Crowley v. Texaco, Inc.

• Decision Date: 10 June 1981
• Docket Number: No. 13243,13243
• Parties: Marshall O. CROWLEY and Maurine Patterson, Plaintiffs and Appellees, v. TEXACO, INC., Defendant and Appellant.
• Court: South Dakota Supreme Court

Page 871

306 N.W.2d 871

22 A.L.R.4th 1284

Marshall O. CROWLEY and Maurine Patterson, Plaintiffs and Appellees, v. TEXACO, INC., Defendant and Appellant.

No. 13243.

Supreme Court of South Dakota.

Argued March 23, 1981.

Decided June 10, 1981.

George S. Mickelson of McCann, Martin & Mickelson, P. C., Brookings, for plaintiffs and appellees.

Mark H. Virshbo, Oak Brook, Ill. and Richard O. Gregerson of Woods, Fuller, Shultz & Smith, Sioux Falls, for defendant and appellant; H. L. Fuller and Francis M. Smith of Woods, Fuller, Shultz & Smith, Sioux Falls, on brief.

FOSHEIM, Justice.

This action for a declaratory judgment involves interpretation of purchase options in a lease agreement. We reverse the trial court's determination that appellant cannot purchase the property for a fixed price.

The lessors (appellees) are brother and sister. They own the real estate in question, which is located in Brookings, South Dakota. They acquired title by descent from Margaret F. Akin, deceased, subject to a filling station lease agreement with Texaco, Inc. (appellant). That agreement was dated March 9, 1955, with the lease term to commence on June 1, 1955, and contained this provision:

(11) OPTION TO PURCHASE. Lessor hereby grants to lessee the exclusive right, at lessee's option, to purchase the demised premises, free and clear of all liens and encumbrances, including leases, (which were not on the premises at the date of this lease) at any time during the term of this lease or any extension or renewal thereof,

(a) for the sum of Twenty Two Thousand dollars; it being understood that if any part of said premises be condemned, the amount of damages awarded to or accepted by lessor as a result thereof shall be deducted from such price,

(b) on the same terms and at the same price as any bona fide offer for said premises received by lessor and which offer lessor desires to accept. Upon receipt of a bona fide offer, and each time any such offer is received, lessor (or his assigns) shall immediately notify lessee, in writing, of the full details of such offer, including the name and address of any offeror, whereupon lessee shall have thirty (30) days after receipt of such notice in which to elect to exercise lessee's prior right to purchase. No sale of or transfer of title to said premises shall be binding on lessee unless and until these requirements are fully complied with.

Any option herein granted shall be continuing and preemptive, binding on the lessor's heirs, devisees, administrators, executors, or assigns, and the failure of lessee to exercise same in any one case shall not affect lessee's right to exercise such option in other cases thereafter arising during the term of this lease or any extension or renewal thereof.

Upon receipt of lessee's notice of election to exercise any option granted herein, which notice shall be given in accordance with the Notice Clause of this lease, lessor shall immediately deliver to lessee, at lessor's expense, a complete Abstract of Title or other evidence of title satisfactory to lessee, and shall also furnish, at lessor's expense, an up-to-date survey by a licensed or registered professional engineer or surveyor showing elevation of property and corners marked with concrete monuments, upon receipt of which the lessee shall have a reasonable time in which to examine title and, upon completion of such examination if title is found satisfactory, shall tender the purchase price to lessor, and lessor shall thereupon deliver to lessee a good and sufficient Warranty Deed conveying the premises to the lessee free and clear of all encumbrances (including without limiting the foregoing the rights of dower and/or curtesy). All rentals and taxes shall be prorated between grantor and grantee to the date of delivery of the aforesaid deed.

The lease also contained this extension grant:

The lessor hereby grants to the lessee the right and option to extend this lease for an additional period of five years from and after the expiration of the first ten year term and a second five years from and after the expiration of the first five years renewal, and a third five years from and after the expiration of the second five year renewal and fourth five years from and after the expiration of the third five year renewal each renewal on the same terms and conditions. Lessee shall notify lessor in writing of its election to extend this lease sixty days prior to the date of the expiration of the term of this lease and notice thereof shall be deemed sufficient if given in the manner hereinafter provided.

If appellant utilized all extensions, the lease would expire on May 31, 1985. Activation of the last five-year extension required a 60-day notice prior to May 31, 1980. On December 31, 1979, appellees received an attractive offer to purchase the property from Taylor Oil Company. The offer was communicated to appellant on January 7, 1980, pursuant to paragraph (11)(b) of the lease. Through inaction, appellant failed to exercise its right to purchase with regard to that offer. By letter dated March 12, 1980, however, appellant notified appellees of its election to exercise its (11)(a) fixed price option under the lease agreement for the sum of $22,000.00.

