Beverage Holdings, L.L.C. v. 5701 Lombardo, L.L.C. (Slip Opinion)

[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as
Beverage Holdings, L.L.C. v. 5701 Lombardo, L.L.C., Slip Opinion No. 2019-Ohio-4716, 2019-
Ohio-4716.]
NOTICE
This slip opinion is subject to formal revision before it is published in an
advance sheet of the Ohio Official Reports. Readers are requested to
promptly notify the Reporter of Decisions, Supreme Court of Ohio, 65
South Front Street, Columbus, Ohio 43215, of any typographical or other
formal errors in the opinion, in order that corrections may be made before
the opinion is published.
SLIP OPINION NO. 2019-OHIO-4716
BEVERAGE HOLDINGS, L.L.C., APPELLANT, v. 5701 LOMBARDO, L.L.C., D.B.A.
VALENTINO-VAV,1 L.L.C., APPELLEE.
[Until this opinion appears in the Ohio Official Reports advance sheets, it
may be cited as Beverage Holdings, L.L.C. v. 5701 Lombardo, L.L.C., Slip
Opinion No. 2019-Ohio-4716.]
Contract dispute—Plain language of contract provision does not lead to manifest
absurdity—Court of appeals’ judgment reversed.
(No. 2018-0616—Submitted May 21, 2019—Decided November 19, 2019.)
APPEAL from the Court of Appeals for Cuyahoga County,
No. 104559, 2017-Ohio-7090.
________________
O’CONNOR, C.J.
{¶ 1} This case involves the sale of a franchise business and the real
property on which it sits. The parties structured the agreement for the sale of the
1. In its complaint, appellant identified appellee’s separate entity as Valentino-Val, L.L.C. The
secretary of state’s records as well as evidence in this case show that the correct name is Valentino-
VAV, L.L.C. The caption in this case has been changed accordingly.
SUPREME COURT OF OHIO
real property to include several adjustments that would be made to the overall
purchase price based on circumstances present at the time of the closing. When the
closing was initiated, however, the parties disputed how one of the credit provisions
should be interpreted.
{¶ 2} The trial court granted summary judgment in favor of the buyer,
plaintiff-appellant, Beverage Holdings, L.L.C., finding that the plain language of
the disputed credit provision supported its position. The Eighth District Court of
Appeals initially affirmed, 2017-Ohio-2983, but it later granted reconsideration and
reversed on the ground that the plain language of the provision was manifestly
absurd, 2017-Ohio-7090. It therefore remanded the case to the trial court for
consideration of evidence concerning the provision’s meaning.
{¶ 3} For the reasons discussed below, we hold that the Eighth District
erred. We therefore reverse.
I. Relevant Background
{¶ 4} Defendant-appellee, 5701 Lombardo, L.L.C., d.b.a. Valentino-VAV,
L.L.C., (“Lombardo”), owns real property in Independence, Ohio, on which it
operated a preschool and daycare-center franchise. As of 2011, Lombardo owed
$1,726,000 on several loans on the property, and it sought to sell both the property
and the franchise to Beverage Holdings. The parties conducted the real-property
and franchise sales through separate transactions.2
{¶ 5} The sale of the franchise business to Beverage Holdings took place in
one transaction, and Beverage Holdings began operating the business immediately.
That transaction is not directly at issue in this appeal. The transaction for the sale
of the real property was more complicated, however, because of a penalty that
would be imposed by one of Lombardo’s lenders if its loan was paid off early. To
2. The parties used related entities to complete the transactions, at least in part, but for the purposes
of this opinion, we refer to the entities used by Lombardo simply as Lombardo and the entities used
by Beverage Holdings as Beverage Holdings.
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effectuate the sale of the real property, the parties entered into agreements on
April 29, 2011. Relevant here, one agreement was for the sale of the real property
(the “Real Estate Purchase Agreement”). The parties set the purchase price at
$1,726,000, but they agreed that the closing would not take place until a date in the
future, to be selected after Beverage Holdings had delivered to Lombardo a notice
of its intent to close the transaction. The second was a lease of the property
designed to be in effect before the closing occurred (the “Lease Agreement”).
Beverage Holdings agreed to pay $12,500 per month in rent.
{¶ 6} In the Real Estate Purchase Agreement, the parties also agreed that
several credits would be applied to reduce the purchase price at the time of closing.
One credit would reduce the purchase price by the amount the principal on
Lombardo’s loans was reduced between the date of the agreement and the date of
the closing. (“Reduction in Principal Credit”). Another credit would reduce the
purchase price by the amount of “[r]ents received by [Lombardo] from [Beverage
Holdings], prorated to date of closing” (“Rents Credit”). Beverage Holdings also
agreed that, if it elected to close the transaction before February 15, 2018, and
thereby caused Lombardo to be required to pay the early-termination penalty to one
of its lenders, Beverage Holdings would pay the penalty for Lombardo.
{¶ 7} On March 12, 2015, after leasing the property for approximately four
years, Beverage Holdings notified Lombardo that it intended to close the real-estate
transaction. In the notice, Beverage Holdings asserted that it was entitled to a Rents
Credit of $462,500. Combining that credit with others provided in the agreement,
including the Reduction in Principal Credit, Beverage Holdings asserted the total
purchase price was reduced to $1,202,110.09. Lombardo rejected the notice,
asserting that Beverage Holdings’s calculation of the Rents Credit was not in line
with what was originally contemplated by the parties.
