McDonald's Corp. v. Lebow Realty Trust

• Decision Date: 11 April 1989
• Docket Number: Civ. A. No. 85-4739-Y.
• Citation: 710 F. Supp. 385
• Parties: McDONALD'S CORPORATION, Plaintiff, v. LEBOW REALTY TRUST and Lawrence N. Lebow, as he is Trustee of the Lebow Realty Trust, Defendants.
• Court: U.S. District Court — District of Massachusetts

710 F. Supp. 385

McDONALD'S CORPORATION, Plaintiff, v. LEBOW REALTY TRUST and Lawrence N. Lebow, as he is Trustee of the Lebow Realty Trust, Defendants.

Civ. A. No. 85-4739-Y.

United States District Court, D. Massachusetts.

April 11, 1989.

Peter Ellis, Brandon White, Foley, Hoag, Eliot, Boston, Mass., for plaintiff.

Alan Rose, Nancy Watters, Nutter, McClennen, Fish, Neil Lerer, Martin Magnuson McCarthy & Kenney, Boston, Mass., for defendants.

MEMORANDUM OF DECISION

YOUNG, District Judge.

The plaintiff lessee, McDonald's Corporation, ("McDonald's") and the defendant lessor, Lebow Realty Trust, and its trustee, Lawrence Lebow, ("Lebow"), are before this Court on cross motions for summary judgment seeking interpretation of a real estate lease ("lease"), entered into on May 30, 1972, commencing on October 1, 1972, and terminating twenty years later on September 30, 1992. There are no material facts in dispute and the issue focuses on the interpretation of two provisions of the lease, viz., Paragraph 15 "Lessee's Right of First Refusal" and Paragraph 24 "Refusal on Sale".

The first paragraph at issue, Paragraph 15, contains two provisions: 1) the lessee's right to relet in the event of a bona fide third party offer to lease the premises during the first ten years of the lease, and 2) the lessee's right:

to purchase the premises at any time during the term of this Lease by giving the Lessor 120 days written notice of such intent. The agreed-upon price for the sale of the premises under this provision is Three hundred thousand dollars ($300,000).

See Complaint, Exhibit A, p. 6. The parties crossed out an extension of this purchase option beyond the twenty year term of the lease and initialed the modification of the provision as originally written.

The second paragraph at issue, Paragraph 24, contains but a single provision, viz., that, in the event of a bona fide third party offer to the lessor to purchase the premises, the lessee has the right to accept or refuse to purchase the premises on the same terms as the outside offer. The provision grants the lessee a right of first refusal. This right is exercisable only during a fifteen-day period after the lessor's notice of the third party offer to the lessee, but the right of first refusal is to operate throughout the term of the lease or "... any extension thereof...." See Complaint, Exhibit A, p. 8.

On or about November 5, 1985, Lebow received a bona fide offer to purchase the premises for $450,000 and gave notice of the proposed sale to McDonald's on November 12, 1985, pursuant to Paragraph 24 of the lease. Thirteen days later, McDonald's gave notice of its intent — not to exercise its right of first refusal — but instead to exercise its option to purchase for $300,000 pursuant to Paragraph 15 of the lease. The lease is silent concerning the relationship between these two lease options. It gives no express guidance concerning whether the exercise of one option has any effect upon the ability to exercise the other.

In his motion for summary judgment, Lebow argues that the lease is ambiguous and that when he gave notice to McDonald's of its right to exercise its option of first refusal at $450,000, that notice vitiated McDonald's fixed price purchase option. In Lebow's view, therefore, McDonald's then had the right either to purchase the premises at $450,000 or, as happened here, decline to exercise its right of first refusal and thus lose its opportunity to purchase when Lebow sold the property to the third party. Cf. Roy v. Greene, 404 Mass. 67, 533 N.E.2d 1323 (1989) (discussing when a person may be deemed to have exercised a "right of first refusal" in the absence of contractual definition or explanation). McDonald's, in its cross motion for summary judgment, argues that the two options are free from ambiguity and function independently of each other. It seeks specific performance of its purchase option upon its tender of the fixed price of $300,000. This case thus presents the single narrow issue of whether the party first exercising one of the two options here involved fixes the rights and liabilities of the other party with respect to the second option. See generally R. Shoshinski, American Law of Landlord & Tenant 622-23 (Lawyers Co-operative Publishing Co. 1980 & Supp. 1989 at 271 nn. 13-15). This issue is one of first impression under the law of Massachusetts.

