Advanced Recycling Systems, LLC v. Southeast Properties Ltd. Partnership

#25304-rev & rem-GAS
2010 SD 70IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA
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ADVANCED RECYCLING SYSTEMS, LLC, Plaintiff and Appellee,
v.
SOUTHEAST PROPERTIES LIMITED
PARTNERSHIP, Defendant and Appellant.
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APPEAL FROM THE CIRCUIT COURT OF
THE SECOND JUDICIAL CIRCUIT
MINNEHAHA COUNTY, SOUTH DAKOTA
* * * *
HONORABLE KATHLEEN K. CALDWELL
Judge
* * * *
RONALD A. PARSONS, Jr.
Johnson, Heidepriem &
Abdallah, LLP
Sioux Falls, South Dakota
and
MARK D. O’LEARY
Sioux Falls, South Dakota Attorneys for plaintiff
and appellee.
MICHAEL J. SCHAFFER
PAUL H. LINDE OF
Schaffer Law Office, Prof., LLC
Sioux Falls, South Dakota Attorneys for defendant
and appellant.
* * * *
ARGUED APRIL 27, 2010
OPINION FILED 08/18/10
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SEVERSON, Justice
[¶1.] Advanced Recycling Systems, LLC initiated this breach of contract
action against Southeast Properties, LP, alleging that Southeast Properties violated
Advanced Recycling’s right of first refusal when it sold the 8th & Railroad Center
development without first offering 110 South Reid Street, a portion of the
development subject to a right of first refusal, to Advanced Recycling. The trial
court granted summary judgment in favor of Advanced Recycling. Southeast
Properties appeals. We reverse and remand with instruction to enter a judgment
consistent with this opinion.
BACKGROUND
[¶2.] Until 2004, Southeast Properties owned the 8th & Railroad Center
development (“the development”) located in downtown Sioux Falls, South Dakota.
The development consists of three properties: 110 South Reid Street; 106 North
Reid Street; and, 110 North Reid Street. Although each of the properties has its
own address, legal description, and real estate tax statement, Southeast Properties
considered the three properties one development.
[¶3.] Advanced Recycling is a drop-off and processing station for waste
management companies and other haulers to deposit recyclable materials such as
paper products, plastics, and aluminum. Advanced Recycling sorts, bales, and ships
these materials to mills or other manufacturing facilities for processing and reuse.
Beginning in 1995, Advanced Recycling leased an aging, unheated building in the
development known as 110 South Reid Street, as well as a small parcel of adjacent
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land, (“the leased premises”) from Southeast Properties. 1 The parties’ mutually
executed lease was for a term of three years, commencing October 1, 1995, and
ending September 30, 1998.
[¶4.] The lease gave Advanced Recycling a right of first refusal on the leased
premises:
The Tenant shall have first right of refusal to purchase the
premises in the event the Landlord chooses to sell and produces
a written bonafide offer to purchase. . . . Tenant shall have
thirty (30) days to match the bonafide offer and, should Tenant
elect to match said offer, shall close on the purchase of the
premises within an additional thirty (30) days from matching
said offer or the date of closing as stated in the offer, whichever
is later.
The parties agree that the right of first refusal provision was limited to the leased
premises and did not apply to the development as a whole.
1. The lease defines “the premises” as:
A block building on Tract 7, County Auditor Subdivision of the
SE ¼, except R.R. R/O/W thereof, in Section 16-T101N-R49W,
Minnehaha County, South Dakota, also known as 110 S. Reid
Street, consisting of approximately 13,000 square feet of
rentable area, located within the development commonly known
as the 8th and R.R. Center, 401 East 8th Street, Sioux Falls,
South Dakota. Tenant also has the use of the adjacent land
described as the area north of the block building rented by
Tenant bounded by the property line on the east and on the
north by a line parallel to the building front that is 86 feet north
of the building and the area west of the building bounded on the
south by the railroad right of way easement and on the west by
a line parallel to the west side of the block building that is 100
feet west of the building and the north by the line parallel to the
north side of the building and 86 feet north of the building for
purposes of driveways, the installation of a truck scale, docks,
and exterior storage. Driveways from Reid Street are available
for Tenant’s use in common with other Tenants.
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[¶5.] An addendum to the lease also gave Advanced Recycling an option to
renew the lease:
The Tenant shall have one two (2) year option to renew this
lease at the expiration of the initial term, subject to the terms
and conditions of the agreement, except that the base rent will
be increased by three percent (3%) each year over the previous
year. Notice of the Tenant’s intention to exercise the option
must be given to the Landlord in writing at least 90 days prior
to the expiration of the term of this lease. If the notice is not
given by the Tenant, the lease shall terminate at the end of the
original term without further notice.
