Kutkowski v. Princeville Prince Golf Course, LLC. , 129 Haw. 350 ( 2013 )

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Electronically Filed
Supreme Court
SCWC-28826
14-MAY-2013
10:47 AM
IN THE SUPREME COURT OF THE STATE OF HAWAI#I
---o0o---
________________________________________________________________
ROBERT KUTKOWSKI,
Petitioner/Plaintiff-Appellant/Plaintiff-Cross-Appellee,
vs.
PRINCEVILLE PRINCE GOLF COURSE, LLC, a Delware Limited Liability
Company, Respondent/Defendant-Appellee/Defendant-Cross-Appellant,
and DOE CORPORATIONS 1-5, DOE LIMITED LIABILITY COMPANIES 1-5,
DOE PARTNERSHIPS 1-5, DOE ENTITIES 1-5, JOHN DOES 1-5, AND JANE
DOES 1-5, Defendants.
________________________________________________________________
SCWC-28826
CERTIORARI TO THE INTERMEDIATE COURT OF APPEALS
(ICA NO. 28826; CIV. NO. 05-1-0004)
May 14, 2013
NAKAYAMA, ACOBA, AND MCKENNA, JJ.,
AND CIRCUIT COURT JUDGE NAKASONE, ASSIGNED BY REASON OF VACANCY;
WITH RECKTENWALD, C.J., CONCURRING AND DISSENTING SEPARATELY
OPINION OF THE COURT BY MCKENNA, J.
I. Introduction
At issue in this appeal is whether the sale of an undivided
parcel of real property triggered a lessee’s right of first
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refusal to purchase a small part of that property. Based on the
specific circumstances of this case, we hold that it did. We
therefore reverse the ICA’s judgment on appeal and remand this
case to the Circuit Court of the Fifth Circuit (“circuit court”)
for further proceedings consistent with this opinion.
II. Background
A. Factual Background
None of the material facts in this case are genuinely
disputed. At issue in this case is a half-acre parcel of land
with a house located on Anini Road on Kauai (sometimes “the
Property”). The Property is part of an undivided 1040-acre
parcel (sometimes “Master Parcel”) now owned by Princeville
Prince Golf Course, LLC (“PPGC”). In 1971, Kutkowski began
subleasing the Property from John Kai. When Kai died, Kutkowski
continued leasing the Property from Kai’s brother, until
Kutkowski himself became a direct lessee of Princeville
Development Corporation under a five-year Agricultural Lease
dated November 1, 1984. There was no option to purchase in the
original Agricultural Lease.
After several renewals of the Agricultural Lease, Kutkowski
and Princeville Corporation1 entered into a License Agreement,
dated August 23, 1998, effective from May 1, 1998 to and
1
It is unclear from the record, but it appears that Princeville
Corporation is a successor to Princeville Development Corporation.
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including April 30, 2003. It included the following “Option to
Purchase” in Paragraph 2:
Licensor [Princeville Corporation] expressly reserves
the right to sell the licensed premises during the term of
this license and to place such signs and notices on or about
the premises for such purpose, subject only to the rights of
the Licensee [the Kutkowskis] contained herein. In the
event Licensor decides to sell the premises, it shall be
first offered to Licensee on terms and conditions provided
by Licensor; PROVIDED, HOWEVER, that Licensee shall have at
all times faithfully and punctually performed all of the
covenants and conditions of this agreement on the part of
Licensee to be performed. Licensee shall have sixty (60)
days to accept the Licensor’s offer or make a counter offer,
PROIVDED [sic], HOWEVER, that if no sales contract is
executed within one hundred twenty (120) days after
Licensor’s initial offer, (1) Licensor shall be free to
offer the premises for sale to the general public and (2)
this license agreement shall be automatically amended with
occupancy to continue on a month to month term. Should the
premises be thereafter sold during the term of the month to
month license, Licensor shall give Licensee forty-five (45)
days prior notice of termination of this license, upon which
Licensee shall relinquish all rights hereunder.
(Emphasis added).
The License Agreement also contained the following provision
entitled “Effect of Licensee’s holding over” in Paragraph 22,
which stated:
Any holding over after the expiration of the term of
this agreement, with consent of Licensor, shall be construed
to be a license from month to month, at the same rate as
required to be paid by Licensee for the period immediately
prior to the expiration of the term hereof, and shall
otherwise be on the terms and conditions herein specified,
so far as applicable.
A proposed sale of the Master Parcel from Princeville
Corporation to PPGC was initiated on July 14, 2004. By letter
dated September 6, 2004, Princeville Corporation proposed an
elimination of Kutkowski’s option to purchase the Property and
enclosed a draft amendment to the License Agreement. Kutkowski
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did not sign it. Rather, in a letter, dated October 25, 2004,
Kutkowski offered Princeville Corporation $250,000 for the
Property, which was rejected. The sale closed on March 17, 2005.
Kutkowski’s son remains on the Property. Kutkowski has
continued to pay rent to PPGC, and PPGC has accepted the rental
payments.