So far as is relevant, the controlling Massachusetts law may be quickly limned. It is well settled under Massachusetts law that courts should construe written contracts according to the intent of the parties at the time of contracting, Sea-Land Service, Inc. v. R.V. D'Alfonso Co., Inc., 727 F.2d 1, 2-3 (1st Cir.1984), in light of what constitutes a rational business instrument effectuating the parties' intent. Berkal v. DeMatteo Constr. Co., 327 Mass. 329, 98 N.E.2d 617 (1951); Lewis v. Chase, 23 Mass.App.Ct. 673, 505 N.E.2d 211 (1987), rev. den. 399 Mass. 1105, 507 N.E.2d 1056 (1987); Fay, Spofford and Thorndike, Inc. v. Massachusetts Port Authy., 7 Mass. App.Ct. 336, 387 N.E.2d 206 (1979). Moreover, since an option provision is a contractual right which may be exercised unilaterally for the benefit of the one who holds it, Lewis v. Chase, 23 Mass.App.Ct. at 676, 505 N.E.2d 211, and is thus likely to be exercised when advantageous to the holder and perhaps disadvantageous to the people subject to it, such a unilateral contract right can only be exercised by turning all the required corners squarely, Tristram's Group, Inc. v. Morrow, 22 Mass.App.Ct. 980, 496 N.E.2d 176 (1986) (rescript), citing Loitherstein v. Int'l Bus. Mach. Corp., 11 Mass.App.Ct. 91, 94, 413 N.E.2d 1146 (1980). Such provisions are construed strictly against the option holder. Westinghouse Broadcasting Co. v. New England Patriots Football Club, Inc., 10 Mass.App.Ct. 70, 73, 406 N.E.2d 399 (1980). Beyond these general principles, Massachusetts cases afford little guidance in resolving the present dispute.¹

As noted above, in the present case the lease is silent on the relationship between McDonald's two options. There is no explicit language to the effect that, if Lebow had an outside offer and notified McDonald's, such notice or McDonald's subsequent refusal to exercise its right of first refusal would void McDonald's purchase option. Close analysis of the undisputed facts does, however, shed a bit more light on the commercial situation between the parties. It appears that Lebow would not extend the $300,000 fixed price purchase option beyond the twenty year term of the lease because the written provision so providing was crossed out by the parties and initialed. Thus it appears to be the intent of the parties that the fixed price would cover anticipated appreciation in property value for a twenty year period but not beyond. This interpretation is supported by the presence of careful provisions for escalation of rental amounts and improvements contained in Paragraphs 1, 2, and 14 of the lease which suggest that the parties considered the expected appreciation of the property's value to be recoverable by Lebow in rental payments. It can also be inferred — though the inference is somewhat more tenuous — that the fixed price purchase option was not intended to reflect appreciated value since the parties could easily have included an escalator provision in Paragraph 15 which was comparable to those used in Paragraphs 1, 2, and 14. Had the purchase option been intended to reflect the fair market value at the time of the option's exercise, the lease could easily have so provided and have fixed a method for determining such value. Instead, this lease contains a clear fixed price purchase option. In contrast, the right of first refusal in Paragraph 24 extends beyond the term of the lease and therefore presumes a bona fide third-party offer based on market value at that future time.

Against this background, it is the duty of this Court, having reference to the persuasively reasoned opinions from other jurisdictions and such other sources of law as may be available, to predict the rule that the Massachusetts Supreme Judicial Court would fashion were it confronted with this issue. See Massengale v. Transitron Electronic Corp., 385 F.2d 83, 86 (1st Cir.1967).

A number of decisions have construed the relationship between the two options at issue in this case. The rationale of most such decisions, however, is confined to a construction of the individual instruments there present. See, e.g., Crowley v. Texaco, Inc., 306 N.W.2d 871 (S.D.1981) (summarizing the fact specific nature of the relevant federal and state decisions). See generally, Annot., Construction and Effect of Options to Purchase at Specified Price and at Price Offered by Third Person, Included in Same Instrument, 22 ALR 4th 1293 (1983). Moreover, in many of the decisions upon which MacDonald's relies, the lease itself expressly spoke to the relationship between the two provisions. See, e.g., Gulf Oil Corp. v. Chiodo, 804 F.2d 284, 285 (4th Cir.1986); Shell Oil Co. v. Prescott, 398 F.2d 592, 593 (6th Cir.1968), cert. denied, 393 U.S. 1017, 89 S.Ct. 621, 21 L.Ed.2d 562 (1969); Texaco v. Creel, 310 N.C. 695, 314 S.E.2d 506, 507 (1984); Amoco Oil v. Snyder, 505 Pa. 214, 478 A.2d 795 (1984); American Oil Co. v. Ross, 390 So.2d 90 (Fla.Dist.Ct.App.1980) rev. denied, 399 So.2d 1145 (Fla.1981).

While these decisions are thus not directly in point, they serve to shed some light on the commercial realities that lead parties to execute leases including these two provisions. As Judge Haynesworth, writing for the Fourth Circuit in Chiodo, explains succinctly:

It is common knowledge that fixed purchase options in leases are usually at prices substantially higher than the lessor's notion of the present value of his land.

* * * * * * In the early days of a long term commercial lease, there is a real possibility that the lessor may wish to sell the property for a price

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