{¶ 8} Beverage Holdings sued Lombardo, seeking, among other things, a
declaratory judgment that its interpretation of the Rents Credit was correct. The
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trial court granted summary judgment to Beverage Holdings as to its request for
declaratory judgment interpreting the Rents Credit clause, finding that the plain
meaning of the Rents Credit clause was unambiguous and in line with the position
of Beverage Holdings. The Eighth District initially affirmed on appeal, but it
subsequently granted reconsideration and reversed.
{¶ 9} In its decision on reconsideration, the Eighth District agreed with the
trial court that “standing alone, the plain language of the [Rents Credit] clause
stating that the purchase price of the property would be decreased by ‘[r]ents
received by [Lombardo] from [Beverage Holdings], prorated to date of closing’
appears to apply to all rents received from [Beverage Holdings], not just the rent
paid during the closing period.” 2017-Ohio-7090 at ¶ 7. But it declined to apply
the plain language in Beverage Holdings’s favor because it believed the plain
language led to a “manifestly absurd result.” Id., citing Cincinnati Ins. Co. v.
Anders, 99 Ohio St. 3d 156, 2003-Ohio-3048, 789 N.E.2d 1094, ¶ 34. Specifically,
the court of appeals believed that because the parties recognized from the outset
that “Lombardo’s financing at the time made it impractical to currently close the
transaction and, in fact, that the sale might not close for ‘several years,’ ” it would
be absurd to conclude that Lombardo intended to provide Beverage Holdings with
credits against the purchase price for both (1) all rents paid between the start of the
agreement and the closing (pursuant to Beverage Holdings’s interpretation of the
Rents Credit clause) and (2) the amount by which the principal on the loans was
reduced during that time (pursuant to the Reduction in Principal Credit clause). It
therefore remanded the case to the trial court for “fact-finding to give the contract
the most sensible and reasonable interpretation.” Id. at ¶ 7.
{¶ 10} Beverage Holdings appealed to this court, and we granted
discretionary review.
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II. Analysis
A. The plain language of the Rents Credit
{¶ 11} We review de novo the Eighth District’s decision regarding the
propriety of the trial court’s grant of summary judgment in favor of Beverage
Holdings. Bonacorsi v. Wheeling & Lake Erie Ry. Co., 95 Ohio St. 3d 314, 2002-
Ohio-2220, 767 N.E.2d 707, ¶ 24. Summary judgment should be granted only
when “there is no genuine issue as to any material fact and * * * the moving party
is entitled to judgment as a matter of law.” Civ.R. 56(C).
{¶ 12} In its first proposition of law, Beverage Holdings argues that the
plain language of the Rents Credit provides that it is entitled to a credit for all rent
payments made during the life of the Lease Agreement and that the Eighth District
erred by concluding that the plain language resulted in a manifest absurdity.
Lombardo counters that Beverage Holdings’s interpretation of the Rents Credit is,
in fact, manifestly absurd and, therefore, the Eighth District correctly remanded the
case for consideration of extrinsic evidence regarding the parties’ intent. We agree
with Beverage Holdings.
{¶ 13} Our legal standards for the interpretation of contracts are well
established. We seek primarily to give effect to the intent of the parties, and we
presume that the intent of the parties is reflected in the plain language of the
contract. Westfield Ins. Co. v. Galatis, 100 Ohio St. 3d 216, 2003-Ohio-5849, 797
N.E.2d 1256, ¶ 11. As a result, if the language of a contract is plain and
unambiguous, we enforce the terms as written, and we may not turn to evidence
outside the four corners of the contract to alter its meaning. See id.; Aultman Hosp.
Assn. v. Community Mut. Ins. Co., 46 Ohio St. 3d 51, 53, 544 N.E.2d 920 (1989)
(“Intentions not expressed in the writing are deemed to have no existence and may
not be shown by parol evidence”). When considering the language of a particular
contractual provision, “[c]ommon words * * * will be given their ordinary meaning
unless manifest absurdity results or unless some other meaning is clear from the
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face or overall contents of the agreement.” Anders, 99 Ohio St. 3d 156, 2003-Ohio-
3048, 789 N.E.2d 1094, at ¶ 34, citing Alexander v. Buckeye Pipe Line Co., 53 Ohio
St.2d 241, 374 N.E.2d 146 (1978), paragraph two of the syllabus.
{¶ 14} As noted above, the Rents Credit clause provides that the purchase
price shall be reduced by the amount of “[r]ents received by [Lombardo] from
[Beverage Holdings], prorated to date of closing.” Beverage Holdings argues that
the clause creates a credit for all rent paid between the beginning of the lease and
the closing of the sale of the real property. For example, if the agreements were
signed on January 1 of a given year and the closing occurred on May 8 of that year,
a Rents Credit would be awarded for rent paid for the entire period between January
1 and May 8.
{¶ 15} Lombardo, by contrast, argues that because the full amount of each
month’s rent was paid by Beverage Holdings in advance, at a time when the exact
date of the closing might not have been known, the Rents Credit is properly
understood as providing a credit for rent covering the partial-month period after the
closing. Using the same example, a Rents Credit would be awarded for rent paid
for the period between May 9 and May 31.
{¶ 16} The language of the Rents Credit is plain and unambiguous, and it
supports only the interpretation asserted by Beverage Holdings. The language is
broad and clear, providing that a credit would be provided for all “rents” paid and
that the credit would be prorated to the date of closing. Notably, the parties made
clear in the Lease Agreement that Beverage Holdings’s obligation to pay rent would
extend only to the date of the closing, at which point, of course, it would become
the owner of the property, and the proration language in the Rents Credit makes
clear that the credit is limited to the same date. The interpretation proffered by
Lombardo would be a plausible reading of the clause only if it contained different
language stating that the credit applied to the period after the date of the closing.