B. Procedural Background
On January 10, 2005, Kutkowski filed a Complaint against
Princeville Corporation, praying for specific performance of
Paragraph 2 of the License Agreement. Kutkowski also filed a
Notice of Pendency of Action over the Property. Under the terms
of the March 17, 2005 sale, PPGC and Princeville Corporation
entered into an Assumption Agreement, under which PPGC accepted
the grant and transfer from Princeville Corporation of, inter
alia, the License Agreement and Kutkowski’s claim for specific
performance. Thereafter, on August 3, 2005, Kutkowski and
Princeville Corporation filed a stipulation substituting PPGC as
the defendant for Princeville Corporation. PPGC then
counterclaimed, seeking declarations that (1) the license
agreement was ineffective in conveying to Kutkowski any rights in
the Property, and, in the alternative, (2) that the option to
purchase clause (if it ever was effective) expired by its own
terms on April 30, 2003.
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The parties brought cross motions for summary judgment.
Preliminarily, Kutkowski and PPGC agreed that the “option to
purchase” contained in the License Agreement was really a “right
of first refusal” (“ROFR”).2 Kutkowski and PPGC disagreed,
however, over two issues, which each acknowledged were issues of
first impression in Hawai‘i, and which each acknowledged produced
a split in authority in other jurisdictions: first, whether the
ROFR survived into the holdover period, and, if it did, whether
the sale of the Master Parcel triggered the ROFR over the
Property.
As to the first issue, Kutkowski and PPGC each relied on the
plain language of Paragraphs 2 and 22 in the License Agreement to
argue, respectively, that the ROFR did and did not survive past
the April 30, 2003 end date of the License Agreement. Neither
contends that Paragraphs 2 and 22 are ambiguous, although each
provided parol evidence (in case the circuit court found the
provisions to be ambiguous) tending to support each’s position.
2
An “option to purchase real property” is a “contract by which an owner
of realty enters an agreement with another allowing the latter to buy the
property at a specified price within a specified time, or within a reasonable
time in the future, but without imposing an obligation to purchase upon the
person to whom it is given.” Black’s Law Dictionary at 1204 (9th Ed. 2009).
A “right of first refusal” is a “potential buyer’s contractual right to meet
the terms of a third party’s higher offer.” Black’s Law Dictionary at 1439
(9th Ed. 2009). Although the Black’s Law Dictionary definition of “right of
first refusal” includes a common condition precedent (“a third party’s higher
offer”), which the Dissent also quotes Corbin on Contracts for, the plain
language of the instant ROFR included no such condition. See
Concurrence/Dissent at 4. Instead, it conditioned sale on “terms and
conditions provided by the Licensor,” not terms and conditions set by a third
party’s offer.
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In addition to the plain language arguments, Kutkowski and PPGC
each marshaled case law from other states and federal courts in
support of each’s position.
As to the second issue, Kutkowski and PPGC disagreed that
the sale of the Master Parcel triggered Kutkowski’s ROFR over the
Property. PPGC argued that even if the ROFR had survived into
the holdover period, Kutkowski could not exercise the right.
PPGC also argued the ROFR extended only to the Property, not the
entire Master Parcel, and the Property was never offered for
sale; therefore, the ROFR was never triggered.
Kutkowski, on the other hand, argued that a lessor may not
preemptively defeat a lessee’s ROFR over a smaller parcel by
selling a larger parcel that contains the smaller parcel.
Kutkowski argued the remedy in those instances is specific
performance.
Further, PPGC argued that the sale of the Property was
conditioned upon (a) a county-approved subdivision plan carving
out the Property, and (b) PPGC’s decision to sell the Property.
PPGC also argued the ROFR was void and unenforceable because it
was legally impossible to perform the terms of the ROFR in an
area zoned for five-acre minimum lot size. Kutkowski, on the
other hand, argued that it was not legally impossible for PPGC to
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carve out Kutkowski’s Property under the Kauai County Code, just
burdensome, suggesting a variance was possible.
In conclusion, PPGC requested that the circuit court enter
an order dismissing Kutkowski’s claims, declare that Kutkowski’s
ROFR did not survive into the holdover period (as requested in
PPGC’s Counterclaim), and expunge Kutkowski’s Notice of Pendency
of Action. Kutkowski, on the other hand, requested that the
circuit court declare that the ROFR was enforceable and order
specific performance of its terms.
The circuit court3 ruled on June 1, 2007. As to the first
issue, it denied PPGC’s counterclaim for a declaration that the
ROFR did not survive into the holdover period, stating “that
pursuant to paragraph 22 of the License Agreement, the first
right of refusal continues during the period of time Kutkowski
holds over under a month to month tenancy.” As to the second
issue, the circuit court dismissed Kutkowski’s claim for specific
performance under the First Amended Complaint, stating:
[T]he sale of the one thousand forty (1040) acre parcel of
land identified by TMK (4) 5-3-06-014 by Princeville
Corporation to [PPGC] did not constitute a decision to sell
the premises described in the License Agreement (the
“Premises”), and, therefore, the first right of refusal
granted thereby was not triggered by that event.
The circuit court subsequently entered final judgment,
Kutkowski timely appealed, and PPGC timely cross-appealed.
According to the parties, a separate ejectment action initiated
3
The Honorable Kathleen N. A. Watanabe presided.
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by PPGC against Kutkowski has been stayed pending the outcome of
this appeal.
