P & N Development, A Partnership v. Betty B. Church

IN THE COURT OF APPEALS OF TENNESSEE
AT KNOXVILLE
February 3, 2010 Session
P & N DEVELOPMENT, A PARTNERSHIP, ET AL. v. BETTY B. CHURCH
Appeal from the Chancery Court for Sullivan County
No. K0035142-B John. S. McClellan, III, Chancellor
No. E2009-01122-COA-R3-CV - FILED AUGUST 4, 2010
Lessee sued Lessor for specific performance and damages, alleging breach of contract after
Lessor did not permit Lessee to exercise the option to purchase the property. Lessor moved
to dismiss, claiming that Lessee failed to properly and timely exercise the option to purchase
the property. Lessor filed a counterclaim, alleging breach of contract and damages. After
a bench trial, the trial court held that Lessee properly and timely exercised the option to
purchase the property. Lessor appeals. Upon reviewing the record, we conclude Lessee did
not exercise the option to purchase the property before the expiration of the Lease.
Therefore, we affirm in part, reverse in part, and remand.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court
Affirmed in Part, Reversed in Part; Case Remanded
J OHN W. M CC LARTY, J., delivered the opinion of the Court, in which H ERSCHEL P. F RANKS,
P.J., and C HARLES D. S USANO, J R., J., joined.
Timothy W. Hudson, Bristol, Tennessee, for the appellant, Betty B. Church.
Thomas A. Peters, Kingsport, Tennessee, for the appellees, P & N Development, a
partnership, Barney Pendleton, and Rhea Newland.
OPINION
I. FACTUAL BACKGROUND
On February 17, 1977, Betty and Gary Church entered into a lease agreement with P
& N Development (“the Lease”) for a building located at 2437 Memorial Boulevard,
Kingsport, Tennessee. Barney Pendleton and Rhea Newland, sole partners of P & N
Development (“Lessee”), signed the Lease on behalf of the partnership. Shortly thereafter,
the Churches divorced and Betty Church (“Lessor”) was awarded the property.
Beginning April 1, 1977, the Lease provided a primary term of twenty years with two
automatic renewal terms of five years each, for a total of thirty years, ending on April 1,
2007. The Lease also provided for an option to purchase the property at the end of the
Lease’s term. The relevant provision states:
8. Lessee shall have the option to purchase said property at the end of this
Lease and the additional ten (10) year option, or at the end of a Thirty (30) year
period, for the total purchase price of Two Hundred Thousand Dollars
($200,000.00).
The parties agree that the thirty-year period ended on April 1, 2007, and Lessee had until that
date to exercise the option to purchase. The Lease does not specify how Lessee should give
notice to Lessor of the intent to exercise the option.
During the primary term of the Lease, Lessee assigned its rights under the Lease to
Rhea Newland’s sons and periodically subleased the property. In January 2007, the sons,
Rhea L. Newland and Gregory Newland, assigned the rights under the Lease back to Lessee.
At some point, the building on the property fell into disrepair. Lessee demolished the
building and constructed a steel post building in its place. By the end of the thirty-year
period, the property was not under contract with any third party although Lessee discussed
subleasing the property for a produce stand.
In January 2007, Lessor asked Lessee if it intended to exercise the option to purchase.
Lessor was considering a tax-deferred exchange for the property if the option was exercised.
Lessor followed up the conversation by sending a letter dated January 22, 2007 to Lessee.
Lessor never received a response to that letter.
On Thursday, March 29, 2007, Lessee, through counsel, sent a letter to Lessor’s post
office box, via certified mail, informing Lessor of its intention to exercise the option to
purchase the property. Lessor signed for and received the letter on Wednesday, April 4,
2007.
Lessor refused to allow Lessee to exercise the option to purchase after the expiration
of the Lease. As a result, Lessee filed a suit against Lessor for specific performance and
damages and recorded a notice of a lien lis pendens against the property. In response, Lessor
filed a civil warrant against Lessee for breach of contract claiming that Lessee failed to
maintain the property and pay property taxes. The cases were consolidated and Lessor’s suit
was treated as a counterclaim for damages for unpaid property taxes, unpaid insurance, and
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loss of rent.