The trial court concluded that appellant's rights to purchase the subject property under paragraph (11)(a) of the lease agreement terminated when the appellees notified appellant of the offer made by Taylor Oil Company, but that appellant nevertheless had a right to extend the lease for another five-year term by giving written notice to appellees sixty days prior to the date of the expiration of the term, which it failed to do. Hence, the lease expired on May 31, 1980.

Appellant contends that any option granted under the lease agreement is continuing, pre-emptive, and binding upon the appellees and their assigns, but concedes it is unlikely that a third party would bid in excess of the fixed price because appellant's right to exercise its option under (11)(a) could cause the third party to lose the excess. It is appellant's position that the amount of a third party offer does not affect its rights, unless the offer is less than the $22,000 fixed price, in which event appellant may elect to purchase the property for the lower price rather than continue to rent. Appellant claims that just as it chose to lease, rather than purchase the property for $22,000, since the original 1955 lease, it may likewise have preferred to continue the lease arrangement rather than exercise its right to meet a third party offer of less than $22,000.

Appellant maintains if it fails to exercise its (11)(b) option to meet a third party offer, appellee can then sell the property, subject to its continuing option. Each successive offer must then be submitted to appellant under (11) (b) by appellees' assigns and, at any time during the term of the lease, appellant could purchase the property for $22,000 regardless of the number of assignments or who then owned it.

Paragraph (11)(a) is a complete option. It gives the optionee the right to purchase the property at his election within an agreed period at a named price. Sinclair Refining Co. v. Allbritton, 147 Tex. 468, 218 S.W.2d 185 (1949). An (11)(b) provision in a lease which gives the lessee the first opportunity to purchase the property for a price the lessor would receive from another party does not, until the lessor gives notice to the lessee, constitute an 'option' as that term is usually understood, but rather a mere right of refusal or first right to purchase. However, when the lessor gives notice pursuant to such provision, the two (the provision and the notice) become an option. Imperial Refineries Corporation v. Morrissey, 254 Iowa 934, 119 N.W.2d 872 (1963). Since the lease agreement refers to both provisions as options, we will do likewise where appropriate.

An instrument that grants both an (11)(a) option and an (11)(b) right to purchase poses some interesting legal problems concerning which the authorities are not in accord. As noted in Annot., 8 A.L.R.2d 604 (1949), however, the cases that have construed such dual options involve a considerable variety of option provisions and the construction applied in each case related to the individual instrument before the court.

One line of cases hold, as did the trial court in this case, that if the lessee does not purchase after due notice of a bona fide offer, then the optioner, by selling the premises, terminates the fixed price option. Shell Oil Co. v. Blumberg, 154 F.2d 251 (5th Cir. 1946); Manasse v. Ford, 58 Cal.App. 312, 208 P. 354 (1922); Harding v. Gibbs, 125 Ill. 85, 17 N.E. 60 (1888); Northwest Racing Association v. Hunt, 20 Ill.App.2d 393, 156 N.E.2d 285 (1959); Adams v. Helburn, 198 Ky. 546, 249 S.W. 543 (1923).

The construction accepted by other authorities is that unless otherwise provided in the lease, the two provisions are separate and distinct. Sinclair Refining Co. v. Clay, 102 F.Supp. 732 (N.D.Ohio 1951), aff'd, 194 F.2d 532 (6th Cir. 1952); Cities Service Oil Co. v. Estes, 208 Va. 44, 155 S.E.2d 59 (1967). The lessee may exercise his option to purchase for a fixed price without regard to the provision for first right of purchase. Gulf Oil Corp. v. Montanaro, 94 N.J.Super. 348, 228 A.2d 352 (1967). The lessee's rights under an (11)(a) type option have thus been held to be continuing and are not extinguished by the failure of the lessee to earlier exercise a first right to purchase after notice of an offer from a third person. See: 51(C) C.J.S. Landlord & Tenant § 88(11).

One of the leading cases adhering to the latter view is Butler v. Richardson, 74 R.I. 344, 60 A.2d 718 (1948). The Rhode Island Supreme Court concluded that a fixed price option similar to (11)(a) was clear, explicit, and not coupled with or conditioned upon any other agreement. Regarding the first refusal provision, the Court said:

But the question here is what effect this...