Shopping Centers of America, Inc. v. Standard Growth Properties, Inc. , 265 Or. 405 ( 1972 )

498 P.2d 781 (1972)

SHOPPING CENTERS OF AMERICA, Inc., a Corporation, Respondent,
v.
STANDARD GROWTH PROPERTIES, Inc., a Corporation, Appellant.

Supreme Court of Oregon, In Banc.

Argued and Submitted May 8, 1972. Decided July 13, 1972.

John R. Faust, Jr., Portland, argued the cause for appellant. With him on the briefs were Cake, Jaureguy, Hardy, Buttler & McEwen, Portland.

Francis E. Marsh, McMinnville, and David C. Haugeberg, McMinnville, argued the cause for respondent. With them on the brief were Marsh, Marsh, Dashney & Cushing, McMinnville.

TONGUE, Justice.

This is a suit to rescind a contract for the sale of land purchased by plaintiff from defendant. Defendant appeals from a decree allowing rescission and other relief, but denying plaintiff's further demand for damages for increase in the value of the property. Plaintiff cross-appeals from the denial of such damages.

On November 28, 1969, plaintiff, a corporation engaged in land subdivision and development, contracted to purchase 827 acres of land in Yamhill county west of Carlton for $472,898 and as a down payment assigned to defendant another contract which, by its terms, would eventually pay $112,898.

Defendant corporation had previously prepared a printed advertising brochure describing the tract as "827 acres of rich farmland and recreational property" which "should be subdivided into 5-10 acre ranchettes which are in great demand in this area." By February 1970, however, after observing surface water on large portions of the tract, plaintiff decided that only 400 acres were suitable for subdivision. It also concluded, either then or subsequently, that the tract was nevertheless worth the contract price provided that 400 acres (later 307 acres) could be subdivided into smaller tracts and the remainder developed for duck ponds, quail and pheasant hunting, and other recreational purposes.

To accomplish that purpose its attorney then recommended that the land be developed under a condominium plan, with "unit deeds" to the property to be subdivided and with the remaining acreage to be held as "community property." In order to develop the land under such a plan, however, plaintiff's attorney also concluded that the Unit Ownership Law of Oregon, including ORS 91.530, would require that title to the entire tract be held either in fee simple or under lease and that this would make it necessary to modify the "acreage release" provision of the land sale contract. Under that contract provision defendant agreed to deliver warranty deeds for tracts of one or more acres only upon receiving $750 per acre from plaintiff in part payment of the contract balance. At that time, however, it was apparently contemplated by the parties that most of the 827 acre tract would be subdivided and no specific or different provisions were made for "acreage release" of title to remaining portions of the tract.

On February 16, 1970, plaintiff's attorney prepared a letter setting forth a proposal for a revised acreage release provision under which title to the property would be deeded in escrow by defendant to plaintiff in fee simple and the contract be converted into a security agreement, with a new payment schedule for release of defendant's interest. A meeting of attorneys and other representatives of both parties was then held to discuss the proposal. At that time, although it was agreed that the attorneys for both parties would review the proposal further, defendant's president stated that "It's all right with me, but it's subject to the approval of the board of directors and I will have to take it back to San Francisco and get the final approval there." No response was ever received, however, as to whether the proposal was acceptable or not.

Meanwhile, plaintiff proceeded with a series of meetings with the Yamhill County Planning Commission in an attempt to secure the necessary approval for the proposed subdivision. Representatives of defendant also appeared at these meetings upon behalf of plaintiff's position. Numerous problems were then encountered, including the problem of septic tanks and sewage disposal. Finally, on August 14, 1970, after much difficulty and effort, plaintiff was able to secure conditional approval of a plan for the subdivision of 307 acres of the tract upon the satisfaction of some further objections. Those conditions were then satisfied by plaintiff.

Plaintiff then requested defendant's approval of that plan and also again requested its approval of the proposed amendments to the lot release provisions of the purchase contract, stating that no sales could be made to the public until the lot release provision had been presented to and approved by the Oregon Real Estate Commissioner. Again, however, no response was received, despite repeated attempts by plaintiff. Finally, nine days before the first annual contract payment of $30,600 was due on November 28, 1970, plaintiff wrote a letter to defendant electing to rescind the contract, based upon the contention that defendant had misrepresented that the entire 827 acres could be subdivided; and that defendant had breached the contract by failing to "cooperate" by approving the plan for subdivision, including "a more feasible release provision," and by failing to deliver a title insurance policy, as required by the contract.

Plaintiff then filed a complaint alleging substantially the same contentions and praying for a decree rescinding the contract, for the refund of its down payment of $112,898 and for judgment in the sum of $437,823.73 (representing the down payment, payment for improvements, and the alleged increase in the value of the tract). The trial court found that plaintiff had not proved misrepresentation or fraud, but had proved a breach of contract, and entered a decree rescinding the contract, requiring the "return to the plaintiff" of "the down payment of $112,898.00" and entering judgment against defendant for various expenses which are not in controversy. The trial court did not, however, allow plaintiff's claim of $250,000 for increase in the value of the property.