C. ICA Appeal
On appeal, Kutkowski raised as his sole Point of Error the
following: “The Circuit Court erred when it denied equitable
relief to Kutkowski because it held that the sale of the Master
Parcel did not constitute a ‘decision to sell’ the Premises which
would trigger Kutkowski’s right of first refusal under paragraph
2 of the Agreement.” Kutkowski also argued that PPGC’s attempt
to eliminate Kutkowski’s ROFR via a proposed amendment to the
License Agreement evidenced PPGC’s “wrongful intent” to defeat
Kutkowski’s ROFR. Therefore, he requested that specific
performance be ordered and that the circuit court determine the
fair market value of the half-acre parcel. In the alternative,
he requested that the sale to PPGC be enjoined or cancelled and
the entire property reconveyed.
In its Answering Brief, PPGC pointed out that the “wrongful
intent” argument was raised for the first time on appeal. PPGC
argued that Kutkowski needed a “reality check,” as the sale of
the Master Parcel was not wrongfully intended to frustrate the
ROFR over a half-acre parcel. PPGC also pointed out that
Kutkowski requested fair market valuation, an injunction, or a
cancellation of the sale to PPGC for the first time on appeal as
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well. The bottom line, to PPGC, was that at the trial level, the
focus was never on whether PPGC defeated Kutkowski’s ROFR and
what remedies should be available for the breach, but whether the
sale of the Master Parcel triggered the ROFR in the first place.
PPGC also argued that the ROFR provision was void because it is
illegal to offer to sell an unsubdivided parcel under the Kauai
Subdivision Ordinance.
PPGC also filed a cross-appeal challenging the circuit
court’s conclusion that the ROFR survived into the holdover
period.
The ICA issued a published opinion affirming the circuit
court. Kutkowski v. Princeville Prince Golf Course, LLC, 128
Hawai‘i 344, 364, 289 P.3d 980, 1000 (2012). As to the first
issue, a majority4 of the ICA first held that the ROFR survived
into the holdover period.5 128 Hawai‘i at 345, 289 P.3d at 981.
As to the second issue (whether the ROFR was triggered by the
sale of the Master Parcel), the ICA further held:
(4) [G]enerally, the desire to sell a large tract of land
may not be taken as a manifestation of the seller’s
intention or desire to sell a small, undivided[] parcel
contained within it, so as to convert a right of first
refusal on the smaller parcel into an exercisable option for
4
See 128 Hawai‘i at 364-66, 289 P.3d at 1000-02 (Ginoza, J., concurring).
5
PPGC did not file its own Application for Writ of Certiorari on the
holdover issue, but it did challenge the ICA majority’s analysis of the
holdover issue in its Response to Kutkowski’s Application for Writ of
Certiorari. We do not believe the ICA erred in its analysis of the holdover
issue under the facts of this case, so we decline to exercise plain error
review pursuant to Hawai#i Rules of Appellate Procedure Rule 40.1 to address
this issue.
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its purchase; (5) Kutkowski’s requested relief of specific
performance would require a wholesale reformation of the
parties’ agreement and, inter alia, require judicial
establishment of a price term, which would directly
contradict the bargained-for rights of the parties; (6)
Hawai‘i courts will not allow a property owner and a
purchaser to, in effect, destroy a bargained-for right of
first refusal before its expiration and, in many
circumstances, would order an injunction of a prospective
sale or the rescission and/or reconveyance of a completed
sale, in order to maintain the status quo, preserving a
lessee’s right of first refusal until its exercise, waiver,
or termination at the expiration of the lease; and (7) under
the circumstances of this case, including that the lessee
holding the right of first refusal did not seek to enjoin or
rescind the sale or a large undivided parcel of land that
neither triggered nor destroyed a right of first refusal
applicable to a small portion of that land, the requested
relief of specific performance of the right of first refusal
was properly denied.
128 Hawai‘i at 345-46, 289 P.3d at 981-82.
The ICA first rejected Kutkowski’s point of error that the
sale of the Master Parcel triggered his ROFR and that he was
entitled to specific performance, concluding that the License
Agreement’s reference to “the premises” in the ROFR provision
meant the half-acre parcel and not the 1040-acre parcel, and
there was no decision to sell just the half-acre parcel. 128
Hawai‘i at 359, 289 P.3d at 995. The ICA then noted that the
cases Kutkowski cited in support reflected the minority view.
128 Hawai‘i at 360, 289 P.3d at 996 (citing Wilber Lime Products,
Inc. v. Ahrndt, 673 N.W.2d 339 (Wis.Ct.App. 2003); Brenner v.
Duncan, 27 N.W.2d 329 (Mich. 1947); Berry-Iverson Co. v. Johnson,
242 N.W.2d 126 (N.D. 1976); and Pantry Pride Enters., Inc. v.
Stop & Shop Cos., 806 F.2d 1227 (4th Cir. 1986)). The ICA then
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adopted the majority view, reflected in the cases cited by PPGC,
for the following statement of law:
[T]he holder of the option of first refusal on a portion
only of a larger tract may not obtain specific performance
of his option so as to require conveyance to him of the
whole property the owner desires to sell[.] Nor may the
property owner, by an acceptance of an offer to sell the
whole, be compelled by judicial decree to dispose of the
optioned part separately from the property as a whole. An
attempt to sell the whole may not be taken as a
manifestation of an intention or desire on the part of the
owner to sell the smaller optioned part so as to give the
optionee the right to purchase the same[.]