Because there is no such language in the Rents Credit clause, we reject the
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interpretation advanced by Lombardo. See Alexander, 53 Ohio St. 2d at 246, 374
N.E.2d 146 (“where the terms in an existing contract are clear and unambiguous,
this court cannot in effect create a new contract by finding an intent not expressed
in the clear language employed by the parties”).
B. The dissenting opinions
{¶ 17} The first dissenting opinion asserts that the plain language of the
Rents Credit has only one reasonable interpretation, namely that it provides
Beverage Holdings with a credit only for the portion of the last month’s rent
attributable to the period after the closing. The second dissenting opinion asserts
that this post-closing-only interpretation of the Rents Credit is at least plausible,
and because it also believes our interpretation is plausible, it would find that the
Rents Credit is ambiguous and remand the case to the trial court for consideration
of extrinsic evidence. We disagree with both views. Although both dissenting
opinions raise questions about our interpretation, that is not enough to support their
ultimate conclusions. Both dissenting opinions lack a convincing affirmative
explanation for why the alternative, post-closing-only interpretation is plausible.
Without that, the approaches of both opinions lack merit.
{¶ 18} The most notable claims of the dissenting opinions are their
assertions that the proration language is rendered superfluous under our
interpretation and that the proration language has no meaning unless the Rents
Credit applies to only the post-closing portion of the final month of the lease. We
do not agree with either point. As we stated above, the proration language is not
superfluous under our view because it can reasonably be understood as ensuring
that the end date for the Rents Credit is clearly defined and matches the end date
for Beverage Holdings’s obligation to pay rent. The dissenting opinions’ post-
closing-only interpretation also fails to provide relevant meaning to the proration
language because, under their interpretation, the Rents Credit as a whole would be
superfluous. If the parties wanted the last month’s rent to be “distributed
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proportionately between the buyer and the seller, as determined by the closing
date,” dissenting opinion of Kennedy, J., at ¶ 40, there was no need to create a
special “Rents Credit” to achieve that result. Even without such a credit, Beverage
Holdings would have had a legal right to receive back the portion of the last month’s
rent covering the period after the closing, because its obligation to pay rent
extended only to the date of the closing and no further. The dissents’ avoidance-
of-surplusage argument is therefore not convincing.
{¶ 19} Ultimately, it is better to put theories of surplusage to the side and to
simply look to the text of the contract. The post-closing-only interpretation
proffered by the dissenting opinions would be plausible only if additional language
were included in the credit, language clearly indicating that the credit applies only
to the post-closing period of the last month of the lease. Because the Rents Credit
does not contain any such language, the only reasonable interpretation is the one
we find here: that the Rents Credit applies to all rents received during the life of
the lease.
C. Manifest absurdity
{¶ 20} We also reject the conclusion of the Eighth District that the plain
language of the Rents Credit leads to a manifest absurdity. The Eighth District
relied on our statement in Anders, 99 Ohio St. 3d 156, 2003-Ohio-3048, 789 N.E.2d
1094, at ¶ 34, that common words in a contract should “be given their ordinary
meaning unless manifest absurdity results * * *.” Although we have repeated this
statement on numerous occasions, e.g., Aultman, 46 Ohio St. 3d at 54, 544 N.E.2d
920; Alexander, at paragraph two of the syllabus, this exception to the plain-
meaning rule is narrow in scope and is necessarily limited by the meaning of the
term “manifest absurdity” itself. First, the word “absurd” conveys a degree of
extremeness. Contract language is absurd not simply when it is unreasonable but
rather when it is “ridiculously unreasonable, unsound, or incongruous” (emphasis
added), Webster’s Third New International Dictionary 8 (2002) (defining
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“absurd”). Second, the word “manifest” requires that any absurdity in contract
language be obvious. See Webster’s Third New International Dictionary at 1375
(defining “manifest” to mean “easily understood or recognized at once by the mind
* * * : OBVIOUS”); see also Black’s Law Dictionary 1107 (10th Ed.2014)
(defining “manifest injustice” as “[a] direct, obvious, and observable error in a trial
court” (emphasis added)); id. at 660 (defining “manifest error” as “[a]n error that is
plain and indisputable” (emphasis added)). The Eighth District failed to
acknowledge the narrow scope of the manifest-absurdity exception to the plain-
meaning rule.
{¶ 21} The Eighth District also erred in its application of the exception. It
determined that the plain language of the Rents Credit resulted in a manifest
absurdity based on two factors. First, it believed that if the Rents Credit is
interpreted to include all rent payments, it would be absurd for the parties to reduce
the purchase price by both the Reduction in Principal Credit and the Rents Credit
“during what could be a lengthy lease term.” 2017-Ohio-7090 at ¶ 9. As an
example, the Eighth District observed that, although the initial term of the lease was
10½ years, the Lease Agreement permitted two five-year extensions, meaning the
lease could potentially continue for up to 20½ years. If the lease remained in effect
for that full period, then under Beverage Holdings’s interpretation, the court stated
that it “would not only acquire the property” at the end of the lease but because the
Rents Credit would have grown enormously over the lease period, Beverage
Holdings “would also be owed money at closing—all the while enjoying the profits
from operating the business.” Id. Second, the Eighth District stated that the Real
Estate Purchase Agreement provides for a closing period of between 120 and 180
days, which it believed “indicates that the [proration provision in the Rents Credit]
was meant to apply only to rent paid after Beverage Holdings gave notice of intent
to close.” Id. at ¶ 10.
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{¶ 22} When considered with the standard for “manifest absurdity”
described above in mind, neither of these rationales supports a finding that the
contract language at issue here is absurd, much less obviously absurd.