Defendant contends on this appeal that the court erred in finding that defendant's conduct was a breach of contract because (1) the "approval clause was incapable of breach by defendant," (2) "delay in acting on the subdivision for approval" was not "shown to be a material breach, justifying rescission," and (3) "defendant's refusal to respond to a request [for] a modification of the contract cannot constitute a breach * * *."

Neither party, in the short briefs submitted by them, has cited any cases or other authorities which directly decide or discuss the legal problems arising from these contentions, as applied to facts similar as those involved in this case, other than general authorities cited by defendant to the effect that the law looks with disfavor upon the unilateral termination of contracts and that rescission is not warranted for breach of contract unless the breach is so substantial as to defeat and frustrate the objects and ends which the contract was designed to serve.^[1] For this reason, and because the decision of this case is controlled by its particular facts, we also deem it unnecessary to cite or discuss further cases or other legal authorities.

We agree that under ordinary circumstances the failure or refusal of one party to a contract to respond to a request by the other party for a modification of its terms cannot constitute a breach of the contract.

In this case, however, plaintiff contends that at the time of the original contract the parties were "in error as to the way the property could be developed." This "error" resulted from the fact that both parties apparently assumed at that time that at least 750 acres of the 827 acres could be subdivided in tracts, whereas it later developed that only 307 acres could be subdivided. Plaintiff also contends that the original lot release provision, which was entered into upon the assumption that at least 750 acres could be subdivided, "became unworkable" when it developed that only 307 acres could be subdivided. Thus, plaintiff contends that the contract was rescindable because "the contract was thereby made impossible to perform as represented by defendant and agreed upon by both parties unless modifications could be made in the amount of land to be subdivided and a workable lot release agreement entered into that could obtain the approval of the Real Estate Commissioner."

Defendant does not deny that the original lot release provision became "unworkable" when it later developed that only 307 acres could be subdivided, except to contend that plaintiff did not prove that the lot release provision would not have been approved by the Real Estate Commissioner. Neither does defendant concede that the original contract, including the lot release provision, became "impossible to perform."

It was conceded by both parties on oral argument, however, that a mutual mistake existed at the time of the execution of this contract in that both parties then assumed and understood that most of the entire tract of 827 acres could be subdivided when, in fact, more than one half of the tract was so low that it was not suitable for subdivision and the county authorities would approve the subdivision of only 307 acres.

Accordingly, upon discovery of that mistake in February 1970, plaintiff would have been entitled to rescind the contract at that time upon the ground of mutual mistake, even under the authorities cited by defendant, provided that the mistake was so material as to frustrate or defeat the purposes of the contract.

Defendant says that there was no "showing" that its withholding of approval frustrated the purposes of this contract and that "there was no showing that the lot release plan executed and in force would not have been approved by the [Real Estate] Commissioner" (presumably under a proposal for condominium development under the Unit Ownership Law of Oregon, including ORS 91.530), but that "the only showing was that the plan executed was not satisfactory to plaintiff."

This, however, is a suit in equity and upon a de novo consideration of the entire record we agree with plaintiff's contention that the original lot release provision, under which defendant would deliver warranty deeds to plaintiff conveying title to tracts of one or more acres only upon payment of $750 per acre, while practical upon the assumption that 750 acres of the 827 acres of the tract could be subdivided and sold in separate parcels, was "unworkable" in its operation and application, as a practical matter, when it subsequently developed that only 307 acres could be subdivided and sold in separate parcels. In our judgment, the mutual mistake relating to the acreage which could be subdivided, when considered in the light of this lot release provision, so frustrated the purposes of the contract for the subdivision and development of the tract as to justify a rescission of the contract. Indeed, as held in Mohr v. Lear, 239 Or. 41, 395 P.2d 117 (1964), one of the breach of contract cases cited by defendant, at pp. 49-50, 395 P.2d at p. 121:

"The power of an equity court to cancel an instrument is discretionary: it is not one of absolute right, but rests in the discretion of the court, to be exercised in accordance with what is equitable and just under the circumstances. Reynolds v. Janzen, 232 Or. 548, 376 P.2d 415; 3 Black, Rescission and Cancellation, (2nd Ed., 1929) § 644, p. 1556; 9 Am.Jur., Cancellation of Instruments, p. 353, § 5. The question generally presents itself: May the contract be maintained or have the ends it was designed to subserve been effectively frustrated? This question is one of degree; no mechanical formula can consistently be applied with satisfaction or success. * * *"

It follows, in our judgment, that because of this mutual mistake of the parties, plaintiff was entitled upon discovery of that mistake in February 1970, to rescind the contract unless defendant would agree to some modification of its original lot release provision. The fact that plaintiff continued its efforts to secure defendant's approval of such a modification over a period of several months does not mean that plaintiff was not still entitled to a rescission of the contract in November 1970, after all such efforts had failed. Indeed, defendant makes no contention that plaintiff's right to rescind the contract was barred by failure to act more promptly (as distinguished from defendant's delay in responding). It follows, in our opinion, that the trial court did not err in entering a decree rescinding this land purchase contract.^[2]