128 Hawai‘i at 361, 289 P.3d at 997 (citing Aden v. Estate of
Hathaway, 427 P.2d 333, 334 (Colo. 1967)(quoting Guaclides v.
Kruse, 170 A.2d 488, 493 (N.J.Super.Ct.App. 1961))).
The ICA reasoned, however, that the lessee’s ROFR should at
least be preserved until the termination of that right; in such a
case, the remedy is not specific performance but an injunction on
the sale of the larger parcel until the termination of the
lessee’s ROFR in order to maintain the status quo ante. 128
Hawai‘i at 361-62, 289 P.3d at 997-98 (citing Guaclides, 170 A.2d
at 497; Chapman v. Mut. Life Ins. Co., 800 P.2d 1147 (Wyo. 1990);
Ollie v. Rainbolt, 669 P.2d 275 (Okla. 1983); Gyurkey v. Babler,
651 P.2d 928 (Idaho 1982)). In this case, however, the ICA
concluded that an injunction or rescission of the sale were not
available as remedies, because Kutkowski never sought those
remedies prior to the sale’s closing date. 128 Hawai‘i at 363-
64, 289 P.3d at 999-1000.
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In any event, the ICA noted, PPGC “expressly assumed and in
effect acknowledged that Kutkowski’s rights under the License
Agreement survived the sale of the Master Parcel” by entering
into the Assumption Agreement with its predecessor, Princeville
Corporation. 128 Hawai‘i at 364, 289 P.3d at 1000. Under the
facts of this case, the ICA considered Kutkowski’s ROFR to remain
intact throughout the holdover period as against PPGC, who must
offer the half-acre parcel for sale to Kutkowski, on PPGC’s terms
and conditions, if PPGC decides to sell the half-acre parcel
while Kutkowski remains a holdover tenant. Id. The ICA
ultimately affirmed the circuit court’s judgment. Id.
III. Arguments on Certiorari
On certiorari, Kutkowski argues that the ICA gravely erred
in (1) affirming the circuit court’s Final Judgment; (2) finding
that Kutkowski’s ROFR was not triggered upon the sale of the
Master Parcel to PPGC; (3) finding that Kutkowski’s requested
relief of specific performance would require a wholesale
reformation of the parties’ agreement; and (4) denying any
equitable relief because Kutkowski did not seek to enjoin or
rescind the sale of the larger parcel of which the leased
premises were a part.
To Kutkowski, the plain meaning of “sell” in the ROFR
provision meant the sale of the Property, regardless of whether
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it was included in a larger sale. Kutkowski also argues that the
ICA’s decision to not provide him any equitable relief has put
him in a different position than he was in status quo ante,
because now he has a new landlord. Kutkowski seeks equitable
relief principally in the form of compelling PPGC to offer him
the Property for sale, but he argues he is also entitled to an
injunction or a rescission of the sale because PPGC violated the
terms of the ROFR.
PPGC counter-argues that Kutkowski’s focus on the word
“sell” in the ROFR provision is wrong; the operative words in the
ROFR provision were “In the event the Licensor decides to sell
the premises,” and the ICA correctly interpreted the phrase “the
premises” to mean just the half-acre parcel. Thus, according to
PPGC, although the Property changed hands, the ROFR itself was
not triggered upon the sale of the Master Parcel. PPGC also
counter-argues that Kutkowski stipulated to the change of
landlord and amended his Complaint accordingly. Lastly, PPGC
argues that the ICA could not have granted equitable relief to
Kutkowski because performing the terms of the ROFR was legally
impossible.
IV. Discussion
We disagree with the ICA’s adoption of the majority rule in
the instant case, and, under the specific circumstances of this
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case, prefer instead to adopt the minority rule. Our established
rules of contract construction would resolve the interpretation
of the ROFR along the lines of the minority rule, which respects
the parties’ intent in assenting to the ROFR.
A. The Majority and Minority Rules
The majority rule holds that the sale of the larger parcel
to a third party does not manifest the seller’s intent to sell
just the smaller parcel. See Guaclides, 170 A.2d at 493 (“An
attempt to sell the whole may not be taken as a manifestation of
an intention or desire on the part of the owner to sell the
smaller optioned part so as to give the optionee a right to
purchase the same.”); Aden, 427 P.2d at 334 (following Guaclides
to hold, “[The deceased lessor’s] expressed intent was to sell in
one package a very much larger tract of ground and the contract
which expresses this intent, in itself, precludes the conclusion
that [he] had any intention to sell the smaller tract in a
transaction other than as an included portion of the contract for
the whole tract.”); Straley v. Osborne, 278 A.2d 64, 69 (Md.
1971)(“[T]he contemplation (or even the acceptance) by the lessor
of an offer for the larger tract is no manifestation of an
intention on his part to sell the smaller (leased) portion
separately.”); Chapman, 800 P.2d 1147, 1150 (Wyo. 1990)(“By
entertaining [the buyer’s] offer for the larger parcel, [the
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lessor] did not express an intention to sell [the smaller
parcel], which intention is the stimulus that would breath[e]
life into the [lessee’s] preemptive right and provide grounds for
specific performance.”); Advanced Recycling Systems, LLC v.