{¶ 23} Contrary to the Eighth District’s first concern, we see no manifest
absurdity in the Rents Credit including all rent payments made during a potentially
“lengthy lease term.” Beverage Holdings argues that the rent payments are properly
understood as prepayments of the purchase price. The growth in the Rents Credit
over time therefore would not reduce the overall amount of money received by
Lombardo for the sale of the property, because the reduction in the purchase price
due to the Rents Credit would be matched dollar-for-dollar by the rent payments
received by Lombardo. As noted above, Lombardo also received the benefit of
completing the sale in the near future with Beverage Holdings agreeing to pay the
early-termination penalty to one of Lombardo’s lenders—a payment Lombardo
otherwise would have been required to make in order to complete the transaction
before February 15, 2018, and that offset the credits from the perspective of
Beverage Holdings. Finally, if the lease were to last long enough for the credits to
add up to the initial purchase price of $1,726,000, Beverage Holdings could easily
avoid the overpayment situation envisioned by the Eighth District by providing
notice of its intent to close the transaction before that occurs. We therefore reject
the conclusion of the Eighth District that the inclusion of the Rents Credit and the
Reduction in Principal Credit in a potentially lengthy lease supports a finding of a
manifest absurdity. See Alexander, 53 Ohio St. 2d at 246, 374 N.E.2d 146 (finding
no absurdity where extreme result theoretically permitted by plain language would
reasonably be expected not to occur).
{¶ 24} We similarly see no manifest absurdity in the second concern raised
by the Eighth District. It is true that the Real Estate Purchase Agreement allowed
the closing to occur several months after Beverage Holdings provided notice of its
intent to close the transaction, but nothing in the language of the provision
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addressing the time for closing alters the plain language of the Rents Credit or
otherwise provides a basis for interpreting the Rents Credit in the manner sought
by Lombardo.
{¶ 25} Putting aside the rationales relied on by the Eighth District, we see
no other basis on which to conclude that the plain language of the Rents Credit
results in a manifest absurdity. The parties are sophisticated entities and were
represented by counsel. Together they agreed to a unique transaction in which the
purchase price would be reduced over time due to the application of various
accumulating credits. To the extent Lombardo may be dissatisfied with the
purchase price that resulted from the plain language agreed to by the parties, “[i]t
is not the responsibility or function of this court to rewrite the parties’ contract in
order to provide for a more equitable result.” Foster Wheeler Enviresponse, Inc. v.
Franklin Cty. Convention Facilities Auth., 78 Ohio St. 3d 353, 362, 678 N.E.2d 519
(1997); see also Natl. Union Fire Ins. Co. of Pittsburgh, Pa. v. Circle, Inc., 915
F.2d 986, 991 (5th Cir.1990) (“Although a business decision may be unwise,
imprudent, risky, or speculative, it is not necessarily ‘absurd.’ We decline to allow
contracting parties to escape the unfortunate and unexpected, though not
objectively ‘absurd,’ consequences of a contract by subsequently characterizing
their consequences as ‘absurd’ ”).
III. Conclusion
{¶ 26} For these reasons, we reverse the judgment of the Eighth District
Court of Appeals and reinstate the judgment of the trial court.
Judgment reversed.
FRENCH, FISCHER, DONNELLY, and SCHAFER, JJ., concur.
KENNEDY, J., dissents, with an opinion.
DEWINE, J., dissents, with an opinion.
JULIE A. SCHAFER, J., of the Ninth District Court of Appeals, sitting for
STEWART, J.
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_________________
KENNEDY, J., dissenting.
{¶ 27} I agree with the majority that “[i]t is not the responsibility or function
of this court to rewrite the parties’ contract in order to provide for a more equitable
result.” Foster Wheeler Enviresponse, Inc. v. Franklin Cty. Convention Facilities
Auth., 78 Ohio St. 3d 353, 362, 678 N.E.2d 519 (1997). It is our responsibility,
however, “to discover and effectuate the intent of the parties” when we construe a
contract. Graham v. Drydock Coal Co., 76 Ohio St. 3d 311, 313, 667 N.E.2d 949
(1996), citing Skivolocki v. E. Ohio Gas Co., 38 Ohio St. 2d 244, 313 N.E.2d 374
(1974), paragraph one of the syllabus. Here, the majority addresses whether a
certain reading of the contract is manifestly absurd. But the problem is that the
majority, like the appellate court, misinterprets the contract. The contract doesn’t
say what the majority says it says, and therefore, the majority’s discussion
regarding whether the contract is manifestly absurd under its reading is irrelevant.
Section 3(a)(ii), the “Rents Credit” clause of the Real Estate Purchase Agreement
(“Purchase Agreement”), does not credit the appellant, Beverage Holdings, L.L.C.,
with all the rents that have been paid since the signing of the Purchase Agreement;
instead, pursuant to the Rents Credit clause, the prepaid rent for the last month of
the lease is distributed proportionately to the owners—the buyer and the seller—
based on the dates of ownership determined by the closing date. That is, the owner
of the property before the closing receives the proportionate share of the rent that
covers the dates before the closing and the owner after the closing takes the part of
the rent that covers the remainder of the month after the closing.
{¶ 28} The first proposition of law set forth by Beverage Holdings is
“Courts cannot disregard unambiguous contract terms by deciding that they could
lead to an absurd result under hypothetical circumstances.” I would hold that that
proposition of law is true, but contrary to the argument of Beverage Holdings, I
would hold that the unambiguous contract terms require judgment in favor of the
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appellee, 5701 Lombardo, L.L.C. Because this case is resolved by addressing the
first proposition of law, I would decline to address the four remaining propositions
of law. I would affirm the court of appeals’ reversal of the trial court on other
grounds and would remand the case to the trial court to enter judgment for the
appellee. Accordingly, I dissent.