Advanced Recycling exercised its option to renew the lease for an additional two
years from October 1, 1998, through September 30, 2000. In September 1999,
Advanced Recycling and Southeast Properties agreed to extend the lease for an
additional three years, and Advanced Recycling was given the option to renew the
lease for an additional three-year term at the expiration of the lease on September
30, 2003. Advanced Recycling exercised this option to renew the lease for an
additional three-year term ending September 30, 2006. Each lease renewal made
clear that “all of the terms, covenants, provisions, and additions of the original lease
[would] be binding and remain in full force.”
[¶6.] In 2004, Southeast Properties contracted to sell the development,
including the leased premises, to 8th & Railroad Center, LLC. Southeast Properties
entered into a commercial purchase agreement to sell the development in March
2004 and conveyed the development by warranty deed on July 15, 2004. The leased
premises were not sold separately, but were sold as part of the development.
Southeast Properties did not receive a separate bona fide offer for the purchase of
the leased premises, and no specific value was allocated to the leased premises.
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[¶7.] On July 23, 2004, Advanced Recycling received notice that the
development had been sold. 2 Advanced Recycling did not assert its right of first
refusal at that time, but remained in possession of the premises under the terms of
the lease. When Advanced Recycling began negotiating a new lease with 8th &
Railroad Center in the summer of 2006, it discovered the right of first refusal
provision in the existing lease and contacted an attorney. 3 Advanced Recycling
entered into a new lease with 8th & Railroad Center on September 29, 2006. This
lease contained a release of Advanced Recycling’s claims against 8th & Railroad
Center for the alleged violation of the right of first refusal. The prior lease,
including the right of first refusal provision, expired on September 30, 2006.
[¶8.] In January 2007, Advanced Recycling initiated this breach of contract
action against Southeast Properties and 8th & Railroad Center, alleging that
Southeast Properties violated the right of first refusal when it sold the development
to 8th & Railroad Center without first offering the leased premises to Advanced
Recycling. Advanced Recycling requested specific performance or monetary
2. There was no evidence presented at the summary judgment hearing that
Southeast Properties acted in bad faith by selling the development as a whole
to avoid the right of first refusal on the leased premises.
3. The original lease containing the right of first refusal provision was
negotiated by Michael and Stewart Shaft on behalf of Advanced Recycling.
At that time, the Shafts were responsible for the day-to-day operations of
Advanced Recycling. The Shafts were asked to leave Advanced Recycling in
2006. Laurie and Gerald Cressman were the sole owners of Advanced
Recycling at the time of trial, and Laurie managed the facility. Laurie was
not a party to the negotiations of the terms of the original lease, but was
responsible for negotiating the lease with 8th & Railroad Center in the
summer of 2006.
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damages. In June 2007, the parties stipulated to the dismissal of Advanced
Recycling’s claims against 8th & Railroad Center and for specific performance. The
trial court entered an order to that effect in July 2007.
[¶9.] In November 2007, Advanced Recycling filed a motion for partial
summary judgment on its breach of contract claim against Southeast Properties.
Southeast Properties filed a cross-motion for summary judgment. A hearing on the
motions was held in December 2007. The trial court subsequently issued a
memorandum decision, granting summary judgment in favor of Advanced
Recycling. The trial court rejected Southeast Properties’ argument that Advanced
Recycling’s right of first refusal was not “triggered” because the leased premises
were sold as part of a larger development. The trial court concluded that Advanced
Recycling was entitled to monetary damages for the violation of the right of first
refusal. After a bench trial on damages, the trial court awarded Advanced
Recycling $484,542.36. Southeast Properties appeals.
STANDARD OF REVIEW
[¶10.] This Court’s standard of review of a grant or denial of a motion for
summary judgment is well settled. “In reviewing a grant or a denial of summary
judgment under SDCL 15-6-56(c), we determine whether the moving party has
demonstrated the absence of any genuine issue of material fact and showed
entitlement to judgment on the merits as a matter of law.” Janis v. Nash Finch Co.,
2010 SD 27, ¶6, 780 NW2d 497, 500 (quoting Dykstra v. Page Holding Co., 2009 SD
38, ¶23, 766 NW2d 491, 496). “The evidence must be viewed most favorably to the
nonmoving party, and reasonable doubts should be resolved against the moving
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party.” Id. (citation omitted). “The nonmoving party, however, must present
specific facts showing that a genuine, material issue for trial exists.” Id. (citation
omitted). But in considering a trial court’s grant of a motion for summary
judgment, this Court “will affirm only if all legal questions have been decided
correctly[.]” Gerhts v. Batteen, 2001 SD 10, ¶4, 620 NW2d 775, 777 (citing Holzer v.