A bench trial was subsequently held. After hearing the evidence, the trial court
determined that Lessee properly exercised the option to purchase the property pursuant to the
terms of the Lease and dismissed Lessor’s counterclaim. Lessor appeals the trial court’s
judgment in favor of Lessee.
II. ISSUES PRESENTED
Lessor raises the following issues on appeal:
1. Whether the trial court erred in finding Lessee timely exercised the option to
purchase the real estate.
2. Whether the trial court erred in finding that Lessee owned the option to purchase
the real estate.
3. Whether the trial court erred in finding in favor of Lessee when no relief was
awarded.
4. Whether the trial court erred in denying Lessor’s claims for damages.
III. STANDARD OF REVIEW
The standard of review for a non-jury case is de novo upon the record. Wright v. City
of Knoxville, 898 S.W.2d 177, 181 (Tenn. 1995). There is a presumption of correctness as
to the trial court’s factual findings, unless the preponderance of the evidence is otherwise.
See Tenn. R. App. P. 13(d); Bogan v. Bogan, 60 S.W.3d 721, 727 (Tenn. 2001). For issues
of law, the standard of review is de novo, with no presumption of correctness. S.
Constructors, Inc. v. Loudon County Bd. of Educ., 58 S.W.3d 706, 710 (Tenn. 2001).
IV. DISCUSSION
A.
The central issue of this appeal is whether the trial court erred in finding that Lessee
timely exercised the option to purchase the property.
Acceptance in an option contract, or the exercise of the option, “is not operative until
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received by the offeror.” Restatement (Second) of Contracts § 63 (1981). Tennessee adopts
the majority rule, as enumerated in the Restatement, that notice of intent to exercise an option
is only valid upon receipt and not upon dispatch, unless the contract states otherwise. S.
Region Indus. Realty, Inc. v. Chattanooga Warehouse & Cold Storage Co., 612 S.W.2d 162,
164-65 (Tenn. Ct. App. 1980) (citing Am. Oil Co. v. Rasar, 308 S.W.2d 486, 490 (Tenn.
1957)).
Option contracts limit the offeror’s ability to revoke an offer. Restatement (Second)
of Contracts § 25 (1981). Option contracts bind the offeror during the life of the contract as
the option is irrevocable during that time. Am. Oil Co., 308 S.W.2d at 490. Time is therefore
of the essence in option contracts because the offeror is bound until the time of expiration.
Ray v. Thomas, 232 S.W.2d 32, 34-35 (Tenn. 1950).
In Tennessee, an option is only enforceable as a contract when it is exercised by an
unqualified, absolute, unconditional, unambiguous acceptance, without reservation, and in
accordance with the terms of the option. See Pinney v. Tarpley, 686 S.W.2d 574, 580 (Tenn.
Ct. App. 1984). For acceptance to be proper, it must be made within the time specified in
the contract. Id. at 579-80. The burden is therefore on the offeree to properly accept the
option in strict compliance with the requirements of the contract. Id. at 580 ; see also Allen
v. Nat’l Adver. Co., 798 S.W.2d 766, 771 (Tenn. Ct. App. 1990).
For leases with options that only provide that the option must be exercised at “the end
of” or “at the termination of” the lease, the ability to exercise or accept that option expires
when the lease expires. Norton v. McCaskill, 12 S.W.3d 789, 794 (Tenn. 2000). In Norton,
the Tennessee Supreme Court explained:
After considering the two prominent views espoused by the courts confronted
with this issue, we conclude that in the absence of a specific time designation
in the lease, an option to renew remains effective only during the term of the
lease. Accordingly, we agree with those courts concluding that when a lease
stipulates that an option to renew must be exercised “at the end of” or “at the
termination of” the lease, the lessee must exercise the option on or before the
day the original lease term expires.
Id. at 793-94.
In the instant case, the option to purchase was binding and irrevocable until the
expiration of the Lease on April 1, 2007. The Lease provides that Lessee “shall have the
option to purchase” the property “at the end” of the Lease. Therefore, Lessor must have
received notice of Lessee’s intent to exercise the option to purchase the property on or before
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April 1, 2007. While Lessee mailed a letter notifying Lessor of its intent to exercise the
option to purchase on March 29, 2007, the letter was not received by Lessor until April 4,
2007, as evidenced by the delivery date on the return receipt.