{¶ 29} The contract at issue in this case is the Purchase Agreement between
Beverage Holdings and Valentino-VAV, L.L.C., specifically Section 3 of the
agreement, titled “Adjustments to Purchase Price.” The majority opinion does not
set forth the language of the entire section. Here is how it reads in the contract:
3. Adjustments to Purchase Price. At closing, the
purchase price shall be adjusted by providing Buyer a credit for the
following:
a) The Purchase Price shall be decreased by:
i) All general taxes and assessments which are a lien on the
property at closing and which are not paid at closing.
ii) Rents received by Seller from the tenant of the Premises,
prorated to date of closing.
iii) Any security deposit held by Seller from the tenant
occupying the property.
iv) The Reduction in Principal Credit.
v) Any indebtedness of Seller assumed by Buyer
b) The purchase price shall be increased and Buyers shall be
responsible to pay an additional amount equal to the Credit-Swap
Differential.
(Emphasis added.)
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{¶ 30} The specific term in dispute is Section 3(a)(ii), which grants the
purchaser “Rents received by Seller from the tenant of the Premises, prorated to
date of closing.” The majority says, “The language is broad and clear, providing
that a credit would be provided for all ‘rents’ paid and that the credit would be
prorated to the date of closing.” Majority opinion at ¶ 16. But the language does
not say or mean what the majority thinks it says or means.
{¶ 31} First, Section 3(a)(ii) does not use the word “all.” That word is
assuredly missing from the clause. Every rent payment is not part of the credit; the
credit includes only those rents that the seller receives from the tenant that are
prorated to the date of closing. The significance of the word “prorated” is discussed
below.
{¶ 32} Second, the fact that “rents” is plural does not necessarily mean that
the credit is for multiple months. We need to look to the Lease Agreement executed
the same day as the Purchase Agreement; “[a]s a general rule of construction, a
court may construe multiple documents together if they concern the same
transaction.” Ctr. Ridge Ganley, Inc. v. Stinn, 31 Ohio St. 3d 310, 314, 511 N.E.2d
106 (1987). The Lease Agreement addresses different types of rent. Leases can
include clauses that call for “additional rent” to be paid, a charge for instance, for
the reasonable cost of operating and maintaining common areas. See, e.g., Ohio
Forms & Transactions, Section 18:19 (2019). The lease in this case contains the
statement, in Section 4, “Any other sums payable to Lessor under this Lease shall
be deemed to be additional rent.” And the lease specifically addresses at least one
“additional rent”:
For each Lease Year during the Term, Lessee shall pay Lessor, as
additional rent on a monthly basis, one-twelfth (1/12th) Real
Property Taxes assessed against the Premises annually as such taxes
become due and payable during the Lease Term, prorated for any
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partial assessment period occurring immediately before the Rent
Commencement Date and after the Expiration Date.
(Emphasis added.) Therefore, the presence of more than one type of rent in the
Lease Agreement accounts for the use of the word “rents” in the Purchase
Agreement. Moreover, it makes sense under the Purchase Agreement that the
prepaid portion of the real-estate taxes paid on the first of each month would be
prorated such that the purchaser gains the benefit of that payment when it becomes
the owner of the property. That is, this “additional rent” would be prorated like the
monthly rent for the premises.
{¶ 33} Third, the majority’s interpretation of Section 3(a)(ii) renders the
word “prorated” meaningless. “When interpreting a contract, we will presume that
words are used for a specific purpose and will avoid interpretations that render
portions meaningless or unnecessary.” Wohl v. Swinney, 118 Ohio St. 3d 277, 2008-
Ohio-2334, 888 N.E.2d 1062, ¶ 22. To prorate is to “divide, assess, or distribute
proportionately.” Black’s Law Dictionary 1340 (9th Ed.2009). There was only one
thing under the Rents Credit clause that would require proration, that would require
a proportionate division: the prepaid rents for the one month during which the buyer
and the seller each owned the property for a separate part of the month. The Rents
Credit clause controls the seller as well as the buyer. Each gets a proportionate
share. Under the majority’s interpretation of the contract, there is nothing to be
divided proportionately. If the buyer is receiving as a credit all the rents received
by the seller, then proration is unnecessary—the buyer simply receives credit for
all the rents that were paid. A proration is meant to ensure that the entity with the
burden of ownership gets the benefit of the rent. For example, if the sale of a rental
property closes on October 15, the seller gets the rents paid from October 1 to
October 15, and the buyer gets the rent from October 16 through October 31. The
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use of “prorated” in Section 3(a)(ii) ensures that the last month’s rent is distributed
according to the periods of ownership.
{¶ 34} Lastly, the majority gives very little attention to the Reduction in
Principal Credit clause in the contract. However, we must construe the contract as
a whole, “and the intent of each part will be gathered from a consideration of the
whole.” Foster Wheeler Enviresponse, 78 Ohio St. 3d at 361, 678 N.E.2d 519. In
Section 3(a)(iv) of the Purchase Agreement, the buyer receives a credit for “The
Reduction in Principal Credit.” That credit is separately defined in Section 4 of the
agreement:
4. Reduction in Principal Credit. Due to the current
financing Seller has in place for the property; it is not practical to
currently close this transaction. Because this transaction may not
close for several years, Seller agrees to reduce the purchase price to
Buyers by the amount of principal payments made by Seller to
Seller’s lender for the mortgage notes currently on the property.
