## Facts

- A shopping mall development was financed through a two-stage structure: a short-term construction loan to build the project and a long-term permanent mortgage loan to retire the construction debt.
- Commonwealth issued a one-year standby permanent loan commitment to lend $3.5 million for the mall’s permanent financing at a specified interest rate, for a nonrefundable fee.
- The commitment conditioned Commonwealth’s duty to fund on timely construction in accordance with the plans and specifications; it did not expressly require perfect completion.
- First National became the construction lender, required a valid take-out commitment as a condition of its construction financing, and took an assignment of the developer’s rights under Commonwealth’s commitment.
- The project was substantially completed by the deadline but soon suffered financial failure (low occupancy and income).
- Commonwealth refused to fund the permanent loan, asserting noncompliance with the “constructed according to plans and specifications” condition and other technical objections.
- First National foreclosed, took possession, and operated the mall at a loss, then sued as assignee for breach, seeking specific performance and damages.
- The district court ordered specific performance compelling Commonwealth to fund and awarded additional monetary relief; Commonwealth appealed.

## Issues

1. Whether the developer’s performance satisfied the commitment’s “constructed according to plans and specifications” condition so that Commonwealth’s refusal to fund constituted a breach.
2. Whether specific performance is an appropriate remedy to compel a lender to honor a standby permanent loan commitment in a commercial real estate financing transaction.

## Decision

- The Third Circuit affirmed the judgment ordering Commonwealth to honor the standby commitment and affirmed the associated damages award.
- The court upheld the finding that the construction condition was satisfied in the manner reasonably contemplated by the parties and that any deviations were not material.
- The court agreed that specific performance was warranted because damages were inadequate given the role of a binding take-out commitment in structuring construction financing and allocating risk.

## Legal Principles

- A standby permanent loan commitment is an enforceable contract used to secure construction financing; it is not treated as a discretionary option for the lender once conditions are met.
- Contractual conditions requiring construction “according to plans and specifications” in commercial development settings may be satisfied by substantial performance; immaterial deviations do not excuse nonperformance.
- Specific performance may be ordered against a lender where the promised financing is central to the transaction and monetary damages would not provide an adequate substitute.
- In evaluating enforcement of a take-out commitment, courts consider the commercial function of the commitment and the parties’ expectations in a two-stage construction-to-permanent financing arrangement.
- A binding permanent loan commitment can serve as the “valid and binding” take-out agreement relevant to a national bank’s ability to extend construction financing under federal banking limits.

## Conclusion

The Third Circuit held that Commonwealth breached a standby permanent loan commitment by refusing to fund despite substantial compliance with construction conditions, and it affirmed equitable relief compelling the lender to perform along with an award of additional damages.


First Nat'l State Bank of N.J. v. Commonwealth Fed. Sav. & Loan Ass'n of Norristown, 610 F.2d 164 (3d Cir. 1979)