Pistol Limited Company v. Green Family Flooring, Inc.

IN THE COURT OF APPEALS OF IOWA
No. 22-0126
Filed April 10, 2023
PISTOL LIMITED COMPANY,
Plaintiff-Appellee,
vs.
GREEN FAMILY FLOORING, INC.,
Defendant-Appellant.
________________________________
PISTOL LIMITED COMPANY,
Counterclaim Defendant,
vs.
GREEN FAMILY FLOORING, INC.,
Counterclaim Plaintiff.
________________________________________________________________
Appeal from the Iowa District Court for Polk County, Paul D. Scott, Judge.
The defendant appeals the district court’s decision finding the plaintiff did
not breach the right of first refusal in the parties’ lease agreement. REVERSED
AND REMANDED.
Kyle Kruidenier, Michael J. Streit, and Jeffrey P. Schultz of Sullivan & Ward,
P.C., West Des Moines, for appellant.
David A. Morse of Law Offices of David A. Morse, Des Moines, for appellee.
Considered by Tabor, P.J., Buller, J., and Carr, S.J.*
*Senior judge assigned by order pursuant to Iowa Code section 602.9206
(2023).
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CARR, Senior Judge.
Green Family Flooring, Inc.1 (Green) appeals the district court’s decision
finding Pistol Limited Co.2 (Pistol) did not breach the right of first refusal in the
parties’ lease agreement. Pistol could not defeat Green’s right of first refusal by
requiring it to buy a larger property as part of a package deal. We reverse the
decision of the district court and remand for further proceedings.
I. Background Facts & Proceedings
On May 30, 2014, Pistol and Green entered into a lease agreement for 1901
Beaver Avenue in Des Moines for a period of five years beginning on June 1, 2014.
The lease contained an option to renew for an additional term of five years. Pistol
owned the building and operated a restaurant, Chef’s Kitchen,3 at 1903 Beaver
Avenue, in the portion of the building not leased to Green.
The lease contained the following provision:
In the event of any offer to purchase the building in which the
premises are located is acceptable to [Pistol] at any time or times
during the original or extended term hereof for the sale of the
premises or for a lease to commence upon the expiration or earlier
termination of the original or extended term hereof, [Pistol], prior to
acceptance thereof, shall give [Green], with respect to each such
offer, written notice thereof and a copy of said offer including the
name and address of the proposed purchaser or tenant and [Green]
shall have the option and right of first refusal for thirty (30) days after
receipt of such notice within which to elect to purchase or lease the
premises, as the case may be, on the same terms and conditions of
said offer. If [Green] shall elect to purchase or lease the premises
pursuant to the option and first refusal granted, it shall give notice of
such election within such thirty (30) day period. [Green’s] failure at
any time to exercise its option under this paragraph shall not affect
1 Green is owned and operated by Robert and Jeni Green.
2 Pistol is owned by Steve and Kristi Little.
3 The restaurant was held in the name of SPL, Inc. Kristi is an owner and the
president of SPL.
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this lease and the continuance of [Green’s] rights and obligations
under this and any other paragraph herein.
In October 2018, Green received a document titled “Declination to Exercise
Right of First Refusal” from Pistol, which stated Pistol had received an offer to
purchase the building and Green declined to exercise the right of first refusal.
Green did not sign the document.
On November 12, 2018, Kristi, as the authorized agent of Pistol, signed a
purchase agreement to sell the entire building at 1901 and 1903 Beaver Avenue
to Jason Simon for $300,000. The sale was scheduled to close on January 3,
2019. The agreement stated:
[Simon] acknowledges some portion of the property being
purchased is currently the subject of a lease between [Pistol] and
third part(ies) who are not a party to this Purchase Agreement. Said
lease involves the Green Family Flooring location on the south side
of the building. . . . At the time of closing, [Pistol] will assign its
interest in the Lease to [Simon].
A separate Asset Purchase Agreement between the parent company of the
restaurant and Simon was also signed on November 12, 2018. Simon agreed to
purchase the restaurant’s assets for $235,000, plus $65,000 for inventory.
Shortly thereafter, on November 15, Green requested a copy of the offer on
the building. It also sent written notice that it intended to extend the lease. On
December 5, 2018, Pistol signed an extension of the lease for an additional five-
year period, commencing on June 1, 2019, and ending on May 31, 2024. In all
other regards, the terms of the lease remained in effect.
Green attempted to exercise its right of first refusal on December 7, 2018.
