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refusing to find a lease agreement unconscionable because it was "extensively negotiated by experienced and knowledgeable persons"
Summary of this case from Riesett v. W.B. Doner Co.Opinion
Docket Nos. 84803, 84804.
Decided April 22, 1986.
Dobson, Griffin Westerman, P.C. (by Harvey W. Berman), for Larry E. Stenke.
Plunkett, Cooney, Rutt, Watters, Stanczyk Pedersen, P.C. (by Ernest R. Bazzana and Mary Ellen Darin), for Amoco Oil Co. Brimacombe Schlecte, P.C. (by Judith A. Ward), for Masland Development Co, Inc.
The subject of this dispute is a lease with an option to purchase involving commercial property located on West Stadium Boulevard in Ann Arbor. Defendant-counterplaintiff Masland Development Company, the owner of the property, entered into a lease with Standard Oil Company, the predecessor in interest of defendant Amoco Oil Company, on February 14, 1958. Renewals of the lease effectuated continuance of the lease through July 17, 1983. On February 2, 1983, the tenant Amoco exercised its option to purchase the property, which was being used as a retail gas station. On May 12, 1983, Amoco assigned the lease including the exercised option to purchase to plaintiff-counterdefendant Larry Stenke who operated the gas station on the premises. Stenke subsequently commenced this action against Masland in the circuit court, seeking specific performance of conveyance of the property pursuant to the option to purchase. Masland filed affirmative defenses and a counterclaim against Stenke, contending that the option provisions of the lease are invalid and unenforceable as a matter of law. Masland also initiated summary proceedings in the district court for possession of the property and unpaid rent. By stipulation of the parties, Masland's district court action was removed to the circuit court and consolidated with Stenke's action.
The parties filed opposing motions for summary judgment. The trial court granted summary disposition in favor of Amoco and Stenke and against Masland pursuant to MCR 2.116(C)(9) and (10). Masland appeals from that order, claiming that the trial court erred in finding that the lease which is the subject of the parties' dispute was assignable, did not constitute an unreasonable restraint on alienation, did not violate the rule against perpetuities, and was not unconscionable. Masland also asserts that the trial court erred in granting summary disposition on Masland's claim that the appellees waived the right to exercise an option to purchase the subject property, because genuine issues of material fact exist. We affirm the trial court's order.
I
Masland first argues that the option provision of the lease constitutes an unreasonable restraint on alienation since, according to Masland, it effectively placed an $85,000 ceiling on the value of the leased premises during the term of the lease.
Paragraph 9 of the lease gave the lessee a fixed price option to buy the leased premises for $85,000 and a right of first refusal to buy the property for the amount contained in any bona fide offer made by a third party. Paragraph 9 provides in pertinent part:
Lessee shall have, and is hereby given, the option of purchasing said premises, buildings, fixtures, equipment, machinery and appliances included in this lease, for the sum of EIGHTY FIVE THOUSAND AND NO/100 — DOLLARS ($85,000.00), provided Lessee shall give Lessor notice in writing of its election to exercise said option of purchase at least thirty (30) days prior to the expiration of this lease, or at least thirty (30) days prior to the expiration of any extension period, if this lease be extended, it being understood that in no event may this option be exercised prior to end of first year original term. . . . It is further understood that if the Lessor or the Lessor's heirs, executors, grantees, or assigns, or successors or assigns at any time during the term of this lease or any extension thereof, receives a bona fide offer to purchase said premises or any property which includes the premises, and said buildings, fixtures, equipment, machinery and appliances and desires to sell said premises, buildings, fixtures, equipment, machinery and appliances, or any part thereof under the terms of said offer, Lessor agrees to give Lessee (90) days notice in writing of such bona fide offer, setting forth the name and address of the proposed purchaser who has made the offer, the amount of the proposed purchase price, and all other terms and conditions of such offer, and the Lessee shall have the first option to purchase the demised premises by giving written notice to the Lessor of its intention to purchase within said (90) day period at the same price and on the same terms of any such proposal.