Therefore, at closing, Buyers will receive a credit equal to the
reduction in principal for the mortgage notes from the date of the
execution of this agreement until the closing date (The Reduction in
Principal Credit).
{¶ 35} The Reduction in Principal Credit already provides a credit to the
buyer for a portion of the rents paid from the execution of the Purchase Agreement
through the closing; this is where the seller recognizes through the granting of a
credit that an affiliate of the buyer has paid down the principal of the mortgage
notes on the property through long-term rental payments. Therefore, credits to the
buyer for all rents paid under the Lease Agreement would be redundant. The buyer
would be getting a credit for the amount the principal was reduced through the
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payment of rents under Section 3(a)(iv) as well as a complete credit for all rents
paid under Section 3(a)(ii). Therefore, the buyer would be credited twice for the
amount paid toward reducing the principal—once through the Reduction in
Principal Credit and then again through the Rents Credit as the majority reads it. If
the buyer already got credit for all rents paid under Section 3(a)(ii), why would it
receive another credit for a portion of rents paid under Section 3(a)(iv)?
{¶ 36} The majority’s interpretation of the contract is unreasonable. To get
where it ends up, the majority adds the word “all,” ignores the meaning of the word
“prorated,” and fails to recognize any significance of the Reduction in Principal
Credit clause. We need only follow our rules of contract interpretation to properly
resolve this case:
When confronted with an issue of contract interpretation, our
role is to give effect to the intent of the parties. We will examine the
contract as a whole and presume that the intent of the parties is
reflected in the language of the contract. In addition, we will look
to the plain and ordinary meaning of the language used in the
contract unless another meaning is clearly apparent from the
contents of the agreement. When the language of a written contract
is clear, a court may look no further than the writing itself to find
the intent of the parties. “As a matter of law, a contract is
unambiguous if it can be given a definite legal meaning.” Westfield
Ins. Co. v. Galatis, 100 Ohio St. 3d 216, 2003-Ohio-5849, 797
N.E.2d 1256, ¶ 11.
Sunoco, Inc. (R & M) v. Toledo Edison Co., 129 Ohio St. 3d 397, 2011-Ohio-2720,
953 N.E.2d 285, ¶ 37.
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SUPREME COURT OF OHIO
{¶ 37} There is only one reasonable interpretation of the contract in this
case. Again, the crux of the case is Section 3(a)(ii) of the Purchase Agreement,
through which the buyer is credited with “Rents received by Seller from the tenant
of the Premises, prorated to date of closing.” When it sets forth this phrase in its
opinion, the majority substitutes “Lombardo” for “Seller,” which is unimportant,
but also substitutes “Beverage Holdings” for “tenant.” The tenant, however, is not
Beverage Holdings; it is PRB Development, L.L.C., the affiliate of Beverage
Holdings that was running the Goddard School at the property. And the use of the
word “tenant” is important to consider. The reasonable interpretation of Section
3(a)(ii) is that Lombardo was selling a building that had a tenant and the parties had
to address what would happen to payments from the tenant occupying the building.
The clause at issue speaks of the “[r]ents received by Seller from the tenant of the
Premises.” (Emphasis added.) An Ohio treatise discusses the prorating of prepaid
rent in a sale subject to tenancies:
At the time of conveyance and transfer of possession to purchaser,
all rentals from property prepaid beyond the transfer date will be
prorated between seller and purchaser as of that date. All rentals
after that date falling due will be the sole property of purchaser.
Ohio Forms Legal & Business, Section 1:186 (2019). Therefore, the clause at issue
recites a common clause included in sales of property that include tenancies. Since
rent is prepaid under the lease—$12,500 rent is paid on the first of each month—it
follows that the Purchase Agreement would account for the portion of the monthly
payment that applies to the days remaining in the month after the closing of the
sale. That prorated portion of the rent would go to the purchaser, who is the new
owner of the property.
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January Term, 2019
{¶ 38} Another clause in Section 3 also addresses the fact that the transfer
involves property that includes a tenant under a lease. Section 3(a)(iii) credits to
the buyer “[a]ny security deposit held by Seller from the tenant occupying the
property.” As the new landlord, the buyer takes the whole of the security deposit
and theoretically returns that amount less deductions to the tenant at the conclusion
of the lease.
{¶ 39} The only reasonable interpretation of the Purchase Agreement is that
Section 3(a)(ii) and Section 3(a)(iii) were designed to address the issues that any
transfer of property that involves a tenant under a lease would address—how to
distribute the last month of prepaid rent when the closing doesn’t fall on the last
day of the month and what to do with the security deposit. Section(3)(a)(iv) is the
term unique to this agreement and how the buyer in this case gets credit for the
benefit the seller received from the long-term lease payments. That clause gets its
own explanatory paragraph in Section 4 of the Purchase Agreement.
{¶ 40} I agree with the appellant’s first proposition of law, that “[c]ourts
cannot disregard unambiguous contract terms by deciding that they could lead to
an absurd result under hypothetical circumstances.” But I would hold that the
unambiguous language of the contract should be interpreted differently from the
interpretation supported by the appellant. Section 3(a)(ii) of the Purchase
Agreement says that the last month’s rent paid by the tenant should be distributed
proportionately between the buyer and the seller, as determined by the closing date.
Therefore, I would remand the cause to the trial court for it to enter judgment in
favor of the appellee.
_________________
DEWINE, J., dissenting.
{¶ 41} The dispute here concerns a contract provision that reduces the
purchase price of the property by the amount of “[r]ents received by Seller [i.e.,
appellee, 5701 Lombardo, L.L.C.,] from the tenant [i.e., an affiliate of appellant,
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SUPREME COURT OF OHIO
Beverage Holdings, L.L.C.] of the Premises, prorated to date of closing.” Both the
majority and the other dissent insist that this clause is unambiguous. The majority
says the contract unambiguously favors Beverage Holdings’s interpretation,
entitling the company to a credit for all rents paid over the entire term of the lease.
