Daily Development for Wednesday, August 31, 1999

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

OPTIONS; OPTIONOR'S REMEDIES; LEASE/OPTIONS; STRICT FORECLOSURE: Oregon courts will require strict foreclosure of optioniee's interest under lease/option agreement where ripened into a binding contract of sale but optionee then fails to perform.

Rockwell v. Nelson, 970 P.2d 666 (Or. App. 1998).

The owner of a home entered into a lease/option agreement with her tenants. The option stated that it would be null and void unless exercised by a certain date. The tenants gave written notice of intent to exercise, but did not immediately tender the purchase price. The owner rejected the exercise of the option and brought an action for summary possession; the tenants counterclaimed for specific performance of the option or other relief.

Although the buyers claimed that they had received approval from a lender, they did not submit conclusive evidence of that fact at trial, and consequently did not prove that they were able to perform the contract. Consequently, the trial court refused to grant specific performance and remanded the case to the justice court to proceed with the summary possession action.

On appeal: held: Reversed. The Oregon Court of Appeals upheld the denial of specific performance, but stated that summary possession is not available when The terms of the option did not require tenants to tender the purchase price of the home immediately, so the owner was in default under the option. However, because the tenants were not able to prove their ability to perform, foreclosure, rather than specific performance, was the appropriate remedy.

As to the option, the court first held that the parties' expression of intent that the option be "exercised" by a certain date required only that the optionee's provide notice that they intended to exercise the option, thus committing them to a binding contract to sell which the parties would thereafter carry out. Although there was no formal contract included with the option, in fact the parties did work out a closing contract during the course of negotiation.

But although the optionees now became buyers with fixed rights, they could not prevail on specific performance because they failed to prove to the trial court that they were in a position to perform, as they did not produce evidence at trial of a loan commitment, although they earlier had claimed to have one.

Nevertheless, although specific performance was denied, the buyers could remain on the property until their interest was foreclosed through an action in strict foreclosure. Once the option became a binding contract, under Oregon common law, a summary eviction proceeding is not the proper method for terminating the buyer's interest.

Comment 1: This case is full of good lessons for young lawyers who have not been beaten and battered by disputes of this type already. First there is the point that option contracts should be carefully drafted to make clear who has to do what and exactly when. If the optionor expects that it will receive the purchase price by a date certain, or that the option will be terminated, then this should be made clear, and use of the language "optionee must exercise the option by [date]" may not do the job. Here the parties expected the optionee to finance the acquisition of the property, and the court was disposed to view the requirement to be only that the option was to be exercised by notice on the exercise date, with financing arrangements to come later.

The court does not say why it reads the option in this way, but one possible reason is the fact that the option price was set by a market price formula, and perhaps the formula was triggered by the exercise of the option. Until that time the buyer did not have a set price and therefore could not easily seek financing. Another reason might be the parties' own conduct in drafting closing agreements post exercise.

Comment 2: The second lesson has to do with the danger of bringing a specific performance action when financing is required. Lawsuits can linger on and on, but lenders don't. The specific performance action came to trial more than six months after the alleged original lender's approval. Six months is the outside limit on many lender's loan commitments. Lawyers representing buyers in this situation must anticipate that the loan commitment must be renewed and that subsequent circumstances, including movement of interest rates and the effect of the litigation itself on buyer's finances may affect the ability to keep the commitment alive.

Comment 3: The third lesson has to do with the Oregon approach to remedies in this situation an approach which the editor finds quite appealing, and in fact recommended as a general solution for Oregon installment land contracts in his firrst major article twenty years ago, Updating the Oregon Installment Land Contract, 15 WILLAMETTE L. REV. 181 (1979).

Although cited by the Oregon court here is very sketchy, and its own discussion of the issue nonexistant, the court apparently views these lease option agreements, once "converted" by exercise of the option into sale contracts, to be the equivalent of long term installment sale contracts. This is a perfectly correct analysis, as the payments typically have been made over a period of time and the buyer has taken possession and built up an expectation that is a form of "equity" in the property. Few modern courts will enforce outright forfeiture provisions in such contracts, and Oregon courts are no exception. Many states have now adopted statutes that would "convert" installment land contracts generally into equitable mortgages that must be foreclosed.

Oregon, however, has had a long standing tradition of using the remedy of strict foreclosure in these circumstances. The court, upon entry of foreclosure, will order possession in the seller if the buyer is unable to pay the purchase price within a specified period.

The consequence in this case is that the buyer will have a third chance to perform the contract as the strict foreclosure action proceeds. Presumably, if the buyer's credit remains intact, the buyer ultimately will get the house.

Comment 4: While the editor is reminiscing about his Oregon days, he notes that Judge DeMuniz, who wrote the opinion, is an old "basketball buddy" from that foggy, soggy period. Stand up guy. Couldn't go to the left.

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