Michigan follows the common-law rule against unreasonable restraints on alienation of property. Moffit v Sederlund, 145 Mich. App. 1, 12-13; 378 N.W.2d 491 (1985). The Restatement, Property, § 404, p 2381 defines a restraint on alienation of property as an attempt by an otherwise effective conveyance or contract to cause a later conveyance (1) to be void, (2) to impose a contractual liability upon the conveyor for conveying in breach of the agreement not to convey, or (3) to terminate all or part of a conveyed property interest. Nichols v Ann Arbor Federal Savings Loan Ass'n, 73 Mich. App. 163, 165; 250 N.W.2d 804 (1977), lv den 400 Mich. 844 (1977).
While Masland apparently concedes that the dual option is not technically a restraint on alienation since it did not prevent alienation, Masland argues that the practical effect of the option provision effectively restricts alienation by placing an $85,000 limit on the purchase price. Masland relies on Nichols, supra, as authority that contractual provisions that restrict alienation as a practical matter constitute unlawful restraint. In Nichols, a due-on-sale clause in a mortgage contract was challenged. While this Court recognized that the clause was not within the classical definition of restraint on alienation, it held that "the due on sale clause directly and fundamentally burdens a mortgagor's ability to alienate as surely and directly as the classical promissory restraint." 73 Mich. App. 166. Masland asks this Court to expand the Nichols rationale to the dual option provision which is the subject of this appeal.
However, Masland's reliance upon Nichols is misplaced because the dual option provision in the parties' lease does not restrict alienation even as a practical matter. Masland's position is premised upon an interpretation of the option clause that the option to purchase at a fixed price can intervene in a circumstance in which the lessee has already been notified of a third-party offer. This Court rejected such an interpretation of an identical option provision in Amoco Oil Co v Kraft, 89 Mich. App. 270; 280 N.W.2d 505 (1979). In Kraft, the lessee was notified of a bona fide purchase offer and declined to exercise its first-refusal option. The sale was made to the third party, and several years later the lessee sought to exercise its fixed-price option. This Court held:
The language of the lease clearly indicates that the parties intended to create alternative options of equal stature. Under plaintiff's interpretation of the contract, however, the first refusal option would cease to be an independent option and instead be transformed into a secondary option subordinate to the fixed price option. Plaintiff's interpretation would freeze the value of the leasehold at the amount of the fixed price option. No one would be willing to purchase the property for a higher price than the fixed price with the knowledge that he could lose his investment and be divested of the property if plaintiff decided to purchase the property at the lower fixed price. This being the case, plaintiff would never have occasion to exercise its first refusal option, and it would be rendered virtually meaningless. We find nothing in the contract to show that the parties intended to make the first refusal option dependent on the fixed price option or to fix a ceiling price on the value of the leasehold. Therefore, plaintiff's interpretation of the contract cannot stand. See Manassee v Ford, 58 Cal.App. 312; 208 P. 354 (1922), Texaco, Inc v Rogow, 150 Conn. 401; 190 A.2d 48 (1963).
Conversely, under defendants' interpretation of the contract, both options continue to be viable until one of them ceases to be merely a contingent interest and instead becomes a vested right, at which time the nonvested option is extinguished. Since defendants' interpretation of the contract keeps both options independent and viable, it is the more reasonable interpretation of the contract. [ 89 Mich. App. 273-275. Footnotes omitted.]
Thus, according to the language of the contract, if Masland had ever received a bona fide offer to purchase from a third party, upon notification as prescribed by the lease the first-refusal option would have vested and the fixed-price option would have been inoperative. We conclude, as did the trial court, that the lease did not limit the price of the property and thus did not effectively constitute an unreasonable restraint on alienation.
II
Masland next argues that the dual option provision of the lease violates the rule against perpetuities by creating an estate in property which might not vest during the twenty-five-year term of the lease. More properly stated, the argument is that the option could remain "contingent," i.e., unexercised, beyond twenty-one years.
