Daily Development for Friday, September 10, 1999

By: 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 incompetent appraisal.

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 "shockingly" low..

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 follows:

    A.)  PEDENS shall select a competent appraiser to appraise the fair market value of said property.

    B.)  The BANK shall select a competent appraiser to appraise the fair market value of said property.

    C.)  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.

    D.)  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.

    E.)  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 Bank.

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.

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