Daily Development for Friday, March 16, 2001

OPTIONS; SPECIFIC PERFORMANCE; ADEQUACY OF TERMS; FINANCING TERMS: Sellerfinanced purchase option is sufficiently definite to be enforceable where purchase option provides for (1) a date on which written notice to exercise a purchase option was due, (2) a method of determining purchase price, and (3) general financing terms, including interest rate, even though purchase option does not address a number of items that typically would be present in a seller financed deal.

McDonald v. Cosman, 6 P.3d 956 (Mon. 2000).

In 1977, McDonald and Cosman entered into a lease that contained purchase option effective February 1, 1998. On October 10, 1997, McDonald informed Cosman that he intended to exercise his option to purchase. The option provided for payment of both principal and interest over a tenyear period. Pursuant to the terms of the lease, three appraisers reviewed the property and gave their unanimous opinion of the property's value. Cosman refused to sell at that value and McDonald brought suit for specific performance.

The lower court granted summary judgment and awarded specific performance to McDonald. Cosman appealed. Cosman's argument on appeal was that the purchase option did not include terms specific and definite enough to be specifically enforced.

Cosman argued that it was not clear whether there were to be ten equal yearly installment payments or ten payments of 1/10th of the principal plus interest then remaining due. He noted further that there was no provision for a down payment, accrual of interest or for the amount of annual payments and interest. Further, the agreement did not allocate the responsibility for payment of taxes or insurance during the term of the purchase.

The Montana Supreme Court held that their terms were sufficient enough to be specifically enforceable. It noted that the option clause set forth the time in which the option is to be exercised, the method of calculating the purchase price, the interest rate, the method by which the purchase price should be paid and the parties' rights on default.

Comment: The standard for clarity of agreement for specific enforcement of a contract usually is higher than that required to recover damages for breach. But still, some elements of any contract are dealt with by reference to local custom and practice. That appears to be what happened here with regard to the issues of who pays taxes and insurance.

Still, the optionee got lucky here when the court decided that the "basics"

were covered. Some of those items not covered are not things typically resolved by custom and practice. For instance, the court does not answer the question of whether equal principal payments or level debt service payments are called for. There is great variety among contracts on this point. The lack of provision for a down payment probably means that no down payment is required, although, of course, one could argue that the first of the ten annual payments ought to be made immediately. Again, this is, in the editor's mind, an ambiguity not resolved by custom and practice.

It is likely that the court concluded that the optionor's real objection was price, and not terms, and it wasn't going to let the optionor duck the whole deal by quibbling.

Comment 2: Don't try this at home, kids. Options create a right to a contract, and the contract should be as specific as if it was already a fully agreed upon deal. This is especially problematic when, as here, there is seller financing. Some lawyers attach the actual contract as an exhibit to the option. Others incorporate the contract into the option. Many of the typical contract issues are moot in a lease option. Usually much of the due diligence is waived or carried out before the lease part of the deal commences. But such issues as the nature of the deed, the state of the title, the ability of the optionor to encumber the property, and many other matters, ought to be considered.

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