Southeast Props. L. P., 787 N.W.2d 778, 784 (S.D. 2010)(“There
was no evidence . . . that [the lessor] entertained a third-party
offer to purchase the leased premises apart from the development.
Consequently [the lessee’s] right of first refusal did not ripen
into an enforceable option contract to purchase the leased
premises.”)(citation omitted).
Under the majority rule, a lessor holding a ROFR over a
smaller part cannot be granted specific performance of the ROFR,
because the court will not order the seller to sell the part
separate from the whole. See Guaclides, 170 A.2d at 493 (“Nor
may the property owner, by an acceptance of an offer to sell the
whole, be compelled by judicial decree to dispose of the optioned
part separately from the property as a whole.”); C & B Wholesale
Stationery v. S. De Bella Dresses, Inc., 43 A.D.2d 579, 580, 349
N.Y.S.2d 751, 754 (N.Y.App.Div. 1973)(“Specific performance is
not available to the [lessee with a ROFR], since the lessor had
no intention to sell only the leased premises.”); Ollie, 669 P.2d
at 281 (in the context of stock sales over which stock owners had
a ROFR over less than all of the stocks sold to a third party,
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holding, “An owner should not be compelled to sell property on
terms and conditions to which he has not agreed or which he has
not intended to accept.”); Chapman, 800 P.2d at 1151 (“There was
no third party offer that established a definite price for [the
smaller parcel]. Consequently, the [lessees’] right [of first
refusal] has not been converted into an option and they cannot
obtain specific performance.”)
However, the “owner of the whole may not impair or destroy
the preemptive right to purchase the part by a sale or agreement
to sell the whole to some third person.” Guaclides, 170 A.2d at
494. To protect the holder of the ROFR, the remedy is an
injunction of the sale, or rescission of the sale and
reconveyance of the larger parcel to await the expiration of the
terms of the ROFR. See Guaclides, 170 A.2d at 495 (enjoining the
sale of the larger parcel to a third party to accord the right of
first refusal to the lessee); Myers v. Lovetinsky, 189 N.W.2d
571, 576 (Iowa 1971)(following Guaclides to hold that, while
specific performance is not available, an injunction on a sale
that has not consummated, or a reconveyance of property pursuant
to a sale that has consummated, are available remedies); C & B
Wholesale Stationery, 43 A.D.2d at 580, 349 NY.S.2d at 754
(reconveying larger parcel back to lessor and enjoining a further
sale of the smaller parcel without first giving the lessee an
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opportunity exercise its ROFR over the smaller parcel); Gyurkey,
651 P.2d at 934 (“The proper remedy in this case is to enjoin the
owners from selling Lot 13 until they receive an acceptable bona
fide offer for Lot 13 unrelated to the sale of any other
property, and give [the lessee of Lot 13] the appropriate notice
and opportunity to meet such offer pursuant to the right of first
refusal.”); Ollie, 669 P.2d at 281 (in the context of stock
sales, holding, “The remedy properly afforded in this case calls
upon the court to enjoin the selling shareholders from
transferring their ownership in the preemption-encumbered stock
until they have receive a bona fide offer that is unrelated to
any other stock and have given the plaintiffs appropriate notice
with opportunity to meet that offer in conformity to the right of
first refusal.”); Saab Enterprises, Inc. v. Wunderbar, 160 A.D.2d
931, 932, 554 N.Y.S.2d 657, 658 (N.Y.App.Div. 1990)(affirming a
rescission of the sale of a larger tract because part of the
tract was subject to the lessee’s ROFR); Chapman, 800 P.2d at
1152 (enjoining the lessor from selling the smaller parcel
“except in response to a bona fide offer for [just the smaller
parcel], and only after presenting the complete terms of the
offer to the [lessees] and giving them adequate opportunity to
exercise their preemptive right.”).
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One court, however, afforded the lessee no remedy,
concluding that “there was no evidence of any wrongful intent”
behind the seller’s decision to sell a larger tract encompassing
a smaller tract burdened by the lessee’s ROFR. Crow-Spieker #23
v. Robert L. Helms Constr. & Dev. Co., 731 P.2d 348, 350 (Nev.
1987).
Further, under the majority rule, the right of first refusal
over the smaller parcel survives the sale of the larger parcel,
and subsequent third party buyers with notice purchase subject to
the right of first refusal. See Atlantic Refining Co. v. Wyoming
Nat’l Bank, 51 A.2d 719, 722 (Pa. 1947)(“[T]he bank’s offer of
the [larger parcel] as an entirety at the auction sale did not
operate to impair or destroy [the lessee’s] option to purchase
[the smaller parcel].”); Guaclides, 170 A.2d at 496-97 (noting
that third party buyer with notice would buy the larger parcel
subject to the existing lessee’s ROFR over the smaller parcel).
The minority rule, on the other hand, holds that the sale of
the larger parcel to a third party does manifest the seller’s
intent to sell the smaller parcel as well. Berry-Iverson Co.,
242 N.W.2d at 134 (“[A]n intention to sell a larger parcel of
land . . . is evidence of an intention to sell the leased
premises. . . . To conclude otherwise would permit an owner and
prospective purchaser to, in effect, destroy a bargained-for
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purchase preemption before the expiration of the term for which
such preemption was obtained.”); Wilber Lime Prods., 673 N.W.2d
at 343 (“[T]he sale of the entire 180-acre farm to [a third
party] triggered [the lessee’s] right of first refusal to the
twenty-five acres. . . . The twenty-five acres were sold, albeit
as part of a package deal. [The lessee] should therefore have
had the right to purchase the land.”)