It expressed an interest in purchasing the building for $300,000 with a closing date
of January 21, 2019. Pistol responded:
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[T]he transaction involving the anticipated sale of the building at 1903
Beaver Avenue is part of a package deal involving the sale of the
Chef’s Kitchen restaurant business which operates at that location.
The agreement to sell the building is specifically conditioned on the
purchase of the business and the total consideration involved in that
package deal is $700,000.00 with scheduled closing to take place on
or about 3 January 2019.
Pistol stated that Green did not propose to purchase the property “under the same
terms and conditions of the offer from Jason Simon . . . and is therefore not
acceptable.” Pistol asserted that if Green wanted to exercise its right of first
refusal, it needed to enter into the same package deal by December 21.
Green did not enter into a package deal with Pistol. The closing of the sale
of the property to Simon occurred on January 4, 2019. Pistol informed Green of
the sale.
On February 29, 2020, Pistol filed a petition for declaratory relief, requesting
a ruling that Green did not properly exercise its right of first refusal because it did
not agree to purchase the property with the same terms and conditions as the sale
to Simon. Green answered the petition and denied that it was required to agree to
a package deal. Green also raised a counterclaim, asserting Pistol breached the
terms of the lease agreement. Pistol denied the allegations in the counterclaim.
A bench trial was held on August 10, 2021. The district court found:
The terms of the right of first refusal applied only to offers to
purchase of the building. Here there was no offer for the purchase
of the building alone. The Simon offer was a package offer. Simon
would not buy, nor would the Littles sell, the building separate from
the restaurant. Given the facts in this case, the attempt to sell the
building in conjunction with the restaurant cannot be considered as
an indication that Pistol was interested in selling the building alone.
The contractual right of first refusal is inapplicable by its own terms.
Additionally, there was no attempt to rewrite Green’s
contractual rights by engineering the package sale. The evidence
shows the Littles wanted to retire from the restaurant business and
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the record is void of any acceptable offers to purchase the building
alone. The evidence indicates a good faith decision by the Littles to
sell the business and the building as a package.
(Footnote omitted.) The court determined the terms of the lease agreement had
not been breached. The court granted the petition for declaratory relief and denied
Green’s counterclaim. Green appealed the district court’s decision.
II. Standard of Review
“The court’s review of a declaratory judgment action depends upon how the
action was tried to the district court.” Van Sloun v. Agans Bros., Inc., 778 N.W.2d
174, 178 (Iowa 2010). Where an action is based on breach-of-contract claims, our
review is for the corrections of errors of law. Id. at 179. “Under this standard of
review, the trial court’s findings carry the force of a special verdict and are binding
if supported by substantial evidence.” Id. The court is not, however, bound by the
legal conclusions of the district court. Id.III. Right of First Refusal
Green asserts that Pistol could not defeat its right of first refusal by creating
a package deal where the property subject to the right of first refusal is only a
portion of the property sold. It states the right of first refusal applies “[i]n the event
of any offer to purchase the building in which the premises are located.” (Emphasis
added.) Green claims there was no expectation that it would be required to
purchase the restaurant because the terms of the lease agreement did not include
the restaurant.
“A right of first refusal is a conditional option which is dependent upon the
decision to sell the property by its owner.” Stone v. Stone, No. 11-1146, 2012 WL
2122319, at *2 (Iowa Ct. App. June 13, 2012) (quoting 17 C.J.S. Contracts § 58
6
(2011)); see also AGR-Keast, L.L.P. v. Steen, No. 10-0835, 2011 WL 649648, at
*4 (Iowa Ct. App. Feb. 23, 2011) (noting “a right of first refusal [is] conditional upon
the owner’s desire to sell”). In general, a right of first refusal is valid and
enforceable. Henderson v. Millis, 373 N.W.2d 497, 503 (Iowa 1985). A right of
first refusal may be waived by the party holding the right. Stone, 2012 WL
2122319, at *3.
A similar factual situation arose in Myers v. Lovetinsky, where a landlord
owned a farm of about ninety-four acres and leased one half-acre of the farm to
the tenant, Myers. 189 N.W.2d 571, 573 (Iowa 1971). The lease agreement
contained a right of first refusal for the leased premises. Id. The landlord gave the
purchasers an option to purchase the farm, including the leased area. Id. Myers
was informed he could exercise the right of first refusal by paying the purchase
price for the entire farm.4 Id. at 573–74. The Iowa Supreme Court determined:
This is a case in which landlords sell the whole farm including the
demised premises to purchasers without separately pricing the
demised premises and the rest of the farm. The decisions recognize
in this kind of case, apparently without exception, that the landlord
breaches the tenant’s preferential right by so doing.
