Shepherd v. Davis

• Decision Date: 10 January 2003
• Docket Number: Record No. 020188,Record No. 020189.
• Citation: 574 S.E.2d 514,265 Va. 108
• Parties: William R. SHEPHERD, Jr., v. Richard F. DAVIS, et al. John T. Henning, et al., v. Richard F. Davis, et al.
• Court: Virginia Supreme Court

574 S.E.2d 514

265 Va. 108

William R. SHEPHERD, Jr., v. Richard F. DAVIS, et al.

John T. Henning, et al., v. Richard F. Davis, et al.

Record Nos. 020188, 020189.

Supreme Court of Virginia.

January 10, 2003.

Stephen G. Test (Megan E. Burns; Williams Mullen, on briefs), Virginia Beach, for appellant (Record No. 020188).

Joseph R. Mayes; Jonathan L. Hauser (Carl W. Isbrandtsen; Wolcott, Rivers, Wheary, Basnight & Kelly; Troutman Sanders, on brief), Virginia Beach, for appellees (Record No. 020188).

Jonathan L. Hauser (Carl W. Isbrandtsen, Virginia Beach; Troutman Sanders, on briefs), for appellants (Record No. 020189).

Joseph R. Mayes (Wolcott, Rivers, Wheary, Basnight & Kelly, on brief), Virginia Beach, for appellees (Record No. 020189).

Present: All the Justices.

Opinion by Justice CYNTHIA D. KINSER.

These consolidated appeals concern a parcel of real estate that is subject to a lease agreement granting the lessee both a fixed-price option to purchase the tract of real estate and a right of first refusal. Such provisions are generally referred to as a "dual option." One of the issues presented in this appeal concerns the interplay between those two provisions when a third party offered to purchase the subject property and the lessee failed to exercise the right of first refusal, attempting instead to invoke the fixed-price option. Additional questions are whether the third-party offeror was entitled to specific performance and, if not, what amount of damages was appropriate. Because we find no error in the chancellor's decrees holding that the lessee forfeited his contractual rights by failing to exercise the right of first refusal, and awarding only nominal damages to the third-party offeror, we will affirm those decrees.

I. MATERIAL FACTS AND PROCEEDINGS

Richard F. and Amelia D. Davis (the Davises) entered into a contract with George J. Parker (Parker or the Parker Estate) in 1981 to purchase a parcel of real estate located a short distance south of Virginia Beach Boulevard in the City of Virginia Beach. Under the terms of the purchase contract and a separate indenture agreement between the parties, the Davises would receive title to the property upon payment in full of the deferred purchase price. The final amortized payment was not due until April 2015.¹ Notably, the purchase contract contained neither an acceleration clause nor a provision allowing prepayment of the purchase price. The contract also prohibited the Davises from conveying their interests in the real estate or assigning the purchase contract without the prior consent of Parker, but provided that they could, with Parker's consent, assign their interests in the contract to "an assignee of adequate financial capability."

In July 1993, the Davises leased this same parcel of real estate to William R. Shepherd, Jr. (Shepherd), for an initial term of five years. The lease agreement contained provisions granting Shepherd both a fixed-price option to purchase and a right of first refusal.² This dual option pertained not only to the leased parcel of real estate (referred to as "Parcel 1" in the lease agreement), but also to an adjacent parcel of real estate owned by the Davises (referred to as "Parcel 2" in the lease agreement) (collectively designated the "Property"). The relevant sections of the lease creating the dual option state the following:

23. OPTION TO PURCHASE AND RIGHT OF FIRST REFUSAL

23.1. Option. Upon compliance with the provisions of this Section 23, Tenant shall have the sole and exclusive Option to purchase the Property pursuant to the terms of this Agreement for the continuous period of time commencing on the Commencement Date and ending on the date the lease terminates. If the Option is properly and timely exercised, as provided in this Agreement, a contract shall then exist between Landlord and Tenant pursuant to which Landlord agrees to sell and Tenant agrees to buy the Property upon the terms and conditions specified in this Section 23.

23.2. Exercise of Option. The Option may be exercised, subject to the terms of paragraph 23.8, by Tenant at any time prior to the expiration of the Lease, which shall be midnight of the last day this lease is in effect. Tenant shall exercise the Option by sending written notice to Landlord prior to the expiration date of the Option specifying Tenant's desire to exercise the Option.

23.3. Purchase Price. The purchase price ("Purchase Price") to be paid by Tenant to Landlord for the Property shall be ONE HUNDRED FIFTY THOSAND AND NO/100 DOLLARS ($150,-000.00)[.]

