transactions between 1985 and 1988. The total acreage of the real estate is approximately 279 acres, including a 47-acre parcel on which is located the Indian Rock Inn ("Inn"). Thomas McBrien ("McBrien") testified that he and his wife bought the real estate in order to live on the land, to develop residential housing, and to establish recreational facilities. Since purchasing the property, McBrien has continued to live on the land and operate a canoeing, rafting and tubing business.

 McBrien testified that, although he would have liked to develop the property himself, financial difficulties forced him to seek outside investors. Because he had incurred substantial legal bills in connection with his efforts to develop the property, and because he had had a rainy canoeing season that caused temporary cash flow problems, McBrien began to market the property in 1988. He listed the property with, among others, a realtor named Richard Murphy. Murphy contacted MDI to inquire whether MDI might be interested in plaintiffs' property. When Mark Fraser, the president of MDI, expressed interest, Murphy suggested that a meeting be held at the site.

 On April 6, 1989, Fraser and Robert Ulrich, a vice president of MDI, met with McBrien and Murphy at the property. Also in attendance was engineer John Rahencamp. Rahencamp's company, John Rahencamp Consultants, is engaged in the business of performing engineering and feasibility studies in connection with the development of real estate. Rahencamp attended the meeting at Murphy's request. The group toured the property and discussed potential development. Rahencamp asserted that a developer could build 250 to 500 lots on the property -- that is, one to two lots per acre. Rahencamp may, however, have said that the developer would not be able to build that many lots without first obtaining a "curative amendment" -- that is, a change in the applicable zoning requirements. *fn1" Although McBrien indicated that his preference was for more limited development, he did not mention any obstacles to the denser development Rahencamp and MDI discussed.

 Because Fraser and Ulrich were impressed with the property and its development potential, they began to negotiate terms under which MDI would purchase the property. Immediately after the April 6 meeting, McBrien gave Fraser and Ulrich a list of his debts. McBrien indicated that he was behind on his mortgages and his real estate taxes and that he feared foreclosure. Fraser and Ulrich met with McBrien in order to try to draft a letter of intent that would, among other things, solve McBrien's short term financial problems and protect MDI's interest in the property.

 In a letter of intent dated April 14, 1989, MDI proposed to purchase the property for a total of $ 1,650,000. Over the next several days, plaintiffs and MDI continued to engage in negotiations concerning the sale of the property. The result was a revised letter of intent ("Letter of Intent") which was dated and executed by the parties on April 18, 1989 (Plaintiffs' Exhibit 2). Under the terms of the Letter of Intent, any profit plaintiffs might make from the sale of the property to MDI would come from a five percent commission on revenues raised from resale of lots by MDI, or, alternatively, from a forty percent commission on the revenue realized from MDI's resale of the property as a whole. The total purchase price was described in the Letter of Intent as $ 2,150,000. Two million dollars would be in the form of two first mortgages obtained by MDI: a first mortgage on the land with First National Bank of Newtown, in the amount of $ 1,500,000; and a first mortgage on the Inn with the Bank of Old York Road, in the amount of $ 500,000. Fifty thousand dollars was a deposit that MDI paid up front, that McBrien used to bring his mortgages up to date. The characterization of the remaining one hundred thousand dollars -- and the condition upon which it would become due -- is one of the subjects of the dispute before this court. The relevant provisions of the Letter of Intent stated:

4. Review Period. Buyer shall have a period of one hundred twenty (120) days commencing with the receipt by Buyer of a copy of this letter executed by Seller, to evaluate the general condition of the property; to determine the feasibility of the proposed purchase, including the physical and economic feasibility; to verify representations made by the Seller, and to satisfy the conditions referred to in this letter. During the Review Period, Buyer and Seller shall negotiate an Agreement of Sale to be executed by the Buyer and Seller on or before the termination of the Review Period. Notwithstanding the foregoing, if at any time during the Review Period Buyer shall elect, for any reason, not to proceed with the intended purchase, Buyer shall so notify the Seller in writing and this Letter of Intent shall be null and void and neither Seller nor Buyer shall have any further right or obligation hereunder. No representations made by Seller shall be relied upon by Buyer at the expiration of the review period. . . .
6. Deposit. Upon the execution of this Letter of Intent by Seller and Buyer, Buyer shall deposit an amount equal to Fifty Thousand Dollars ($ 50,000.00), which shall be released to Seller. Upon the expiration of the period referred to in Paragraph 4, Buyer will deposit an amount equal to One Hundred Thousand Dollars ($ 100,000.00) which shall be released to Seller. The deposit(s) shall secure Buyer's obligations under this Letter and the subsequent Agreement of Sale and Buyer's liability shall be limited to same.

 The Letter of Intent also required MDI to pay the real estate taxes on the property and to make the monthly mortgage payments that came due, beginning on the date the Letter of Intent was signed. Finally, the Letter of Intent gave MDI access to the property for the purposes of conducting feasibility and other studies of the land, and the Letter provided that work produced in connection with such studies would become the property of the Seller in the event that no settlement occurred.

 Fraser testified that he understood the 120 day review period described in paragraph 4 of the Letter of Intent to have two purposes: to enable MDI and McBrien to meet with the banks holding mortgages on the property and the Inn and discuss having MDI assume those mortgages, and to give MDI time to have feasibility and engineering studies done on the property. Ulrich, Fraser and McBrien did indeed meet with the First National Bank of Newtown and the Bank of Old York Road on June 7, 1989, and MDI proposed that it would assume the mortgages. The banks, however, both rejected MDI'S proposal, on or around June 21, 1989. Fraser testified that he felt that MDI had other financing options: MDI could make the mortgage payments through McBrien, could raise additional funds through outside investors and pay off the mortgages, or could obtain a bank loan in addition to funding from investors and use the money to pay off the mortgages. Fraser explained that, at that point, MDI put the financing issue on hold until it received the results of feasibility studies.

 On May 1, 1989, MDI hired John Rahencamp Consultants ("JRC") to perform feasibility and engineering studies of the property. As time passed, JRC gradually modified its predictions for the developability of the property. Towards the end of May, 1989, Skip Weiner from JRC told Fraser in a phone conversation that he thought MDI could get at most 100 to 125 lots without a curative amendment. At a meeting on June 28, 1989, Skip Weiner told Ulrich and Fraser that MDI might get as few as eighty-four lots, but that eighty-four lots -- built with traditional septic systems -- was the minimum they would get. Although MDI principals were less enthusiastic about the property than when they ...

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