The burden was on Lessee to ensure that Lessor received notice of the intent to
exercise the option to purchase on or before April 1, 2007. See Pinney, 686 S.W.2d at 580.
While Lessor mailed written notice via certified mail to Lessor’s post office box before the
expiration of the Lease, Lessee did nothing more to ensure that his notification was received
by the deadline.
There are special circumstances wherein equitable relief may be granted in spite of
the lessee’s failure to properly exercise an option to renew. See generally Am. Oil Co., 308
S.W.2d at 490. In contrast, options to purchase are strictly construed, and courts have not
granted relief even where the date of expiration fell on a national holiday and service was
effected one day later. See Silsbe v. Houston Levee Indus. Park, L.L.C., 165 S.W.3d 260, 266
(Tenn. Ct. App. 2004).
In the case at bar, the trial court found that equity favored the position of Lessee and
cited Southern Region as authority. The Southern Region case is not instructive in resolving
the issues of this case for two key reasons. First, equity is only granted in special
circumstances where “the failure to grant relief would cause a tenant unconscionable
hardship.” Corim, Inc. v. Sam Blair Co., 721 S.W.2d 256, 261 (Tenn. Ct. App. 1986) (citing
William B. Johnson, Annotation, Circumstances excusing lessee’s failure to give timely
notice of exercise of option to renew or extend lease, 27 A.L.R. 266 (1984)). Second, the
dispute in Southern Region concerned an option to renew a lease, not an option to purchase
– the issue in this case.
In Southern Region, the lease at issue concerned a warehouse facility that included
a cold storage plant. 612 S.W.2d at 163. The lease required the tenant to provide written
notice of its election to renew the lease at least 90 days prior to expiration of the lease’s
primary term. Id. The tenant mailed a letter of its intent to renew the lease within 90 days
of the lease’s expiration, but the landlord never received it, allowed the lease to expire, and
filed suit when the tenant refused to vacate the premises. Id. Because termination of the
lease would result in “extreme economic hardship to the [tenant] or a complete loss of the
business operation,” this court concluded that equitable relief was appropriate. Id. at 165.1
1
In Southern Region, special circumstances existed due to the severe economic consequences that
would result from the termination of the lease. This court found that there were not similar buildings
containing cold storage facilities in the Chattanooga, Tennessee area and the cost of constructing a similar
(continued...)
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There is no evidence of unconscionable hardship or special circumstances in this case.
The record reflects that Lessee was not a tenant of the property at issue. Although Lessee
argues that it discussed leasing the property, no conclusive agreement was reached. There
is no evidence that the property was under any contract at the time of Lessee’s attempt to
exercise the option to purchase. The loss of potential rent in this case is distinguishable from
the exceptional facts of Southern Region, where the tenant would have likely closed its
business if forced to move due to the uncommon nature of a cold storage plant and the high
cost of building a suitable facility. See S. Region, 612 S.W.2d at 165.
The trial court also relied on Southern Region to support its finding that “there is a
presumption of the due receipt of a letter that arises upon proof that such letter was deposited
in a P.O. Box or post office properly stamped and correctly addressed.” The trial court’s
reliance on Southern Region for such a proposition is misplaced.
Although the Southern Region court concluded that equitable considerations relieved
strict compliance with the lease’s proscribed method to exercise the option, it nonetheless
observed the applicable rules governing option contracts. 612 S.W.2d at 165. This court
explained:
A presumption of the due receipt of a letter arises upon proof that such letter
was deposited in the post office, properly stamped and correctly addressed.
And a presumption that a letter was mailed may arise from the testimony of an
officer of a corporation that he dictated and signed the letter and place it in the
regular course of mailing. . . . The rule that notice is operative on mailing
does not extend to option contracts.
Id. at 164 (emphasis added) (supporting citations omitted).2
In support of its finding, the trial court noted that it was only Lessor’s personal
circumstances – an automobile accident – that prohibited her from checking the post office
1
(...continued)
cold storage facility would cost in excess of six million dollars. 612 S.W.2d at 165.
