El Paso Natural Gas Co. v. Western Bldg. Associates, s. 80-1001

• Decision Date: 21 April 1982
• Docket Number: Nos. 80-1001,80-1002,s. 80-1001
• Citation: 675 F.2d 1135
• Court: U.S. Court of Appeals — Tenth Circuit
• Parties: EL PASO NATURAL GAS COMPANY, Plaintiff-Appellant, Cross-Appellee, v. WESTERN BUILDING ASSOCIATES, a partnership; R. L. Kysar; W. M. Gallaway; B. J. Baggett; and Perkins & Co., a New Mexico corporation, Defendants-Appellees, Cross-Appellants. Tenth Circuit

Page 1135

675 F.2d 1135

EL PASO NATURAL GAS COMPANY, Plaintiff-Appellant, Cross-Appellee, v. WESTERN BUILDING ASSOCIATES, a partnership; R. L. Kysar; W M. Gallaway; B. J. Baggett; and Perkins & Co., a New Mexico corporation Defendants-Appellees, Cross-Appellants.

Nos. 80-1001, 80-1002.

United States Court of Appeals,Tenth Circuit.

April 21, 1982.

John B. Pound of Montgomery, Andrews & Hannahs, Santa Fe, N. M., for plaintiff-appellant/cross-appellee.

John R. Cooney, Albuquerque, N. M. (Mark B. Thompson, III, Albuquerque, N. M. with him on the briefs), of Modrall, Sperling, Roehl, Harris & Sisk, Albuquerque, N. M., for defendants-appellees/cross-appellants.

Before BARRETT and LOGAN, Circuit Judges, and CHILSON, District Judge ^*.

LOGAN, Circuit Judge.

In this diversity action both plaintiff El Paso Natural Gas Company ("El Paso") and the defendants, Western Building Associates and related parties (collectively "Western"), appeal the trial court's decision, which granted El Paso specific performance of its contract to purchase property owned by Western, but which also granted to Western various adjustments in the sale price. Western challenges the grant of specific performance and El Paso seeks to avoid the adjustments.

In September 1969, Western purchased an 8.08 acre tract in Farmington, New Mexico, containing the four-story Petroleum Plaza Building. At that time El Paso occupied all of the third and half of the fourth floors. Western and El Paso then began negotiating a long-term lease, and in December they signed a five-year lease to begin January 1, 1970, with El Paso having the right to renew the lease for two additional five-year periods. This case focuses on Section VI of the lease, which gives El Paso an option to purchase the building at the end of the first five-year period:

"VI. OPTION TO PURCHASE

Section 6.1 Lessor hereby grants unto Lessee the exclusive right and option to purchase all right, title and interest in and to Petroleum Club Plaza Building comprising 8.08 acres of land, more or less, and all appurtenances, facilities, equipment and hereditaments thereunto belonging subject to attorney's title opinion showing good and merchantable fee simple title to the premises in Lessor for a total consideration of $850,000.00 in cash; provided, however, this option shall be effective during a one hundred twenty (120) day period following the expiration of the initial term of this Lease. In the event Lessee exercises this option to purchase, this Lease shall terminate as of the date title vests in Lessee."

In October 1974, El Paso renewed the lease for a second five-year period. On February 27, 1975, it gave Western written notice that it was exercising the purchase option. Western responded on March 31, 1975, stating that it would not convey the property because it believed that El Paso, by renewing the lease, had waived its right to exercise the purchase option. El Paso then brought this action for specific performance.

The case was tried to the court, sitting without a jury. The court referred to a special master several issues such as the value of improvements Western had made to the building during the lease period, the amount of rents and profits that had accrued to Western after El Paso had attempted to exercise the purchase option, and the identity of the fixtures to be conveyed with the building. In granting specific performance, the court adopted the special master's findings, which included the award to Western of 81/2% interest from March 1, 1975, the approximate date El Paso stated it was exercising the option. However, the court ordered Western to convey only the building, the parking lot, and a small surrounding strip of land-less than four of the 8.08 acres. The court concluded as a matter of law that the option did not include the entire 8.08 acre tract. El Paso appealed this finding, and we reversed, holding that the lease agreement did not support the trial court's interpretation. El Paso Natural Gas Co. v. Western Bldg. Assoc., 599 F.2d 927, 929 (10th Cir. 1979). In that appeal El Paso also challenged the adjustments the court had made in the purchase price, but we reasoned that the court's resolution of those issues may have been tied to its conclusion that Western need convey only approximately four acres. Therefore, rather than determining the propriety of those adjustments or addressing the contentions Western raised in its cross-appeal, we remanded the entire case for further consideration.

