Klair v. Reese

• Decision Date: 12 May 1987
• Citation: 531 A.2d 219
• Parties: Franklin A. KLAIR, Charlotte Dudkewitz, and Bank of Delaware, as Trustee, Defendants Below, Appellants, v. Dale L. REESE and John W. Holsten, t/a Able Associates, Plaintiffs Below, Appellees. . Submitted:
• Court: United States State Supreme Court of Delaware

Page 219

531 A.2d 219

Franklin A. KLAIR, Charlotte Dudkewitz, and Bank of

Delaware, as Trustee, Defendants Below, Appellants, v. Dale L. REESE and John W. Holsten, t/a Able Associates,

Plaintiffs Below, Appellees.

Supreme Court of Delaware.

Submitted: May 12, 1987.

Decided: Sept. 16, 1987.

Upon appeal from the Court of Chancery. Reversed and Remanded.

Court Below--Court of Chancery, in and for New Castle County: C.A. No. 7485.

Thomas Herlihy, III (argued), Herlihy and Wier, Wilmington, for appellants Klair and Dudkewitz.

Andrew P. Taylor, Cooch and Taylor, Wilmington, for appellant Bank of Delaware.

John R. Carrow, Wilmington, Guardian ad litem.

Richard J. Abrams, Richards, Layton & Finger, Wilmington, for appellees.

Before CHRISTIE, Chief Justice, MOORE, and WALSH, Justices.

CHRISTIE, Chief Justice:

This appeal centers on the parties' divergent interpretations of a purchase option provision in a long-term ground lease which grants the tenants the right to purchase the "leasehold premises ... for a consideration to be determined at the then value of the land." The tenants, Dale L. Reese and John W. Holsten, t/a Able Associates, who have exercised their option to purchase the land, contend that this provision calls for the land to be valued as encumbered by their remaining leasehold interest of over 70 years. The landowners, Franklin A. Klair, Charlotte Dudkewitz, and the Bank of Delaware as trustee under the will of Norman E. Klair and by agreement with Ethel Helen Klair (the parents of Franklin and Charlotte), contend that the language calls for the land to be valued as a fee simple, without the lease encumbrance. ¹

In a declaratory judgment action brought by tenants, the Court of Chancery granted summary judgment in favor of tenants on the valuation issue. The court ruled that the dispositive provisions clearly called for a lease encumbered valuation and that it was not necessary to consider extrinsic evidence concerning the parties' intent, their course of conduct, or the standard practice within the industry. We find that under the circumstances the court erred in failing to consider the relevant extrinsic evidence, and we reverse and remand for further proceedings.

I.

The parties concede that their respective rights and duties with respect to purchase options are governed by a lease agreement which was first executed in 1959 and then assigned to tenants and re-executed with certain modifications in 1961. In June, 1959, Ralph E. Gordy, as President of Kirkwood Shopping Center, Inc., entered into a lease agreement with Norman and Ethel Klair whereby Gordy agreed to lease from the owners the 22.6 acres of land now in dispute. In 1961, Gordy assigned his interest in the land to the tenants. In December, 1961, tenants renegotiated and re-executed the lease agreement with the Klair family.

Under paragraph 23 of the 1961 agreement the tenants held two exclusive purchase options. The first, in effect from 1972 to 1982, granted tenants the right to purchase all of the leasehold premises for $300,000.00. Paragraph 23(c) set forth the second purchase option as follows:

A further and exclusive option to purchase all of the leasehold premises is hereby granted by the Landlord (Seller), to Tenant (Purchaser) to begin [on December 16, 1981] and to run for the balance of this Leasehold Agreement, for a consideration to be determined at the then value of the land, in accordance with an appraisal to be made by three (3) members of the Wilmington Real Estate Board, one to be chosen by each of the parties hereto and the third by the two so chosen ..." (emphasis added).

By letter dated April 29, 1982 and in discussions held shortly thereafter, the tenants notified the landowners that they planned to exercise their option to purchase the leasehold premises pursuant to the second purchase option set forth in paragraph 23(c). Almost immediately, a dispute arose as to whether the purchase price pursuant to the option should be determined by an appraisal which reflected the value of the land as encumbered or as unencumbered by the lease. The landowners, in accordance with the terms of the option clause, appointed an appraiser and asked the tenants to do the same. Instead the tenants chose to press the landowners for an agreement as to the procedures and standards to be used in developing the appraisals. Neither side acceded to the requests of the other.