2
In Southern Region, this court further noted:
But when, by the terms of an already consummated contract it is provided that one party
shall have power to produce certain legal results by giving notice, it is usually held that this
means notice received in fact and not merely notice mailed.
See 612 S.W.2d at 164; see also Calvert Ins. Co. v. Amer. Nat. Bank, 438 S.W.2d 545 (Tenn. 1969)).
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box until after the expiration of the Lease. However, barring any evidence of bad faith, the
date on which Lessor checked her post office box is of no consequence because, given the
exceptional nature of option contracts, the burden of ensuring receipt of acceptance is on the
offeree, not on the offeror. See Pinney, 686 S.W.2d at 579-80.
Lessee – the offeree – had the burden of ensuring that Lessor – the offeror – received
its acceptance of the option to purchase on or before the expiration of the Lease’s primary
term. Besides mailing the letter of its acceptance of the option a few days before the
expiration of the Lease, Lessee made no efforts to personally serve Lessor or notify her by
phone. Thus, we conclude that Lessee failed to timely exercise the option to purchase before
the Lease expired on April 1, 2007. Accordingly, we reverse.
B.
We next address whether the trial court erred in finding that Lessee owned the option
to purchase the property. Lessee assigned its rights under the Lease to Rhea Newland’s sons,
Rhea L. Newland and Gregory Newland in 1982. On January 25, 2007, the sons assigned
those rights back to Lessee. Although Lessee is listed as the party of the second part and the
sons are listed as parties of the first part, there is no language in the assignment stating to
whom the rights are assigned. Lessor, citing Collier v. Greenbriar Developers, L.L.C, No.
E2008-01601-COA-R3-CV, 2009 WL 1026025 (Tenn. Ct. App. E.S., April 16, 2009), argues
that the option to purchase the property was never properly re-assigned to Lessee because the
2007 assignment fails to contain language identifying the assignee. We disagree.
For an assignment to be effective, “the owner of [the] right must manifest an intention
to make a present transfer of the right.” Collier, 2009 WL 1026025, at *5. However, “the
owner may manifest this intention directly to the assignee,” but is not required to do so. Id.
(emphasis added). Further, “no words of art are required; the assignor need not even use the
word assign. Whether the owner of a right has manifested an intention to transfer it is a
question of interpretation to be answered from all circumstances, including words and other
conduct.” Id.
In the instant case, considering the history of the Lease’s assignment, that Lessee and
the sons are named in the 2007 document, and given Lessee’s testimony that this was its
intention, the intent to assign the rights to the property back to Lessee is sufficient to render
the assignment effective. Accordingly, we affirm the trial court’s ruling on this issue.
C.
We consolidate our discussion of the remaining issues raised by Lessor. Lessor
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contends that the trial court erred in failing to award any type of relief and in dismissing her
claim for damages.
From our review of the final order, it appears that the trial court dismissed Lessor’s
claims for damages because of its finding that Lessee properly exercised the option to
purchase the property. The trial court also stated that Lessee “would owe their obligation
under the lease agreement.” Aside from that, the trial court failed to enter an amount for
Lessee’s remaining obligation.
In light of our conclusion that Lessee failed to timely exercise the option to purchase,
a remand to the trial court is necessary for a determination on Lessor’s counterclaim for
damages concerning the property taxes, insurance, and unpaid rent. On remand, the trial
court should determine what, if any, damages are appropriate for Lessor’s counterclaim.
V. CONCLUSION
For the foregoing reasons, we affirm in part and reverse in part the judgment of the
trial court. Because Lessor did not receive Lessee’s acceptance of the option until after the
expiration of the Lease, we reverse and find that Lessee failed to timely exercise the option
to purchase. We affirm the trial court’s finding that the rights under the Lease were properly
assigned back to Lessee in 2007. Accordingly, we remand for further proceedings consistent
with this Opinion and the collection of costs. Costs of this appeal are taxed to the appellees,
P & N Development, Barney Pendleton, and Rhea Newland.
_________________________________
JOHN W. McCLARTY, JUDGE
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