According to the minority rule, a sale of the larger parcel
without honoring the right of first refusal over the smaller
parcel constitutes a breach, for which courts possess the
equitable discretion to order specific performance as the remedy.
See Brenner, 27 N.W.2d at 322 (“[T]he lease imposed upon [the
lessor] a duty, before selling . . . to fix a specific sum as the
amount as which she was willing to sell the [smaller parcel] and
to afford to [the lessees their ROFR]. Her failure to do so
constituted a breach of contract.”); Berry-Iverson Co., 242
N.W.2d at 131 (“The owners, by failing to provide [the lessee]
with an opportunity to exercise its right of first refusal with
reference to the sale of the four-acre tract of land, breached
their contractual agreement by selling the 390.43-acre farm
containing the four-acre tract to the [buyers].”); Thomas & Son
Transfer Line v. Kenyon, Inc., 574 P.2d 107, 112 (Colo.App.
1977)(rejecting Aden and ordering specific performance when
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lessor sold 14 lots to buyer, disregarding a lessee’s ROFR over
10 of those lots); Pantry Pride Enters., Inc., 806 F.2d at 1229-
30 (distinguishing case from the majority rule because case
involved separate valuation of leasehold and equipment interests,
which the lessor attempted to sell as a package deal in
derogation of the lessee’s ROFR over just the lease).
Some courts allow for judicial determination of the purchase
price for the smaller parcel. See Brenner, 27 N.W.2d at 322;
Berry-Iverson, 242 N.W.2d at 135-36; Wilber Lime Prods., 673
N.W.2d at 343 (remanding case to trial court for a determination
of the fair market value of the smaller tract of land so that the
lessee would have the opportunity to exercise his ROFR). One
court left the purchase price to the parties but ordered specific
performance of the ROFR nonetheless. Pantry Pride Enters., 806
F.2d at 1231-32.
The majority rule presumes the lessor did not intend to sell
a smaller parcel included in a sale of a larger parcel, never
triggering the ROFR; the minority rule recognizes that the
smaller parcel is in fact included upon the sale of the larger
parcel, evidencing the lessor’s intent to sell the smaller
parcel, triggering the ROFR. As applied to the specific
circumstances of this case, the minority rule accords primacy to
the parties’ intent in assenting to the ROFR in the first place,
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and we expressly adopt it here. The majority rule renders ROFR’s
over smaller parcels illusory upon the lessor’s decision to
include the smaller parcel as part of a larger property sale to a
third party, which does not enforce the parties’ bargain for a
ROFR.
B. Hawai‘i Law on Contract Interpretation
Further, the primacy of the parties’ intent underlying the
minority rule is in line with our case law on contract
interpretation. “In construing a lease we must avoid an
unreasonable interpretation if that can be done consistently with
the tenor of the agreement and choose the most obviously just
interpretation as the presumed intent.” Broida v. Hayashi, 51
Haw. 493, 496, 464 P.2d 285, 288 (1970).
Interpretation of the parties’ intent begins with the
language the parties use. For the reader’s convenience, the ROFR
provision is reproduced below:
2. Option to Purchase: Licensor [Princeville Corporation]
expressly reserves the right to sell the licensed premises
during the term of this license and to place such signs and
notices on or about the premises for such purpose, subject
only to the rights of the Licensee [the Kutkowskis]
contained herein. In the event Licensor decides to sell the
premises, it shall be first offered to Licensee on terms and
conditions provided by Licensor; PROVIDED, HOWEVER, that
Licensee shall have at all times faithfully and punctually
performed all of the covenants and conditions of this
agreement on the part of Licensee to be performed. Licensee
shall have sixty (60) days to accept the Licensor’s offer or
make a counter offer, PROIVDED [sic], HOWEVER, that if no
sales contract is executed within one hundred twenty (120)
days after Licensor’s initial offer, (1) Licensor shall be
free to offer the premises for sale to the general public
and (2) this license agreement shall be automatically
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amended with occupancy to continue on a month to month term.
Should the premises be thereafter sold during the term of
the month to month license, Licensor shall give Licensee
forty-five (45) days prior notice of termination of this
license, upon which Licensee shall relinquish all rights
hereunder.
To the ICA, the term “the premises” in the second sentence’s
phrase, “In the event Licensor decides to sell the premises,”
referred only to the half-acre parcel. 128 Hawai‘i at 359, 289
P.3d at 995. To the ICA, the decision to sell the 1040-acre
parcel was not a decision to sell just the half-acre parcel. Id.
Because PPGC’s Master Parcel was undivided, however, the decision
to sell it necessarily meant that the Property would be swept up
in the sale. The decision to sell the whole was a decision to
also sell the part; the ROFR was thus triggered.6 An
interpretation otherwise would render the ROFR meaningless.
The minority rule, as applied to the circumstances of this
case, gives effect to the parties’ agreement. Berry Iverson Co.,
242 N.W.2d at 134 (“To conclude [that a decision to sell a larger
parcel was not a decision to sell a smaller parcel within it]
would . . . destroy a bargained-for purchase preemption before
the expiration for which such preemption was obtained.”) See
also Restatement (Second) of Contracts § 203 (1981)(“In the
interpretation of a promise or agreement or a term thereof, . . .