Defendant points out that plaintiff did not rely upon a theory of mutual mistake at the time of trial, but proceeded instead upon theories of misrepresentation and breach of contract. It is also true that the trial court based its decision upon a finding that defendant had breached the contract. The question of mistake was discussed by the parties, however, both in their briefs and in oral argument before this court. Indeed, it was conceded at that time that in entering into this contract both parties were acting under the mutual mistake that most of the 827 acre tract could be subdivided and sold in 5-10 acre "ranchettes." It also appears in this case, in which plaintiff did not plead mutual mistake, but did plead the somewhat closely related theory of misrepresentation, that the record is also complete on the issue of mutual mistake, even though not specifically pleaded as such. Cf. Hanscom v. Irwin, 186 Or. 541, 558-559, 208 P.2d 330 (1946).^[3]

For all of these reasons, and upon a de novo review of the entire record, we hold that plaintiff was entitled to a rescission of the contract.

Defendant also assigns as error the failure of the trial court to "restor(e) the parties to their previous position" in that the decree ordered defendant to "return to the plaintiff the down payment in the sum of $112,898.00." Thus, defendant points out that the down payment was not paid by plaintiff in cash, but by the assignment to defendant of another contract which would eventually pay that amount, and only after a contract payment by defendant of over $75,000.

At the time of trial plaintiff stipulated that "if we get the contract back, why, they get that $75,000 plus whatever paid [in interest]." Plaintiff contends, however, that there was no evidence "that defendant still owned the contract" so as to be able to return it to plaintiff.

Under these circumstances, we hold that the decree of the trial court should be modified so as to provide, in the alternative, that defendant shall reassign that contract to plaintiff if it is able to do so within such reasonable time as may be fixed by the trial court and, if not, that defendant shall pay to plaintiff the sum of $112,898. The decree should also provide that, in either event, defendant is entitled to credit for such payments of principal and interest as may have been made by it under that contract.

Defendant's final assignment of error is that the trial court erred in denying its cross-complaint for foreclosure of the land sale contract because of plaintiff's failure to pay the first annual payment on that contract. Since, however, we have held that the trial court did not err in rescinding the contract, it follows that defendant was not entitled to foreclose it.

Plaintiff, by cross-appeal, contends that the trial court erred in not restoring the "status quo" by awarding plaintiff "compensation" in the sum of $250,000 as "the value by which the property was enhanced due to plaintiff's efforts resulting in subdivision approval." In support of that contention plaintiff cites authorities for the proposition that in a suit for rescission of a land sale contract the court may decree an allowance for the value of any permanent and valuable improvements placed upon the land by the vendee.

In this case, however, plaintiff does not seek compensation for any permanent improvements placed upon the land by it. Moreover, as pointed out by defendant, any "enhanced value" based upon the securing of subdivision approval by a county planning commission may perhaps be "lost at the stroke of an administrator's pen" and, in any event, can hardly be considered to be a "permanent improvement" of the land. Indeed, plaintiff also sought (and was awarded) reimbursement for expenses incurred by it in such improvements. Under the circumstances of this case the trial court did not err in denying plaintiff's claim for an additional $250,000 for enhanced value of the land as the result of plaintiff's efforts in obtaining subdivision approval.

The decree of the trial court is affirmed, as modified, with costs to neither party, and the case is remanded for further proceedings consistent with this opinion.

NOTES

[1] Bollenback v. Continental Casualty Co., 243 Or. 498, 506, 414 P.2d 802 (1966); Mohr v. Lear, 239 Or. 41, 49, 395 P.2d 117 (1964); Restatement of Contracts § 276.

[2] Similarly, the fact that the tract may have been worth the full contract price even if only 307 acres could be subdivided does not require a different result under the facts of this case because we are convinced that, as a practical matter, the lot release provision made such a subdivision impractical unless that provision was modified in some manner.

[3] Defendant also contends that the contract provision in question was "incapable of breach by defendant" because plaintiff could have proceeded with performance without approval by defendant on the theory that defendant, by failing and refusing to answer plaintiff's letters, had waived the contract provision requiring its approval of plans for development of the tract.

The effect of defendant's contention would be to put plaintiff in the position of proceeding at its risk with the development of the property under a plan which defendant had not approved and to accept the possibility that if plaintiff was wrong in assuming a waiver by defendant, the entire purchase contract could be foreclosed by defendant for such a breach by plaintiff. There may have been sufficient evidence of such a waiver of defendant's right to approve the plot plan for development of the 307 acres, as submitted by plaintiff for approval on August 14, 1970, and October 8, 1970. There was no evidence, however, that defendant had waived its right to approve plaintiff's proposed amendment of the acreage release provision of the contract. Indeed, the evidence is to the contrary. Moreover, even after plaintiff elected to rescind, defendant informed plaintiff that it would not approve "your proposed * * * development plan," but would perform the original "lot release program."