23.4. Title. Landlord shall convey to Tenant, at Closing, good, indefeasible and marketable title to the Property, free and clear of all liens, encumbrances and easements, other than those to which the Tenant fails to object .

... If Landlord is unwilling or unable to correct such objections within [thirty days,] Tenant shall have the option of taking such title as Landlord can give without abatement of the Purchase Price, or terminating this Agreement[.]

* * * * * *

23.11. Right of First Refusal. Notwithstanding anything contained in this Agreement to the contrary, if Landlord shall receive from a third party ("Offeror") a bona fide written offer to purchase the Property, or any part of it, Landlord shall send to Tenant a copy of the proposed offer ("Offer"), with notification that Landlord intends to accept the Offer. Tenant shall have the right within ten (10) days thereafter to exercise the Option to purchase the Property, or such part of it described in the Offer, pursuant to the terms and conditions contained in the Offer. If Tenant does not elect to purchase the Property or such part of it described in the Offer, within such five (5) day period, Landlord may sell the Property or the part described in the Offer to the Offeror. If Landlord does not sell the Property or any part of it, according to the Offer, then Tenant's right of first refusal shall remain in full force.

Almost five years later, in March 1998, John T. Henning and David J. Cross (Henning/Cross), who jointly owned a parcel of real estate adjoining the Property to the west, offered to buy the Property for $175,000. As specified in the ensuing agreement between Henning/Cross and the Davises, the purchase of the Property was contingent upon vacation of the lot line between the Property and the Henning/Cross parcel. The terms of the agreement also acknowledged that Shepherd had an option to purchase and a right of first refusal with respect to the Property. Accordingly, the Davises, through their attorney, transmitted the Henning/Cross offer (the "Offer") to Shepherd in accordance with the requirements of Paragraph 23.11 of their lease with Shepherd. Shepherd elected not to exercise his right of first refusal because the terms of the Offer were not acceptable to him. Instead, he attempted to exercise his fixedprice option to purchase the Property.

Despite repeated demands from both Shepherd and Henning/Cross, the Davises refused to close on either agreement.³ Consequently, Shepherd and Henning/Cross filed separate bills of complaint for specific performance of their respective agreements with the Davises. The Davises defended both suits on the basis that it was impossible for them to perform under the terms of either agreement because, pursuant to their purchase contract with Parker, they did not yet own marketable title to Parcel 1.

The matters were consolidated and referred to a commissioner in chancery for presentation of evidence and the submission of a report to a chancellor. The issues before the commissioner were: (1) whether Shepherd could purchase the Property pursuant to his fixed-price option or whether, having failed to exercise his right of first refusal, Shepherd lost that option; (2) whether Henning/Cross were entitled to specific performance of their agreement with the Davises; (3) whether the Davises were excused from fulfilling their obligations under either agreement based on the defense of impossibility; (4) whether the Davises' rights under the purchase contract with Parker could be assigned; and (5) whether either Shepherd or Henning/Cross were entitled to damages and an award of attorney fees, and if so, in what amounts.

After hearing evidence, the commissioner issued his report, finding that the "first refusal clause [was] obviously intended to override the option clause, since it [began] with the language `[n]otwithstanding anything contained in this Agreement to the contrary. . . ." Concluding that the Henning/Cross Offer to purchase the Property was a "`bona fide offer'" not made for any improper purpose, the commissioner determined that "Shepherd was required to respond to the right of first refusal, and was not entitled to ignore it by preferring the option."⁴

The Commissioner further concluded that, although the Henning/Cross agreement was "valid and facially enforceable" and had been breached by the Davises, the agreement could not be specifically enforced because it was presently impossible for the Davises to convey marketable title. Their purchase contract with Parker did not contain an acceleration clause or provision allowing prepayment of the purchase price. Nor did it allow an assignment of the Davises' interests without Parker's consent, and there was no evidence of such consent. Thus, the commissioner declined to recommend an assignment of the Davises' interests under their purchase contract with Parker.

However, the commissioner stated that "while impossibility is a defense to specific performance, it is no defense to liability for contractual damages." Consequently, the commissioner recommended an award of damages in the amount of $376,430 to Henning/Cross as well as attorney fees and costs. The commissioner also recommended a reimbursement of certain sums paid by Shepherd to the Davises in his attempt to exercise his fixed-price purchase option and to protect his position.

All the parties filed exceptions to...