Daily Development for Friday, September 10,
Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
Thanks to "reliable source" H.E.
Peterson for this one:
OPTIONS; EXERCISE: Where option agreement
requires that optionee give notice of exercise and then appoint a competent
appraiser as the first step in the process of valuing the property, optionee's
appointment of an incompetent appraiser, resulting in optionor's failure to
carry out the balance of the valuation process, is nevertheless an exercise of
the option, and optionee remains bound to the exercise but loses benefit of the
Salin Bank & Trust Co. v. Peden Trust, No.
09A059810CV495 (Ind. Ct. App. 9/9/99)
This case involved an option to purchase
contained in a long term lease of a two story commercial building. During the
course of the lease, the lessee bank, which owned buildings on both sides of the
subject property, incorporated the leased property with its own buildings, and
the leased building lost its separate identity. The bank timely gave notice of
its decision to exercise the option, and submitted an appraisal listing the
value of the property at $16,000, which the optionor/lessor found
The option language provided:
"As additional consideration for said payments above
specified, PEDENS do hereby grant to the BANK the option to purchase the real
estate described in said lease at the termination thereof and within sixty (60)
days prior to December 31, 1996, for an [a]mount of money to be determined as
PEDENS shall select a competent
appraiser to appraise the fair market value of said property.
The BANK shall select a competent
appraiser to appraise the fair market value of said property.
The appraiser selected by PEDENS
and the appraiser selected by the BANK shall select a third competent appraiser
to appraise the fair market value of said property.
The appraisers shall then make
exchange of appraisals, provide a copy thereof to the PEDENS and a copy to the
BANK and the price at which said option may be exercised shall be the average
price of the 3 appraisals.
The BANK shall notify PEDENS in
writing within sixty (60) days prior to December 31, 1996, of their election to
exercise said option to purchase and within said 60day period, the price shall
be determined as above set forth and in the event said option is exercised,
PEDENS shall furnish to the BANK at the time of closing their general warranty
deed for the premises together with a merchantable abstract of title."
The bank gave timely notice of its option to
exercise the option, and simultaneously provided an appraisal by one John
McClain, setting forth the $16,000 value indicated above. Although the court
indicated that it expressed no opinion about McClain's ethics, it held that
McClain was incompetent to render the appraisal in question, due to the fact
that he was the son in law of the bank's president. As the court noted: "
McClain's spouse was an employee , officer, shareholder, and director of Salin
who stood to profit if Salin were to buy the property at a deflated price. . .
McClain's personal interest could only benefit by his spouse's profits. McClain,
therefore, was not a competent appraiser insofar as the property was
concerned." McClain's appraisal did not disclose his relationship to the
When the Bank realized that it would not have
the benefit of McClain's appraisal, it attempted to get out of the option
altogether, but the landlord (Pedens) brought a specific performance action to
enforce the sale agreement resulting from the option. The trial court threw out
McClain's appraisal, and excused landlord from its failure to respond within the
sixty days with an appraiser of its own, since McClain had not tendered a
competent appraisal. The trial court ordered the parties to proceed with the
process established in the contract, and indicated that if they failed to do so
within sixty days, it would make its own valuation. Thereafter [apparently
because of the Bank's failure to cooperate], the parties did not reach an agreed
valuation, and the court found the value of the property to be $85,000, and
granted specific performance to landlord.
On appeal: held: Affirmed. The
court concluded, as indicated, that McClain was not a "competent
appraiser" within the terms of the option agreement, but that the selection
of appraisers was independent of the exercise of the option. The bank had
unequivocally exercised the option, and therefore was obligated to carry out the
resulting sale contract. Because it did not provide a competent appraiser during
the 60 day period, the landlord was excused from its failure to provide one, and
the trial court was proper in ordering them to start over and, failing that, in
setting the price.
Comment 1: The obvious lesson is to be very
comfortable with the pricing mechanism before one exercises an option worded in
this way. The second lesson is to consider alternative wording whereby the
optionee gets a chance to know the price before committing to buy.
Comment 2: The editor has heard lots of talk
recently about "spousal conflicts." Here of course, the appraiser's
duty was to be neutral, and the undisclosed relationship with his wife spoiled
that neutrality. But isn't the problem even more acute when a professional is
serving one client in a disputed matter in which the professional's spouse is
serving the opposition? This case appears to be a genuine conflict, but in
general we are going to have to work on clear standards for all professionals
(including lawyers) as to when conflicts arise as a consequence of two spouses
working with clients that have competing interests.
in the Daily Development section generally are extracted from the Quarterly
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