The common-law rule against perpetuities has been adopted in Michigan by statute. MCL 554.51; MSA 26.49(1). The statute also expanded the rule to apply to both real and personal property interests. The rule against perpetuities is violated if, at the time an instrument creating a future estate (interest in property) comes into operation, it is not certain that the estate will vest or fail to vest within twenty-one years of the death of a person named in the instrument. Moffitt v Sederlund, supra.
It is readily apparent that the rule against perpetuities is not applicable in the present case since the holder of an option to purchase land does not have an interest in the premises, either legal or equitable. Oshtemo Twp v Kalamazoo, 77 Mich. App. 33; 257 N.W.2d 260 (1977), lv den 402 Mich. 814 (1977). The rule against perpetuities applies only to future estates or interests in property. In Windiate v Leland, 246 Mich. 659, 665; 225 N.W. 620 (1929), the Supreme Court quoted with approval the following language from Keogh v Peck, 316 Ill. 318; 147 N.E. 266; 38 ALR 1151 (1925):
"An option to purchase does not create estate in land. No title, legal or equitable, is granted to the holder of the option by an option agreement.
"Options are not invalid as contrary to rule against perpetuities. Optional contracts, either in deeds or in long-term leases, giving an optional right of forfeiture and re-entry for covenant broken or a right of renewal are not invalid as being contrary to the rule against perpetuities."
Masland asserts that Windiate is not controlling authority because its holding was based upon a statutory rule against perpetuities which was repealed in 1949. This argument is faulty for two reasons. First, while Windiate was originally decided by analysis of only the then-applicable statute, 236 Mich. 531, 534 (1926), on rehearing our Supreme Court also reviewed the case under the perspective of the common-law rule. The Court's rationale on rehearing was based on its "own holding, by text writers, and by decisions of other courts." 246 Mich. 664-665. In short, the conclusion that options cannot violate the rule against perpetuities was based on the common-law rule which remains the controlling law of this state today. Second, the underlying premise of Windiate, that an option to purchase creates no interest on behalf of the option holder, remains current law. Oshtemo Twp v Kalamazoo, supra.
The lower court did not err in granting summary disposition against Masland's rule against perpetuities defense.
III
Masland also argues that it should be given the opportunity to show at trial that the purchase option provision was unconscionable.
During discovery, the only deposition taken was that of Masland's president, Joseph Petovello. Petovello is also a director and the sole owner of Masland. Masland, a commercial real estate development company, was founded by Edward Maslanka. Petovello bought Masland in 1961. At the time the instant lease was negotiated, Masland was represented by Maslanka, who was a commercial builder, and Maslanka's lawyer. It happens that Petovello at the time was an employee of Standard (the corporate predecessor of Amoco), and negotiated the subject lease, that he now claims is unconscionable, on behalf of his employer.
Petovello, a licensed real estate broker, has extensive experience in commercial real estate development, particularly in the area of retail petroleum outlet locations. He testified that fairly extensive negotiations regarding the instant lease took place between himself and Masland's representatives, and that the parties did not reach an agreement for sixty days. One of the major issues during negotiations was the amount at which the fixed-price option should be set, which Masland attempted to fix at as high an amount as possible. Petovello also testified that when the parties agreed to a price of $85,000, it was a fair and good price for the land.
The equitable doctrine of unconscionability has a long history in Michigan. In Eames v Eames, 16 Mich. 348 (1868), our Supreme Court refused to exercise its power to order specific performance of a contract because the contract would have given the buyer an unconscionable advantage. The doctrine was adopted by our Legislature in the Uniform Commercial Code, MCL 440.2302; MSA 19.2302, and continues to apply to contracts outside the scope of the Uniform Commercial Code as well. Reed v Kaydon Engineering Corp, 38 Mich. App. 353, 356; 196 N.W.2d 487 (1972). There is a two-pronged test for determining whether a contract is unenforceable as unconscionable:
"(1) What is the relative bargaining power of the parties, their relative economic strength, the alternative sources of supply, in a word, what are their options?; (2) Is the challenged term substantively reasonable?" Allen v Michigan Bell Telephone Co, 18 Mich. App. 632, 637; 171 N.W.2d 689 (1969), lv den 383 Mich. 804 (1970).