An appraisal completed in 1982 for the landowners stated that the unencumbered fee value of the leased premises was $1,695,000.00, but that the landowners' interest encumbered by the long-term lease was worth only $145,000.00. An appraisal of land as encumbered reflects the value of the landowners' interest in the land under the long-term lease, i.e., the present value of their right to receive $14,400 in rent for the 74 years remaining on the 100-year lease, plus the value of their reversionary interest in the fee simple after the lease expires. The encumbered value of the land is much less than the unencumbered value in this case because the tenants have a lease at a very favorable rent which will run for more than 70 years. Apparently the owners' reversionary interest in the land at the present time was assigned a very limited economic value. The value of the encumbered fee therefore was deemed to approximate the value of a $14,400 annual annuity (which is equal to the annual rent) despite the fact that the fair market price of the unencumbered fee has soared since the lease was executed.

In any case, the parties were unable to resolve their disagreement and, by letter dated January 17, 1983, tenants notified the landowners that they were withdrawing their exercise of the purchase option. The landowners responded almost a year later by stating that tenants had breached the purchase option provisions of the 1961 lease agreement thereby losing all rights under the agreement and that the landowners considered the tenants to be hold-over tenants at sufferance.

In February, 1984, the tenants filed this action in the Court of Chancery maintaining that their withdrawal of their exercise of the option was valid; that they were entitled to continue renting the shopping center for the balance of the term pursuant to the 1961 agreement; and that if they ever in the future decided to exercise their option to purchase under paragraph 23(c) of the lease agreement, the purchase price would equal the then fair market value of the land as encumbered by the lease.

The parties produced documentary and testimonial evidence to support their contrary interpretations of the second purchase option provision. The landowners relied in particular on the depositions of Franklin Klair and Charlotte Dudkewitz and an affidavit by Ralph Gordy. Franklin Klair and Charlotte Dudkewitz stated that although they did not participate in the negotiations that led to the 1961 agreement they were under the impression that the land would never be worth less than $300,000.00. Mr. Gordy, who negotiated the 1959 lease on which the 1961 lease was based, stated therein that the same language in the 1959 lease meant that the land would be valued as unencumbered by the lease. The landowners contended that these statements supported their view that the contract called for the land to be valued without encumbrances or that there was a failure of mutual assent in the formation of the provision.

On cross-motions for summary judgment, the Court of Chancery ruled as an initial matter that the tenants' exercise of their option to purchase the land created a binding contract for the sale of the land from which the tenants could not withdraw. The court then ruled that the tenants did not breach the terms of the agreement because of their failure to appoint an appraiser. The court found that both sides undertook reasonable, if divergent, steps to resolve their disagreement over how the land was to be valued.

On the issue of whether the land subject to the option should be valued as encumbered by the lease, the court relied on a legal presumption which states that absent clear provisions to the contrary, the law presumes that land is to be appraised as encumbered by existing leaseholds--at least when the leases have a negative impact on the land's value. Finding that the contract did not clearly provide for an unencumbered valuation, the court applied the presumption and ruled that the land should be valued as encumbered. In light of the presumption, the court considered the dispositive provisions "clear" in calling for an encumbered valuation and declined to consider extrinsic evidence that might shed light on the meaning of the critical language as used by the parties to the 1961 agreement.

The court also rejected the argument that there was a failure of mutual assent, finding that there was no reliable evidence that the persons who actually negotiated the 1961 agreement were not in complete accord.

II.

The proper interpretation of language in a contract, while analytically a question of fact, is treated as a question of law both in the trial court and on appeal. Restatement (Second) of Contracts § 212, comment d (1981); 4 W. Jaeger, Williston on Contracts § 616 (3d ed. 1961). An appellate court will make its own interpretation of the contractual language, since it is in as good a position as the trial court to do so. Restatement (Second) of Contracts § 212, comment d (1981); See Radio Corp. of America v. Philadelphia Storage Battery Co., Del.Supr., 6 A.2d 329 (1939); Emor Inc. v. Cyprus Mines Corp., 467 F.2d 770 (3d Cir.1972) ("Appellate courts have untrammeled power to interpret written documents."). If the interpretation of the trial court rests not on its reading of the agreement but on findings of fact concerning evidence beyond the four corners of the contract ("extrinsic evidence") or on inferences drawn from those findings, the appellate court will defer to the trial court's interpretation unless...