Dakota Speedway, Inc., 2000 SD 65, ¶8, 610 NW2d 787, 791).
ANALYSIS AND DECISION
[¶11.] 1. Whether Southeast Properties violated the right of first
refusal when it sold the development without first
offering the leased premises to Advanced Recycling.
[¶12.] It is essential to the resolution of this case to appreciate the difference
between options and rights of first refusal. An option “gives the optionee the right
to purchase the property at his election within an agreed period at a named price.”
Crowley v. Texaco, Inc., 306 NW2d 871, 873 (SD 1981) (citing Sinclair Ref. Co. v.
Allbritton, 147 Tex 468, 218 SW2d 185 (1949)). See Ziegler Furniture and Funeral
Home, Inc. v. Cicmanec, 2006 SD 6, ¶17, 709 NW2d 350, 355 (“An option to
purchase real property may be defined as a contract by which an owner of real
property agrees with another person that the latter shall have the privilege of
buying the property at a specified price within a specified time, or within a
reasonable time[.]”) (quoting Kuhfeld v. Kuhfeld, 292 NW2d 312, 314 (SD 1980)).
An option contract is an irrevocable offer by the owner to sell on specified terms and
creates a power of acceptance in the optionee. Straley v. Osborne, 262 Md 514, 521,
278 A2d 64, 68 (1971) (citing 1A Corbin, Corbin on Contracts §§ 259, 260 (1963 ed))
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(additional citations omitted). The option is exercised when the optionee accepts
the irrevocable offer, and an enforceable contract of sale is created. Id.
[¶13.] Unlike an option, a right of first refusal “does not entitle the [holder] to
compel an unwilling owner to sell.” Landa v. Century 21 Simmons & Co., Inc., 237
Va 374, 380, 377 SE2d 416, 419 (quoting Cities Serv. v. Estes, 208 Va 44, 47, 155
SE2d 59, 62 (1967)). A right of first refusal is a conditional and presumptive right.
Chapman v. Mut. Life Ins. Co. of N.Y., 800 P2d 1147, 1150 (Wyo 1990) (quoting
Hartnett v. Jones, 629 P2d 1357, 1362 n1 (Wyo 1981)). It requires the owner, when
he receives a third-party offer to purchase the premises subject to the right of first
refusal and manifests an intention or desire to sell on those terms, to offer the
property first to the holder of the right on the same terms as the third-party offer.
Id. Indeed, a right of first refusal ripens into an option contract when the owner
receives the third-party offer and manifests an intention to sell on those terms.
Crowley, 306 NW2d at 873 (citing Imperial Refs. Corp. v. Morrissey, 254 Iowa 934,
119 NW2d 872 (1963)). See Chapman, 800 P2d at 1150 (citing Myers v. Lovetinsky,
189 NW2d 571, 576 (Iowa 1971)) (additional citation omitted). If the owner does not
offer the property to the holder of the right of first refusal on the same terms as the
third-party offer, he breaches an enforceable option contract. Landa, 237 Va at 381,
377 SE2d at 420 (citations omitted).
[¶14.] This case presents a question of first impression in South Dakota.
Southeast Properties argues that the majority of courts have held that the owner of
property does not violate a right of first refusal by selling a development, including
leased premises subject to a right of first refusal, without first offering the leased
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premises to the holder of the right. Advanced Recycling asserts that the undisputed
facts establish that Southeast Properties breached an enforceable contract by
selling the development to 8th & Railroad Center without first offering the leased
premises to Advanced Recycling.
[¶15.] The majority rule is consistent with the legal distinction between
options and rights of first refusal. The right of first refusal is a conditional right
that ripens into an enforceable option contract when the owner receives a third-
party offer to purchase the property subject to the right and manifests an intention
to sell on those terms. Crowley, 306 NW2d at 873. See Chapman, 800 P2d at 1150.
“[A]n 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
[holder of the right of first refusal] the right to purchase the same.” Id. at 1151
(quoting Guaclides v. Kruse, 67 NJSuper 348, 357, 170 A2d 488, 493
(NJSuperCtAppDiv 1961)). See Manella v. Brown Co., 537 FSupp 1226, 1229 (D
Mass 1982); Aden v. Estate of Walter E. Hathaway, 162 Colo 311, 314, 427 P2d 333,
334 (1967); Straley, 262 Md at 523, 278 A2d at 69; New Atl. Garden, Inc. v. Atl.
Garden Realty Corp., 201 AppDiv 404, 412, 194 NYS 34, 40 (1922); Sawyer v.
