Daily Development for Thursday, October 12, 2006
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

OPTIONS; PRIORITY: Where a lessee has a purchase option in property subject to a prior lease, that also contains a purchase option, the second purchase option loses its rights when the first purchase option is exercised. 

Startex v. Aelina Enterprises, 2006 Westlaw 952390 (Ark. App.  4/14/06)

Startex was the successor in interest to a lessee’s interest in a gas station on a lot that also contained a convenience store.  The Startex lease contained a right of first refusal that gave the tenant a seven day right to respond to any offer.  The right also provided that if the tenant did not exercise its option, its right of first refusal remained intact and any sale would be subject to the lease.

In fact, the landlord’s interest transferred several times, and the tenants under the gas station lease did not exercise the right of first refusal.  Then the landlord leased the convenience store property to Aelina, giving Aelina a purchase option in the same property covered in the gas station right of refusal.  Then the tenant assigned to Startex.

Aelina entered into a purchase agreement with the landlord to acquire the property for less than the option price, and landlord tendered this contract to Startex.  Startex elected to purchase the property.  Then Aelina notified Startex that it was exercising the option contained in its lease to purchase the property from Startex.  Startex refused to sell, and this lawsuit ensued.

Indicating that the dispute here was a matter of first impression, the court of appeals found that Startex exercise of its purchase option (right of refusal) was prior, and terminated the Aelina purchase option.  The court didn’t say whether the Startex purchase also terminated the Aelina lease.  It quoted Friedman on Leases (Third Edition)  to the effect that a “lease and option can be cut off by a paramount interest . . . Accordingly, the tenant cannot rely on the option for any serious purpose unless he satisfies himself with the condition of the landlord’s title before entering the lease and then records a memorandum of  the lease with the option included.” 

Comment Although this is not quite a case of first impression it certainly is a rare case, and prior courts have addressed the overall situation differently.  If the court had an up to date Friedman on Leases (Randolph - 5th - Edition), it would have found, at Section 15.5.1, notes 221 and 222, that cases in other jurisdictions have dealt differently with the situation of competing leases where one of the lessees exercises its lease option.  In Durfee House Furnishing Co. V. Great Atl. & Pac. Tea Co., 136 A.2d 379 (1927), a tenant exercising a lease option was held to take subject to a lease granted subsequent to the tenant’s lease, on the notion that no contract came into effect until the option was exercised.  The editor disagrees with this analysis, and prefers that used in this case and in Cwiakala v Guinta, 92 A. 2d 849 (N.J. App. 1952), where the exercise of the option permitted the optionee to avoid a lease entered into subsequent to the lease containing the optionee’s righ

t.  The option was deemed to relate back to the date of the lease.

As that section also indicates, there is some confusion arising from the fact that many states do not regard an option as a real estate interest, leaving a situation where the optionee may be bound by the existing lease on the proprty, albeit junior to his option, but may have a damages claim against the optionor.

Comment 2: Of course, proper notice is always essential to the first optionor’s rights.  Here, it appears that the parties did have notice of one another.

Comment 3: Note also that there is no mention in the instant case about the survival of Aelina’s lease, only its option.  But the editor assumes that if one falls, both falls.  But what if the optionee under the first option begins to accept rent from the existing tenant and a lease relationship forms.  Under that circumstance, would the option contained in that lease also be valid?  Hmmm. 

Readers are encouraged to respond to or criticize this posting.

Items reported on DIRT and in the ABA publications related to it  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 provided and opinions expressed  by the DIRT editor the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.

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 - 15 messages per work day.

Daily Developments are posted every work day.  To
subscribe, send the message

subscribe Dirt [your name]

to

listserv@listserv.umkc.edu

To cancel your subscription, send the message
signoff DIRT to the address:

listserv@listserv.umkc.edu

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 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 the message

subscribe BrokerDIRT [your name]

to

listserv@listserv.umkc.edu

To cancel your subscription to BrokerDIRT, send the message
signoff BrokerDIRT to the address:

listserv@listserv.umkc.edu

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:
https://e2k.exchange.umkc.edu/exchweb/bin/redir.asp?URL=http://www.umkc.edu/dirt/

Members of the ABA Section on Real Property, Probate
and Trust Law or of the National Association of Realtors can subscribe to a quarterly hardcopy report that includes all DIRT Daily Developments, many other cases, and periodic reviews of real estate oriented literature and state legislation by contacting Antonette Smith at (312) 988 5260 or asmith4@staff.abanet.org

-----

To be removed from this mailing list, please go to
<https://e2k.exchange.umkc.edu/exchweb/bin/redir.asp?URL=http://listserv.umkc.edu/listserv/wa.exe?SUBED1=DIRT%26A=1>
or send an email message to the address listserv@listserv.umkc.edu,
with the text SIGNOFF DIRT in the body of the message. Problems
or questions should be directed to manager@listserv.umkc.edu.

randolpp@SMTPGATE.SSB.UMKC.EDU