Id. at 575 (collecting cases). The court determined the proper remedy was “limited
to maintaining the status quo ante with respect to the demised premises for the
rest of the term of the lease.” Id. at 576. The court concluded Myers was not
entitled to relief because he waited until the lease expired before bringing an action
for relief. Id. at 577.
4 Additionally, the landlord falsely informed Myers that in order to exercise the right
of first refusal he would need to pay $20,000 for the half-acre being leased,
although the proposed sale was for $1750 per acre for the entire ninety-four-acre
farm. Myers, 189 N.W.2d at 576.
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A plain reading of the Myers case supports a finding that Pistol could not
defeat Green’s right of first refusal by requiring it to buy the restaurant to get the
building. See id. at 575. A package deal cannot defeat the right of first refusal.5
Id. Although not cited or discussed by it, the trial court’s conclusion adopts a
minority view, following Crow-Spieker No. 23 v. Robert L. Helms Constr. & Dev.
Co., 731 P.2d 348, 350 (Nev. 1987), which held that because the offer was for
more than the building, the right of first refusal was not implicated.6 In Iowa we
must follow the holding in Myers. See Nationwide Agribusiness Ins. Co. v. PGI
Int’l, 882 N.W.2d 512, 518 n.4 (Iowa Ct. App. 2016) (“We are not, however, at
liberty to overturn Iowa Supreme Court precedent.”). We conclude the district court
erred by failing to follow Iowa legal precedent in its decision that the right of first
5 A lengthy discussion of the right of first refusal in association with package deals
is found in a law review note, which concludes:
In terms of fairness and efficiency, the most appropriate default rule
is to require an owner who receives an acceptable offer for a
package deal to provide the rightholder with an opportunity to
purchase the burdened portion of the package at a reasonable price.
If the owner fails to do so, the rightholder should be entitled to
enforce her privilege by purchasing the burdened property at a price
determined by the court to be fair and reasonable.
Bernard Daskal, Note, Rights of First Refusal and the Package Deal, 22 Fordham
Urb. L.J. 461, 501 (1995).
6 There are several cases that have refused to follow Crow-Spieker. See B&R Oil
Co., Inc. v. Stoler, 77 N.E.3d 823, 833 (Ind. Ct. App. 2017) (listing Crow-Spieker
as contrary to “the substantial weight of authority”); Navasota Res., L.P. v. First
Source Tex., Inc., 249 S.W.3d 526, 536 (Tex. App. 2008) (noting Crow-Spieker “is
contrary to the greater weight of authority on this particular issue”); Chapman v.
Mut. Life Ins. Co., 800 P.2d 1147, 1151 (Wyo. 1990) (stating Crow-Spieker is
contrary to the holding of a “great majority of courts that have addressed this issue”
and “a preemptive right may not be defeated by a sale of the property burdened
by the right as part of a larger tract”); but see Kutkowski v. Princeville Prince Golf
Course, LLC, 300 P.3d 1009, 1020 (Haw. 2013) (Recktenwalk, C.J., concurring in
part and dissenting in part) (listing Crow-Spieker as following a majority of other
jurisdictions).
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refusal was inapplicable as Pistol wanted to sell the property as part of a package
deal. Put simply, Pistol had bargained away any right to force Green to buy either
the restaurant with the land or nothing at all.
On appeal, in addition to the claims regarding the package deal, Pistol
claims Green did not effectively exercise its right of first refusal because its offer
(1) had a different closing date than Simon’s offer and (2) was conditional on
financing. Pistol contends Green did not meet the requirements of the right of first
refusal in the leasing agreement because the offer was not “on the same terms
and conditions of said offer.”
Simon’s offer had a proposed closing date of January 3, 2019,7 while Green
proposed to close the sale on January 21. Green’s offer did change the date, but
Pistol does not explain how this difference is material. We note that if Pistol had
timely notified Green of the offer to purchase from Simon then potentially Green
could have closed sooner. Also, Green’s offer was not contingent on financing.
Green’s offer stated, “Buyer’s lender will require approximately forty-five (45) days
[from] the date of this agreement to fund the transaction.” The offer merely recited
that the closing needed to be two weeks later to allow financing to be put in place.
We reverse the district court’s decision and remand for a determination of a
proper remedy for Green. See Myers, 189 N.W.2d at 576–77 (discussing possible
remedies when a landlord violates a tenant’s right of first refusal).
REVERSED AND REMANDED.
7 The sale actually closed on January 4, 2019.