Firestone, 513 A2d 36, 39 (RI 1986); Smith v. Traxler, 228 SC 418, 431, 90 SE2d
482, 488 (1955). See also Gyurkey v. Babler, 103 Idaho 663, 667, 651 P2d 928, 932
(1982); Myers, 189 NW2d at 576. If the owner has not manifested an intention to
sell the leased premises apart from the whole, the right of first refusal does not
ripen into an enforceable option contract to purchase the leased premises.
Chapman, 800 P2d at 1150-51. There was no evidence presented at the summary
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judgment hearing that Southeast Properties entertained a third-party offer to
purchase the leased premises apart from the development. See supra ¶6.
Consequently, Advanced Recycling’s right of first refusal did not ripen into an
enforceable option contract to purchase the leased premises. See Chapman, 800
P2d at 1150-51.
[¶16.] Furthermore, the creation of a contract requires an offer by one party
and an acceptance by the other. Standard Cas. Co. v. Boyd, 75 SD 617, 622, 71
NW2d 450, 453 (1955). “The general rule is that an acceptance must not change,
add to, or qualify the terms of the offer” if there is to be a contract. Rossum v. Wick,
74 SD 554, 557, 56 NW2d 770, 771 (1953) (citations omitted). “An acceptance must
be absolute and unqualified[.]” SDCL 53-7-3. “A reply to an offer, though
purporting to accept it, which adds qualifications or requires performance of
conditions, is not an acceptance, but is a counteroffer.” Rossum, 74 SD at 557, 56
NW2d at 771 (citations omitted).
[¶17.] This basic principle of contract law applies to the present case. A right
of first refusal requires the owner to offer the property first to the holder of the right
on the same terms as the third-party offer. Chapman, 800 P2d at 1150.
Negotiations with the third party determine the terms of the offer the owner must
submit to the holder of the right. Id. To create an enforceable contract of sale, the
holder’s acceptance of the offer must be “absolute and unqualified.” See SDCL 53-7-
3.
[¶18.] The right of first refusal required Southeast Properties to offer
Advanced Recycling the leased premises on the same terms as any third-party offer.
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See supra ¶4. Yet there was no evidence of an offer to purchase the leased premises
separate from the development. See supra ¶6. The offer by 8th & Railroad Center
to purchase the development in its entirety did not enlarge Advanced Recycling’s
right of first refusal. See Atl. Ref. Co. v. Wyo. Nat’l Bank of Wilkes-Barre, et al., 356
Pa 226, 232, 51 A2d 719, 722-23 (1947) (citing New Atl. Garden, 201 AppDiv at 412,
194 NYS at 40). Because Advanced Recycling could only accept an offer to purchase
the leased premises, its acceptance necessarily would have changed, added to, or
qualified the terms of the offer to purchase the development. See Rossum, 74 SD at
557, 56 NW2d at 771. Not only did Advanced Recycling’s right of first refusal fail to
ripen into an enforceable option contract, but there was no valid offer open for
Advanced Recycling’s acceptance, and thus no enforceable contract of sale created in
its favor. See Atl. Ref. Co., 356 Pa at 234, 51 A2d at 724. For these reasons,
Southeast Properties did not violate the right of first refusal or breach an
enforceable contract when it sold the development without first offering the leased
premises to Advanced Recycling.
[¶19.] Nevertheless, Advanced Recycling argues that if Southeast Properties
meant for the right of first refusal to apply only to a sale of the leased premises
apart from the development, it could have so provided. Advanced Recycling
contends that this Court should construe the right of first refusal provision against
Southeast Properties, the drafter of the lease. This Court has said that
“[a]mbiguities arising in a contract should be interpreted and construed against the
scrivener.” Campion v. Parkview Apts., 1999 SD 10, ¶34, 588 NW2d 897, 904
(quoting Prod. Credit Ass’n of the Midlands v. Wynne, 474 NW2d 735, 740 (SD
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1991) (quoting Forester v. Weber, 298 NW2d 96, 97 (SD 1980))). “This is a rule of
construction to be applied against one who drafted an ambiguous contract.” Id.(quoting Prod. Credit Ass’n, 474 NW2d at 740). “Ambiguity is a question of law for
a court to determine.” Canyon Lake Park, LLC v. Loftus Dental, PC, 2005 SD 82,
¶18, 700 NW2d 729, 734 (citing Baker v. Wilburn, 456 NW2d 304, 306 (SD 1990)).
In the present case, the meaning of the lease is unmistakably clear, and we decline
to construe it against Southeast Properties.
