Ace owns Blueacre, a forty-acre parcel of unimproved real estate on the outskirts of a burgeoning city in the state of Calvada. In June 1996, the legislature of Calvada approved the construction of a freeway adjacent to Blueacre. Shortly after the completion of the freeway in 2003, Ace was approached by Greenhorn, who desired to construct an apartment building on Blueacre. Greenhorn is a licensed general contractor previously employed by several large apartment building developers. Although Greenhorn could not arrange financing to purchase Blueacre outright, he was able to negotiate a sixty-year ground lease from Ace on the express condition that Greenhorn complete construction of the apartment building before July 1, 2008. The lease was duly executed by both Ace and Greenhorn, and a memorandum of the lease was legally recorded.

Greenhorn obtained a $10 million loan at 9 percent interest that was due and payable on or before July 1, 2008, from Construction Lender. To secure repayment of the construction loan, Greenhorn executed a leasehold mortgage in favor of Construction Lender and legally recorded it.

Concurrently with the funding of the construction loan, Greenhorn obtained a standby commitment from Permanent Lender to advance $10 million at 7 percent interest contingent on

(1) The issuance of certificates of occupancy for 80 percent of the apartment building and (2) The leasing of 60 percent of the total rentable space of the apartment building to tenants acceptable to Permanent Lender. Greenhorn contracted with various subcontractors for the construction of the apartment building. Certificates of occupancy for 80 percent of the apartment building were issued on or before May 31, 2008. Certificates of occupancy for the remaining units were not obtained until July 3, 2008. The leasing of units was hampered by the availability of apartments at a lower cost in competing complexes. As of May 31, 2008, Permanent Lender had approved leases for only 45 percent of the rentable space.

Fearful of defaulting on the construction loan, Greenhorn approached both Construction Lender and Permanent Lender and was successful in negotiating a letter of intent involving Greenhorn, Construction Lender, and Permanent Lender, whereby it was agreed in principle that the term of the construction note would be extended to December 31, 2008, subject to approval by counsel for both Construction Lender and Permanent Lender. Upon the execution of the letter of intent, the officer of Construction Lender negotiating it exclaimed that he was glad that an agreement had been reached to extend the construction loan. The officer representing Permanent Lender replied that he should receive a memento to mark the importance of the occasion.

Subsequently, Permanent Lender suffered record defaults in its mortgage business, its lending policies were scrutinized by the federal regulatory authorities, and its reserve requirements were substantially increased. Unbeknownst to Greenhorn and Construction Lender, Permanent Lender was no longer in a position to fund the permanent loan because of its increased reserve requirements.

Prior to December 31, 2008, Greenhorn submitted executed leases to Permanent Lender sufficient to meet the 60 percent lease contingency. The financial condition of the tenants who signed these leases was equal to or greater than that of the tenants previously approved by Permanent Lender. Recognizing the tight position that Permanent Lender was in, its attorneys uncovered an ancient deed restriction that precluded the sale or lease of Blueacre or any portion thereof to any person of Chinese descent. Based on this restriction, Permanent Lender refused to approve several leases to individuals with Chinese surnames. As a result, Greenhorn was unable to fulfill the 60 percent lease contingency prior to December 31, 2008, and Permanent Lender refused to fund the permanent loan.

On January 5, 2009, Construction Lender sent a notice of default to Greenhorn and announced its intent to foreclose the leasehold mortgage. What are the legal rights and obligations of Ace, Greenhorn, Construction Lender, and Permanent Lender? Has each of the parties acted ethically?