Cowan v. Mervin Mewes, Inc.

• Decision Date: 15 February 1996
• Docket Number: 19304,Nos. 19274,s. 19274
• Citation: 1996 SD 40,546 N.W.2d 104
• Parties: Todd COWAN, Plaintiff and Appellee, v. MERVIN MEWES, INC., Defendant and Appellant. MERVIN MEWES, INC., Plaintiff and Appellant, v. Todd COWAN, Defendant and Appellee. . Considered on Briefs
• Court: South Dakota Supreme Court

Page 104

546 N.W.2d 104

1996 SD 40

Todd COWAN, Plaintiff and Appellee, v. MERVIN MEWES, INC., Defendant and Appellant.

MERVIN MEWES, INC., Plaintiff and Appellant, v. Todd COWAN, Defendant and Appellee.

Nos. 19274, 19304.

Supreme Court of South Dakota.

Considered on Briefs Feb. 15, 1996.

Decided April 17, 1996.

Gary F. Colwill of Schmidt, Schroyer, Colwill & Moreno, P.C., Pierre, for appellee.

Patricia A. Leary Carlson of Carlson Law Office, Pierre, for appellant.

PER CURIAM.

¶1 Mervin Mewes, Inc. (Mewes) appeals from a judgment which determined an implied contract existed between Mewes and Todd Cowan (Cowan). Cowan filed a notice of review challenging the court's determination that the option to renew the contract had been forfeited.

FACTS

¶2 The facts in this case were well summarized by the trial court in its memorandum decision, which was incorporated into its findings of fact and conclusions of law.

Cowan and Mewes entered into a written contract on September 1, 1990, to lease approximately 1,120 acres of farm real estate. The term of the lease was for three years commencing September 1, 1990, and terminating at the end of the crop year 1993 for the crop ground and on November 30, 1993, for the pasture. In addition, the lease contained an option to renew for an additional two years under the same terms and conditions provided that Cowan notified Mewes of the exercise of the option by August 1 "of each year prior to the September 1, possession date." The agreed rental was $13,000 per year, payable semi-annually on September 1 and July 1 of each rental year. In addition, the contract stated that, "If a Horse from Todd Cowan is not mutually agreed on by both parties there is an additional Five Hundred [dollars] per year due [and] payable at the end of the lease."

Cowan made all payments required under the lease except that he did not deliver a horse or pay the additional five hundred dollars per year. On or before August 1, 1993, Cowan delivered a notice of intent to exercise the option to renew the lease. Mewes indicated that he would not renew the lease at that time. Cowan then tendered the first $6,500 installment for the 1994 lease to Mewes. The date of tender is in dispute as Cowan believes it was September 1, 1993, and Mewes contends it was September 7, 1993. Nevertheless, Mewes refused the check and never cashed it. On about September 8 or 9, 1993, Cowan commenced planting winter wheat on the leased ground. Mewes discovered that Cowan was planting wheat and spoke with Cowan about it the same day. Cowan alleges that the parties spoke and reached an oral agreement where Cowan would lease three parcels of crop land and Mewes would retain possession of the rest of the property in the lease. Mewes, however, denies that any such agreement took place and [alleges] that he again told Cowan that there was no lease. On September 10, 1993, Mewes delivered a notice to the Hyde County ASCS office indicating that he had no lease with Cowan on the subject property.

The parties had some discussions about the wheat crop but nothing was done. The wheat crop which Cowan planted was harvested and stored pending the outcome of this matter. Cowan also did not farm a third quarter of Mewes' property [which had been included in the original lease] in the spring of 1994. He went to plant the crop and discovered that another party was already working the ground. Shortly thereafter he commenced this action.

Mewes later filed a separate action against Cowan. The two matters were consolidated and tried to the court.

¶3 The court concluded that, because Cowan did not supply a horse or pay $500 per year, his notice to exercise the option to continue the lease for 1994 was invalid. However, the court went on to conclude an implied contract was formed for Cowan to plant the two quarters of winter wheat for the 1994 crop year based on the parties' conduct. The court held that Cowan was entitled to harvest the winter wheat and retain its proceeds, and was entitled to retain any ASCS payments for the 1994 crop year for the two quarters of land involved. The court also concluded that Mewes was entitled to cash rent for two quarters of land in the amount of $5,880, a figure representing $20 per acre. Mewes appeals, and Cowan has filed a notice of review.

ISSUES

¶4 I. Did the trial court err in concluding that the option to renew the lease was invalid because Cowan did not supply a horse or $500 per year?

¶5 Cowan argues that his option to renew the lease for two years was not conditioned on the satisfaction of the requirement in the 3-year lease that he deliver a horse or pay $500 per year. He contends Mewes had no right to refuse to renew the lease or declare the option forfeited. The issue is squarely whether a lessee's right to exercise an option to renew a lease is contingent on the satisfaction of all covenants and conditions of the lease agreement, particularly those concerning payment.

¶6 "Interpretation of contractual provisions is a question of law. Because we can review the contract as easily as the trial court, there is no presumption in favor of the trial court's determination." Commercial Trust & Sav. Bank v. Christensen, 535 N.W.2d 853, 856 (S.D.1995) (citations omitted). We consider contracts as a whole and all of the provisions, including those granting an option, are examined to determine the meaning of any part. Id. at 857; Crowley v. Texaco, Inc., 306 N.W.2d 871 (S.D.1981). Also, in determining the validity of an option contained in a contract and whether that option is separately enforceable, we look to whether the total consideration can be apportioned to correspond with separate consideration offered by the other party in exchange for the option. See Crowley, 306 N.W.2d at 874.

¶7 In Skillman v. Lynch, 74 S.D. 212, 213, 50 N.W.2d 641, 642 (1951), we considered an option in a lease which allowed renewal "if all the conditions are otherwise agreeable to all parties[.]" We held the lessor could refuse to renew the lease when the lessee failed to comply with a term restricting gambling on the premises. However, we have not previously addressed a case such as this where the lessor relies upon the lessee's default in a payment term under the original lease as the basis for refusing to honor the lessee's right to exercise an option to renew the lease.

¶8 In reaching its decision, the trial court relied on a decision of the North Dakota Supreme Court, Hieb v. Jelinek, 497 N.W.2d 88 (N.D.1993). In that case, the lessees did not make the final lease payment but nonetheless tried to exercise an option to renew the lease. The North Dakota court held:

Because the [lessees] refused to pay the rent which was due, [the lessors] were under no obligation to extend to them the right of first refusal to relet the property[.] The primary consideration for any lease is the rent to be paid. Because nonpayment of rent substantially undermines the basis for the agreement, it would be fundamentally unfair to require a landlord to offer a tenant a right of first refusal when rental payments are uncertain or delinquent.

Therefore, it is commonly held that the right to exercise an option to renew a lease or the right to demand a first refusal to renew, is implicitly dependent upon the faithful performance of the conditions and covenants contained in the lease. It is axiomatic, then, that the nonpayment of rents precludes a lessee from demanding a right of first refusal or exercising an option to renew.

Id. at 92 (citations omitted). The logic of the Hieb decision is compelling, and is consistent with our decision in Skillman where we held that failure to satisfy a material lease term was sufficient justification for termination of the right to exercise an option to renew a lease. Here, the trial court found...