After rehearing the trial court ordered Western to convey the entire 8.08 acre tract. On this second appeal Western renews its contention that El Paso should be denied the remedy of specific performance; alternatively, that the trial court should have limited specific performance, as it initially did, to the building, the parking lot, and the area immediately surrounding the building. El Paso's cross-appeal questions two adjustments, claiming, first, that it should not have to pay the cost of improvements Western had made in the building since Western had recouped its costs through additional rents generated by the improvements; and, second, that Western was not entitled to 81/2% interest on the purchase price, and instead was entitled either to no interest because Western had wrongfully refused to convey, or interest at New Mexico's statutory rate of 6%. ¹ Western also argues the trial court acted improperly in cancelling, as a fraud and a sham, a fifty-year lease on approximately four of the 8.08 acres that Western had entered into on December 20, 1974, with a company controlled by one of Western's partners.

I Specific Performance

Western contends that the trial court should not have granted specific performance to El Paso because (1) on remand the trial court found that the parties did not intend the option provision to be exercised unless Western dissolved, became bankrupt, or mismanaged the building, none of which occurred; (2) in purporting to exercise the option, El Paso improperly added new terms to it; (3) El Paso never tendered the $850,000 purchase price within the option period; and (4) the parties had not foreseen the tremendous increase in the building's value that occurred between the lease date and the option date. Additionally, Western contends that if specific performance was proper, it should have been limited, as the trial court initially did, to the building, the parking lot, and the land within a reasonable perimeter, less than four acres, rather than the entire 8.08 acres, for the reason that "Building comprising 8.08 acres" is an ambiguous description to be construed against the draftsman, El Paso.

According to Western, George Vance, the building manager of the El Paso subsidiary responsible for supervising El Paso's office facilities, told Western partners on several occasions that El Paso would never exercise the purchase option unless Western dissolved, became bankrupt, or failed to provide adequate service. Western alleges that it relied on Vance's representations when it made improvements to the building, and that the representations both modified the purchase option clause and make it inequitable to grant specific performance.

In its first opinion the trial court found that Vance never made any such representations and that El Paso had an unconditional right to exercise the purchase option. In its opinion after the rehearing on remand, the trial court incorporated the earlier findings unless they conflicted with its new findings. While Vance's representations were not an issue on remand, Western argues the trial court's findings in the second opinion are inconsistent on this issue with those in the earlier opinion and that the trial court has now found that the option provision was not to be exercised unless one of three conditions occurred: Western's dissolution, bankruptcy, or mismanagement. In support Western points to the court's new finding of fact no. 18, which states that the "original purpose (of the option clause) was to protect the lessee, EPNG, from the lessor's mismanagement of the property or failure to maintain the property not leased to the lessee, EPNG." Additionally, Western points to the court's statement in its memorandum opinion that "notwithstanding (the option clause's) original purpose" El Paso exercised the option because land values in Farmington increased dramatically during the lease period.

However, Western confuses the purpose of the option clause with conditions placed on its exercise. El Paso may have sought the option clause for the reasons stated by Western-fear of dissolution, bankruptcy, or mismanagement-but it did not limit exercise of the option to occurrence of one of those three conditions. The court's finding of a limited purpose for the option clause is consistent with its finding that El Paso had an unconditional right to exercise the option. ²

Western's second argument against specific performance is that El Paso did not properly exercise the option and that the trial court was wrong in its conclusion to the contrary. For an option to be exercised, New Mexico requires an "unequivocal and unqualified" expression of intention to do so. See, e.g., Skarda v. Davis, 83 N.M. 342, 491 P.2d 1153, 1157 (1971). Western notes that El Paso's letter of February 27, 1975 purports to exercise the option, but says El Paso will "tender its consideration upon Western Building's tender of an attorney's title opinion." ³ The option clause states that El Paso has the right to purchase the property "subject to attorney's title opinion showing good and merchantable fee simple title," but the option does not specify who is to pay for the title opinion. Western argues that requiring Western to tender the title opinion was only a qualified acceptance of the purchase option. However even if we were to agree, the trial court found that three weeks later, which was still within the time permitted for exercise of the...