6
Therefore, we do not disagree with the Dissent (or the ICA) that “the
premises” in the ROFR referred to just the half-acre parcel. As a practical
matter, however, there is no way the sale of the undivided 1040-acre parcel
would not include the half-acre parcel.
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an interpretation which gives a reasonable, lawful, and effective
meaning to all the terms is preferred to an interpretation which
leaves a part unreasonable, unlawful, or of no effect[.]” See
also Amfac, Inc. v. Waikiki Beachcomber Inv. Co., 74 Haw. 85,
110, 839 P.2d 10, 25 (1992); Stanford Carr Dev. Corp. v. Unity
House, Inc., 111 Hawai‘i 286, 297, 141 P.3d 459, 470 (2006).
Thus, the decision to sell the Master Parcel was a decision
to “sell the premises.” Under the terms of the ROFR,
Princeville Corporation was required to “first offer[] [the
premises] to [Kutkowski] on terms and conditions provided by the
Licensor[.]” In this case, Princeville Corporation’s decision to
sell the premises to PPGC occurred at least by July 2004, when
the sale of the Master Parcel commenced. It is undisputed that
Princeville Corporation did not first offer the premises to
Kutkowski.7 In fact, rather than honor its obligations under the
ROFR, Princeville Corporation instead sought to amend the License
Agreement, while the sale of the Master Parcel was in progress,
to eliminate Kutkowski’s ROFR. On his own initiative, Kutkowski
7
The Dissent points to Kutkowski’s Declaration, which stated that the
Licensor did not first sell the half-acre to Kutkowski, as evidence failing to
“indicate whether the parties intended, at the time of entering into the
license agreement, to trigger the right of first refusal upon Princeville
Corporation’s intent to sell the master parcel.” Dissent at 8 n.6.
Kutkowski’s Declaration, however, merely averred to the fact (which PPGC does
not dispute) that the Licensor never offered to sell the half-acre to
Kutkowski. Respectfully, such a declaration was not used (and in this case,
should not be used, where neither party argues that the ROFR is ambiguous) as
a source of contractual intent. Contractual intent is ordinarily found within
the four corners of the agreement. See Found. Int’l, Inc. v. E.T. Ige
Constr., Inc., 102 Hawai‘i 487, 496 n.14, 78 P.3d 23, 32 n.14 (2003).
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attempted to exercise what he understood to be his “option” by
offering to buy the half-acre parcel for $250,000. The offer was
rejected.
In light of this sequence of events, the ICA’s adoption of
the majority rule, which holds that the ROFR was not triggered,
in effect, also relieved PPGC of its duty of good faith and fair
dealing in performing the contract. See Restatement (Second) of
Contracts § 205 (1981)(“Every contract imposes upon each party a
duty of good faith and fair dealing in its performance and its
enforcement.”); Young v. Allstate Ins. Co., 199 Hawai‘i 403, 427,
198 P.3d 666, 690 (2008)(“[E]very contract contains an implied
covenant of good faith and fair dealing that neither party will
do anything that will deprive the other of the benefits of the
agreement.”)(citation omitted); Simmons v. Puu, 105 Hawai‘i 112,
119, 94 P.3d 667, 674 (2004)(stating that Hawai‘i courts
recognize that parties to a contract have a duty of good faith
and fair dealing in performing contractual obligations).
To further disclaim any obligation to perform the ROFR in
good faith and fair dealing, PPGC argues that performance of the
contract was legally impossible in any event, because it could
not have subdivided the half-acre parcel in an area zoned for
agricultural use, where minimum lot size is five acres. Thus,
PPGC argues, Kutkowski is not entitled to specific performance.
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Kutkowski cited to the County of Kaua‘i, Kauai County Code, § 9-
3.1 (requiring minimum lot size to conform to the provisions of
the Kauai Comprehensive Zoning Ordinance, respectively); the
County of Kaua#i, Comprehensive Zoning Ordinance, § 8-
7.4(b)(2)(generally requiring a parcel of over 75 acres to be
subdivided into smaller parcels no larger than five acres); and
Whitlow v. Jennings, 40 Haw. 523, 532 (Haw. Terr. 1954)(“[A]n
agreement to sell in violation of the [subdivision] statute is
void[.]”)]
PPGC’s argument misses the point of the ROFR, which was for
the Licensor to “offer[ to sell the premises] to Licensee on
terms and conditions provided by the Licensor,” not to outright
sell an unsubdivided half-acre parcel to the Licensee.8 The
meaning of the phrase “terms and conditions provided by the
Licensor” could have included the purchase price, possibly taking
into account the cost of seeking a subdivision of the half-acre
parcel (including attempts to grandfather in the subdivision of
the smaller parcel or attempts to seek a variance from the
subdivision ordinance), or attempts to create a condominium
property regime, or other attempts to effectuate the ROFR. The
8
The ICA also recognized that the ROFR gave the Licensor a “right to
determine the terms and conditions of any sale, including the purchase price
and the satisfaction of any conditions.” 128 Hawai‘i at 360, 289 P.3d at 996.
We believe that the purchase price is PPGC’s to decide. Therefore, we
disagree with Kutkowski that the circuit court should set a price term for the
half-acre parcel on remand.
