Daily Development for Wednesday, August 30, 2000

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

OPTIONS; EXERCISE: Although exercise of an option must be unconditional in order to be effective, the mere fact that the option agreement contains contingencies does not render exercise of the option subject to those conditions unenforceable, so long as the optionee is reasonable in stipulating what is necessary to satisfy the conditions in accordance with the contract. . Matrix Properties Corp. v. Tag Invs., 609 N.W.2d 737 (N.D. 2000), also discussed under the heading: "Words and Phrases; "Purchase."

In 1996, Holder's predecessor entered into an option agreement with Owner. The option allowed Holder to purchase 114 acres from Owner for the purchase price of $9,375 per acre. The option agreement required Holder to purchase at least 20 acres on or before June 1, 1999, and at least 40 acres on or before June 1, 2000. The option agreement provided that Owner was required to deliver to a "continued abstract" within 10 days of Holder's exercise of its option, and that if the abstract did not disclose a good and marketable title, Holder could declare the exercise of the option null and void, or could postpone closing by up to 120 days to allow Owner to cure the title problem.

On May 26, 1999, Holder gave notice to Owner of exercise of his option. The notice stated that Holder was going to purchase 21.82 acres, contained the legal description of the parcel to be purchased, and requested that Owner send an updated abstract. Holder received an updated abstract on June 14, 1999. The updated abstract disclosed title issues that required action by Owner. On June 21, 1999, Owner transferred the parcel to one of its general partners, who agreed to sell to Holder only on the condition that the Holder acknowledge that the option agreement was no longer in any force or effect due to Holder's failure to purchase at least 20 acres prior to June 1, 1999. Ultimately, however, the sale proceeded without this clause, on June 28.

Thereafter, Holder attempted to exercise the option for the balance of the property. Owner refused the tendered exercise of the option on the grounds that the first sale had not occurred prior to June 1, 1999, and that this terminated the option.

Holder sued Owner and its general partner for specific performance under the option agreement. requiring tender of payment for exercise of the option.

The Owner argued first that the various conditions on the Holder's obligations to close on the 1999 sale rendered the option exercise invalid. The court noted that it was not certain whether this argument was that the 1999 option exercise was void because it was conditional or that the whole contract was void because it was conditional, and therefore illusory.

In either case, the court commented, it is certainly within the province of the parties to stipulate that the optionee be able to require certain reasonable assurances of title prior to closing, and that so long as the optionee's requirements are reasonable and consistent with the overall purpose of the agreement, and consistent with the agreement, there is no illusory consideration. The optionor got exactly what it bargained for.

WORDS AND PHRASES; "PURCHASE:" Where an option agreement requires that the optionee "purchase" a portion of the land subject to option by a certain date in order to preserve the option for additional property, and the optionee exercises its option for the required portion by that date, but does not close, the optionee has satisfied the "purchase" requirement in the agreement.

Matrix Properties Corp. v. Tag Invs., 609 N.W.2d 737 (N.D. 2000), discussed under the heading: "Options; Exercise:"

Owner asserted that the option agreement was null and void due to Holder's failure to purchase at least 20 acres on or before June 1, 1999, as required by the option agreement. Owner argued that the common definition of "purchase," means "to acquire by paying money." The court rejected the Owner's argument, stating:

"Nothing in the contract requires [Holder] to tender the purchase price in order to exercise the option. Thus, the tender of the purchase price is an incident of performance, not a condition precedent to the exercise of the option. Because [Holder] gave notice to [Owner] . . . prior to the June 1, 1999 deadline, it complied with the option to purchase and the fact it did not tender purchase money prior to June 1, 1999 is irrelevant. Although the option agreement has a "time is of the essence" provision, it does not change the option contract into one requiring tender of payment for exercise of the option."

Comment 1: The Holder's lawyer dodged a bullet here. The agreement never should have provided that "purchase" by a certain date on a conditional contract be the trigger for further rights arising for additional later purchases. Clearly there was some anticipation that any closing on the first acreage might be delayed by title issues, and the drafter of the option should have recognized that the term "purchase" as the triggering event was at best ambiguous and at worst potentially fatal.

Comment 2: Don't try this at home, kids. When a party must complete certain acts in order to insure further rights under a contract, the language defining what those acts are and how it is established that they have been completed should be taken very, very seriously.

Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. The same is true of all commentary provided by contributors to the DIRT list. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

Parties posting messages to DIRT are posting to a source that is readily accessible by members of the general public, and should take that fact into account in evaluating confidentiality issues.

ABOUT DIRT:

DIRT is an Internet discussion group for serious real estate professionals. Message volume varies, but commonly runs 5 ‑ 10 messages per workday.

Daily Developments are posted every workday.

To subscribe to Dirt, send an e-mail to:

To:	ListServ@listserv.umkc.edu
Subject:	[Does not matter]
Text in body of message	Subscribe Dirt [your name]

To cancel your subscription to Dirt, send an e-mail to:

To:	ListServ@listserv.umkc.edu
Subject:	[Does not matter]
Text in body of message	Signoff Dirt

For information on other commands, send the message Help to the listserv address.

DIRT has an alternate, more extensive coverage that includes not only commercial and general real estate matters but also focuses specifically upon residential real estate matters. Because real estate brokers generally find this service more valuable, it is named “Brokerdirt.” But residential specialist attorneys, title insurers, lenders and others interested in the residential market will want to subscribe to this alternative list. If you subscribe to Brokerdirt, it is not necessary also to subscribe to DIRT, as Brokerdirt carries all DIRT traffic in addition to the residential discussions.

To subscribe to Brokerdirt, send an e-mail to:

To:	ListServ@listserv.umkc.edu
Subject:	[Does not matter]
Text in body of message	Subscribe Brokerdirt [your name]

To cancel your subscription to Brokerdirt, send an e-mail to:

To:	ListServ@listserv.umkc.edu
Subject:	[Does not matter]
Text in body of message	Signoff Brokerdirt

DIRT is a service of the American Bar Association Section on Real Property, Probate & Trust Law and the University of Missouri, Kansas City, School of Law. Daily Developments are copyrighted by Patrick A. Randolph, Jr., Professor of Law, UMKC School of Law, but Professor Randolph grants permission for copying or distribution of Daily Developments for educational purposes, including professional continuing education, provided that no charge is imposed for such distribution and that appropriate credit is given to Professor Randolph, DIRT, and its sponsors.

DIRT has a WebPage at: http://www.umkc.edu/dirt/