The other dissent says the contract unambiguously favors Lombardo’s
interpretation, providing Beverage Holdings a credit only for a portion of the last
month’s rent payment. Neither story is wholly satisfying. While both opinions
identify contract terms that seemingly point in their direction, neither is able to
account for terms that seem to go the other way. In my view, the contract
reasonably admits of competing interpretations, each of which is equally plausible
on the face of the contract. I would thus hold that the disputed provision is
ambiguous and remand the matter to the trial court for it to consider extrinsic
evidence.
{¶ 42} As a rule, “written contracts are usually enforced in accordance with
the ordinary meaning of the language used in them and without recourse to
evidence, beyond the contract itself, as to what the parties meant.” Beanstalk
Group, Inc. v. AM Gen. Corp., 283 F.3d 856, 859 (7th Cir.2002). This “strong
presumption” that we not look beyond the four corners of the contract “simplifies
the litigation of contract disputes and, more important, protects contracting parties
against being blindsided by evidence intended to contradict the deal that they
thought they had graven in stone by using clear language.” Id.
{¶ 43} Accordingly, it is the duty of the court to exhaust principles of
contract interpretation before resorting to extrinsic evidence of the parties’ intent.
See 11 Lord, Williston on Contracts, Section 30:4 (4th Ed.2019); CNH Indus. N.V.
v. Reese, __ U.S. __, 138 S. Ct. 761, 765, 200 L. Ed. 2d 1 (2018). Using basic
principles of interpretation, it will usually be the case that one interpretation of a
contract is the most plausible, because competing interpretations strain ordinary
usage or are at odds with the apparent structure or purpose of the contract read as a
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January Term, 2019
whole. In such a case, the mere fact that a motivated attorney can formulate a
competing interpretation that is arguably consistent with the text of a contractual
provision doesn’t mean that the contract is ambiguous.
{¶ 44} But here, the case turns on a provision that is, to say the least,
underspecified, given the effect that it has on the terms of the deal between the
parties. And looking to the broader context of the contract doesn’t help to resolve
the issue in favor of one or the other of the dueling interpretations offered. As both
the majority and other dissent illustrate, each of the interpretations is an imperfect
fit for the contractual language—both require modifying the contractual language
in order to yield a wholly unambiguous statement of the parties’ intent.
{¶ 45} Start with the majority. The majority states that the “language is
broad and clear, providing that a credit would be provided for all ‘rents’ paid and
that the credit would be prorated to the date of closing.” Majority opinion at ¶ 16.
The majority thus reads the disputed provision to mean all rents received by the
seller from the tenant over the entire course of the lease agreement, prorated to the
date of closing. At first blush, this reading would appear to make sense. If A enters
into a contract for the purchase of 100 widgets from B and the contract states that
“the widgets shall be delivered on March 15,” the referent of “the widgets” is
usually fairly understood to be all 100 widgets that are the subject of the transaction
and not some subset thereof. Reading “the widgets” to encompass all the widgets
seems right based on the broader structure and context of the contract.
{¶ 46} The majority assumes that something similar is happening here: that
one can fairly infer that “rents received by Seller from the tenant” means all rents
received. And if the contract had merely provided a credit for rents received by the
seller from the tenant, without additional qualifying language, that might be the
most logical reading of the contract. But as the other dissent points out, the
majority’s account struggles to make sense of the proration clause—“the purchase
price shall be decreased by * * * [r]ents received by Seller * * * prorated to date
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SUPREME COURT OF OHIO
of closing.” (Emphasis added.) Since rent is prepaid, if the buyer gets a credit for
all rents received by the seller, then there is nothing left to prorate—the proration
clause has no effect. The majority offers no real rationale for the inclusion of the
provision. It says only that “the proration language in the Rents Credit makes clear
that the credit is limited to the [date of closing.]” Majority opinion at ¶ 16. But
that makes little sense. If, as the majority contends, there is a credit for all rents
received, then the rent credit isn’t prorated at all.
{¶ 47} So, to adopt the majority’s view, we must necessarily conclude that
the proration clause is without practical effect, that it is simply surplusage. The
necessity to do so certainly counts against the majority’s interpretation. But I do
not believe it completely forecloses our adoption of that approach. As the United
States Supreme Court has noted, a “preference for avoiding surplusage
constructions is not absolute.” Lamie v. United States Trustee, 540 U.S. 526, 536,
124 S. Ct. 1023, 157 L. Ed. 2d 1024 (2004). And in this case, the competing view of
the contract offered by the other dissent also fails to satisfactorily account for the
contractual provision at issue.
{¶ 48} The other dissent would read the disputed provision to mean prepaid
rents received by the seller from the tenant for the month of closing, prorated to the
date of closing. This reading has the advantage of allowing the proration clause to
do something. But it is premised upon an inference about the narrow reach of the
“rents received” clause that isn’t apparent from the text alone. And the other
dissent’s supporting arguments fall short of yielding confidence that its
interpretation is required.
{¶ 49} The other dissent struggles to get around the fact that the most
natural reading of the plural “rents” is the one adopted by the majority—all rents
received. It argues that the use of the plural “rents” could be explained by the fact
that there are different types of rent—the monthly rent payment and the additional
rent payment covering property taxes. But that just establishes that Lombardo’s
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January Term, 2019
interpretation is permissible, the use of the plural “rents” notwithstanding. It
doesn’t show that Lombardo’s interpretation is correct.