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factual record is undeveloped as to the current state of the
property and the options available for carving out the half-acre
parcel. The point is that PPGC could have, but did not, offer
the half-acre, or any other parcel, to Kutkowski for sale on
terms and conditions set by PPGC.
[T]he right of private contract is no small part of the
liberty of the citizen, and . . . the usual and most
important functions of courts of justice is rather to
maintain and enforce contracts, than to enable parties
thereto to escape from their obligation on the pretext of
public policy. . . . [I]f there is one thing which more
than another public policy requires it is that men of full
age and competent understanding shall have the utmost
liberty of contracting, and that their contracts when
entered into freely and voluntarily shall be held sacred and
shall be enforced by courts of justice.
Robinson v. Thurston, 23 Haw. 777, 790-91 (Haw. Terr.
1917)(Robertson, C.J., dissenting), rev’d 248 F. 420, 424 (9th
Cir. 1918)(adopting Chief Justice Robertson’s dissent).
This court does not attempt to set forth the path that PPGC
must take in performing the ROFR. It merely construes the ROFR
to presume that there existed “terms and conditions” acceptable
to the Licensor that would allow it to offer the premises to
Kutkowski for sale, pursuant to its duty to perform the ROFR in
good faith and fair dealing. Otherwise, the ROFR would have been
illusory. We decline to presume that the parties intended to
insert a meaningless and ineffectual ROFR into their License
Agreement.
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Furthermore, a presumption that these terms and conditions
existed is a reasonable interpretation, when construing the ROFR
against the drafter, who would have been in a better position to
know which options were available to it for carving out the half-
acre. See Restatement (Second) of Contracts § 206 (1981)(“In
choosing among the reasonable meanings of a promise or agreement
of a term thereof, that meaning is generally preferred which
operates against the party who supplies the words or from whom a
writing otherwise proceeds.”); Amfac, 74 Haw. at 110 n.5, 839
P.2d at 25 n.5. This rule of interpretation is especially just
where parties are of unequal sophistication and bargaining power,
as Kutkowski and Princeville Corporation were in this case. See
id.; see also Calvin v. Limco, 60 Haw. 154, 158, 587 P.2d 1216,
1219 (1978)(“As between [a corporate developer party] and
[individual] appellees, [the corporate developer] must be
regarded as the party by whom the [contracts] were prepared. The
trial court concluded that ambiguities in the [contracts] should
be resolved against [the corporate developer], as the preparer of
the agreements. We agree.”)(citations omitted) Alternatively,
if the lessor had intended to exclude the sale of any more than
the half-acre parcel as a triggering event under the ROFR, it
could have drafted the ROFR to specify that.9
9
The Dissent argues that, if the “parties [could have] expressly
contract[ed] for this result,” then it is not the case that the ROFR would be
meaningless if interpreted to exclude the sale of the master parcel as a
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C. The Remedy
Having concluded that the ROFR was triggered by Princeville
Corporation’s decision to sell the Master Parcel in 2005, we now
must determine the remedy available to Kutkowski. We agree with
the ICA that Kutkowski’s ROFR continues to remain intact
throughout the holdover period as against PPGC, who has assumed
the rights and obligations once held by Princeville Corporation
with regard to Kutkowski. In effect, PPGC bought the Master
Parcel subject to Kutkowski’s ROFR, which survives so long as
Kutkowski remains a holdover tenant.10 Therefore, the
appropriate remedy is specific performance: the Licensor having
triggered the ROFR through its decision to sell the premises,
PPGC (as the Licensor’s successor under the Assumption Agreement)
must offer the Property for sale to Kutkowski, pursuant to the
analysis in this opinion.
V. Conclusion
We agree with the ICA that Kutkowski’s ROFR continues into
triggering event. Concurrence/Dissent at 5 n.4. Respectfully, the Dissent
conflates two separate contract interpretation arguments made within this
opinion. We first noted that we interpret contracts to avoid a meaningless
result; in so doing, we recognized the practical reality that a sale of the
undivided 1040-acre parcel necessarily involves the sale of the half-acre
parcel within it. We next noted that contracts are construed against the
drafter, and the Licensor (as drafter, not the parties in concert) could have
avoided our reading of the ROFR to avoid a meaningless result by specifying
that the sale of the 1040-acre parcel would not trigger the sale of the half-
acre parcel.
10
The majority and Concurrence/Dissent agree that the ROFR remains intact
and enforceable during Kutkowski’s holdover tenancy. Concurrence/Dissent at 7
n.5.
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the holdover period. The ROFR can be presently exercised
because Princeville Corporation’s decision to sell the Master
Parcel triggered its (and now PPGC’s assumed) obligation to
perform. We therefore reverse the ICA’s Judgment on Appeal and
remand this case to the circuit court for further proceedings
consistent with this opinion.
Joe P. Moss, and /s/ Paula A. Nakayama
Margery S. Bronster and
Rex Y. Fujichaku /s/ Simeon R. Acoba, Jr.
Bronster Hoshibata
for petitioner /s/ Sabrina S. McKenna
David W. Proudfoot and /s/ Karen T. Nakasone
Max W. J. Graham
Belles Graham Proudfoot
Wilson & Chun, LLP
for respondent
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