[¶20.] 2. Whether the trial court erred by awarding Advanced
Recycling monetary damages.
[¶21.] Advanced Recycling argues that Southeast Properties’ violation of the
right of first refusal resulted in substantial damages, entitling Advanced Recycling
to an award of monetary damages. The trial court, relying on Anderson v. Armour
& Co., 205 Kan 801, 473 P2d 84 (1970), awarded Advanced Recycling $484,542.36.
But Anderson is contrary to the great weight of authority and disregards the legal
distinction between options and rights of first refusal. As noted above, the right of
first refusal is not a completed contract, but only a conditional and presumptive
right. Chapman, 800 P2d at 1150. See supra ¶¶13, 15. While Advanced Recycling
argues that this is purely a breach of contract action, 4 the right of first refusal did
4. Advanced Recycling stipulated to the dismissal of its claim for specific
performance. Therefore, while some courts have granted specific
performance in cases involving similar facts, we do not address whether
specific performance is appropriate in this case or others like it. See Pantry
Pride Enterp. v. The Stop & Shop Co., Inc., 806 F2d 1227, 1229 (4thCir 1986);
Wilson v. Brown, 5 Cal2d 425, 55 P2d 485 (1936); Maron v. Howard, 258
CalApp2d 473, 66 CalRptr 70 (1968); Thomas & Son Transfer Line, Inc. v.
Kenyon, Inc., 40 ColoApp 150, 574 P2d 107 (1977); Brenner v. Duncan, 318
Mich 1, 27 NW2d 320 (1947); Stuart v. Stammen, 1999 ND 38, 590 NW2d
(continued . . .)
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not ripen into an enforceable option contract, and no contract of sale was created.
See supra ¶18. Because Southeast Properties did not breach an enforceable
contract, Advanced Recycling is not entitled to monetary damages. 5
[¶22.] 3. Whether the trial court’s calculation of monetary
damages was clearly erroneous.
[¶23.] Southeast Properties argues that the trial court’s calculation of
monetary damages was clearly erroneous. Because we conclude that Advanced
Recycling was not entitled to monetary damages, we need not address this issue.
[¶24.] Reversed and remanded with instruction to enter judgment consistent
with this opinion.
________________________
(. . . continued)
224; Berry-Iverson Co. of North Dakota, Inc. v. Johnson, 242 NW2d 126 (ND
1976).
5. This is not to say that no remedy is available in these cases. In order to
maintain the status quo until the right of first refusal expires, several courts
have enjoined the conveyance of the leased premises subject to the right of
first refusal or ordered a reconveyance when title has already passed to a
third party with actual or constructive notice of the right. Manella, 537
FSupp at 1229; Gyurkey, 103 Idaho at 668-69, 651 P2d at 933-34; Myers, 189
NW2d at 576-77; Straley, 262 Md at 524, 278 A2d at 70; Guaclides, 67
NJSuper at 359, 170 A2d at 494-95; New Atl. Garden, 201 AppDiv at 412, 194
NYS at 40-41; L.E. Wallach, Inc. v. Toll, 381 Pa 423, 429, 113 A2d 258, 261
(1955); Atl. Ref. Co., 356 Pa at 238, 51 A2d at 725; Sawyer, 513 A2d at 39-40;
Chapman, 800 P2d at 1152. But Advanced Recycling did not pursue its
rights until after the lease expired. The original lease expired on September
30, 2006, and Advanced Recycling initiated this breach of contract action in
January 2007. Because the right of first refusal expired with the lease,
equitable remedies are not available on the facts of this case. Myers, 189
NW2d at 577; Johnnies Pelham Rd. Serv., Inc. v. Thomas, 26 AppDiv3d 414,
416, 809 NYS2d 561, 563 (2006) (citing Costello v. Hoffman, 30 AppDiv2d
530, 531, 291 NYS2d 116, 118 (1968)). We express no opinion as to whether
equitable remedies are appropriate in these cases.
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[¶25.] GILBERTSON, Chief Justice, and ZINTER, Justice, and
THORSTENSON, Circuit Court Judge, concur.
[¶26.] KONENKAMP, Justice, concurs in result.
[¶27.] THORSTENSON, Circuit Court Judge, sitting for MEIERHENRY,
Justice, disqualified.
KONENKAMP, Justice (concurring in result).
[¶28.] Not wanting to endorse prematurely the law and rationale the Court
adopts in this case, I concur in result. It is sufficient to say, as the Court does in the
end, that when Advanced Recycling’s lease expired, “its right of first refusal expired
with it.” Advanced Recycling knew more than two years before the lease expired
that the development had been sold. Under these circumstances, no equitable or
legal relief could be granted.
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