{¶ 50} Second, the other dissent argues that giving Beverage Holdings a
credit for both all rents paid under the lease agreement and for any reduction in
principal would be “redundant.” Dissenting opinion of Kennedy, J., at ¶ 35. But it
is hard to see how “redundancy” is a relevant concept if we look simply at the
purchase agreement. To see why, consider that there is no reason, in theory, why
the parties could not have agreed to a credit equal to twice the reduction in principal
or to twice the total rent payments. Given other conditions, that might even be a
sensible deal for both parties—for instance, if both the monthly rent payment and
the sale price were far above the actual market values. Based on the rent payments,
the sale price of the property, the property’s market value, and the date of closing,
we could calculate an effective interest rate for the money transferred by the buyer
to the seller prior to closing. That interest rate may be high, it may be low, or it
may be quite reasonable. If under prevailing commercial norms that effective rate
is too high or too low, that might count against a party’s interpretation of the
contract. But that is something that can be assessed only through extrinsic
evidence. From the face of the contract, this court simply cannot tell. And it would
be a mistake to rule out that sort of transaction by declaring the credits contemplated
by the agreement to be redundant.
{¶ 51} So, we are left with two competing interpretations, either of which
could be claimed to be permitted by the text but neither of which is an especially
good fit for it. The ordinary rules of contract interpretation do not answer the
question before us; instead, they point us in different directions. I would therefore
find that the text of the contract is ambiguous. “[W]here a contract is ambiguous,
parol evidence may be employed to resolve the ambiguity and ascertain the
intention of the parties.” Illinois Controls, Inc. v. Langham, 70 Ohio St. 3d 512,
521, 639 N.E.2d 771 (1994). I would send the matter back to the trial court for it
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SUPREME COURT OF OHIO
to look to extrinsic evidence in order to determine the intent of the parties regarding
the disputed rent-credit provision.
{¶ 52} So, like the court of appeals, and unlike the majority and the other
dissent, I believe a remand for further proceedings is in order. But I believe that
the court of appeals erred in finding that Beverage Holdings’ interpretation was
manifestly absurd. As the majority correctly points out, the court of appeals did
not adequately respect the narrow scope of our manifest-absurdity doctrine. That
doctrine should not be invoked to rescue a party from a harsh result of applying the
clear meaning of a contract. Foster Wheeler Enviresponse, Inc. v. Franklin Cty.
Convention Facilities Auth., 78 Ohio St. 3d 353, 362, 678 N.E.2d 519 (1997).
Rather, it is appropriately applied only to interpretations that make the contract
incoherent in some fundamental way—perhaps by requiring a party to do
something that is functionally impossible or by yielding nonsense.
{¶ 53} Here, there is nothing manifestly absurd about Beverage Holdings’s
interpretation. As I have explained, whether Beverage Holdings’s interpretation of
the contract is even a bad deal for Lombardo depends on what additional
assumptions one makes about the market rental and sale value of the property.
Indeed, this case illustrates the dangers of a court deploying the manifest-absurdity
doctrine to protect against what it perceives to be a bad deal for one of the parties.
Courts that get involved in assessing whether a contract is a bad deal can often be
mistaken in that assessment. And, anyway, sometimes contracting parties make
bad deals. The better course in deploying the manifest-absurdity doctrine is to stick
with the face of the contract and ask whether a plain reading would render it
fundamentally incoherent, such that no reasonable person would have agreed to it.
Beverage Holdings’s interpretation of the contract is certainly not fundamentally
incoherent in a way that would legitimate invoking the manifest-absurdity
exception to the plain-meaning rule. Thus, while I would remand the matter to the
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January Term, 2019
trial court for it to look to extrinsic evidence to determine the parties’ intent, I would
do so without any presumption that Beverage Holdings’s interpretation is absurd.3
_________________
Polito Rodstrom Burke, L.L.P., Joseph T. Burke, and James D. Romer, for
appellant.
DiCaudo, Pitchford & Yoder, L.L.C., J. Reid Yoder, and Benjamin R.
Sorber, for appellee.
Nee Law Firm, L.L.C., and Leigh S. Prugh, urging reversal for amicus
curiae West Shore Bar Association.
Haddad Law Office and Tina R. Haddad, urging reversal for amici curiae
Harlan D. Karp and Tina R. Haddad.
_________________
3. We accepted five propositions of law. The disposition of this case turns on the first proposition
of law, which relates to the proper interpretation of the contract. Based on how I would resolve this
case, propositions two through four are moot. In the fifth proposition of law, Beverage suggests
that when parties are of equal bargaining power, ambiguities are construed against the drafter of the
contract. But most courts today do not apply the principle that ambiguities are construed against
the drafter to contracts negotiated by sophisticated commercial parties represented by counsel. See
Beanstalk, 283 F.3d at 858. This court has not yet explicitly held that the principle has no application
to such disputes. But it has also never held that it applies without first attempting to resolve the
ambiguity through other means. Ohio courts routinely hold that to the extent that the principle of
construing ambiguities against the drafter applies at all, it is a secondary rule of construction that
comes into play only when an ambiguity remains after a court has looked to extrinsic evidence. See
Porterfield v. Bruner Land Co., Inc., 2017-Ohio-9045, 103 N.E.3d 152, ¶ 19 (7th Dist.); Cline v.
Rose, 96 Ohio App. 3d 611, 615, 645 N.E.2d 806 (3d Dist.1994); Malcuit v. Equity Oil & Gas Funds,
Inc., 81 Ohio App. 3d 236, 240, 610 N.E.2d 1044 (9th Dist.1992).
25