Even if the contract is adhesive under the first prong, still the challenged term is enforceable if it is substantively reasonable and not oppressive or unconscionable. Allen, supra, p 638; Brown v Siang, 107 Mich. App. 91, 107; 309 N.W.2d 575 (1981). [ Ryoti v Paine, Webber, Jackson Curtis, Inc, 142 Mich. App. 805, 809; 371 N.W.2d 454 (1985).]
Contrary to Masland's argument on appeal, its owner, director, and president testified during deposition that the lease agreement was extensively negotiated by experienced and knowledgeable persons. Unlike the typical contract of adhesion between an individual and a monopoly, this lease was the result of two corporations dealing at arms' length. Such circumstances support the conclusion that the instant lease is not unconscionable. See St Paul Fire Marine Ins Co v Guardian Alarm Co of Michigan, 115 Mich. App. 278, 283; 320 N.W.2d 244 (1982).
Even if there were unequal bargaining power to the extent that Standard's position was unconscionably advantageous, the lease is still enforceable if the resultant terms are substantively fair. Ryoti, supra, p 809. Masland argues that the option provision was unfair. It points to the dual option provision, and repeats its argument regarding interpretation of the effect of that provision which it advanced in its first issue on appeal. As set forth previously, Masland's argument has no merit.
The appellees' motions for summary judgment on this issue were brought pursuant to GCR 1963, 117.2(3), now MCR 2.116(C)(10). A motion for summary judgment under rule 117.2(3) is designed to test whether there is factual support for a claim. In ruling on this motion, a trial court must consider not only the pleadings, but also depositions, affidavits and other documentary evidence. Rizzo v Kretschmer, 389 Mich. 363, 373; 207 N.W.2d 316 (1973). The party opposing the motion must come forward to establish the existence of a material factual dispute. If the nonmoving party fails to establish that a material fact is in issue, the motion is properly granted. Bob v Holmes, 78 Mich. App. 205, 212; 259 N.W.2d 427 (1977).
Here, Masland has failed to point to anything on the record which would support its contention that the lease was procedurally or substantively unconscionable. Rather, the testimony of Masland's president amounts to a party admission that the lease negotiations and the resultant terms were fair. In ruling on the motion, the trial court held that the record entirely failed to substantiate Masland's contentions of unconscionability. We agree. The dual option provision afforded Masland two alternatives: 1) it could do nothing and be faced with the possibility that Amoco would exercise its $85,000 fixed price option, or 2) it could have put the property on the market and attempted to get a higher price. As a matter of law, where the fixed price option is fair at the time the contract was entered into and the owner is free to sell to a purchaser who will pay a higher price, we cannot conclude that the dual option provision in dispute in this case is unconscionable. Because there was no factual issue in dispute regarding the unconscionability of the contract, summary disposition of this issue was proper. Barck v Grant State Bank, 137 Mich. App. 440, 446; 357 N.W.2d 872 (1984).
IV
Masland next argues that the purchase-option provision of the lease was not assignable and therefore its purported assignment by Amoco to Stenke is invalid as a matter of law.
Paragraph 12 of the parties' lease begins:
Lessor agrees that Lessee may assign this lease or sublet the premises and equipment herein described without consent of Lessor.
Based upon this language, the trial court held that Amoco unquestionably could assign its lessee's interest to Stenke. Masland now avers that the trial court misinterpreted the above-quoted provision. It asserts that the assignment clause must be read in context with other provisions that suggest that assignment of the lease was contemplated only for assignment of the lessee's possessory interest in the property. This argument focuses upon the use of "lease" (with a small "l") as opposed to "Lease" which Masland claims indicates that only the possessory interest of the lease was assignable.
Absent a contractual provision prohibiting assignment, an option to purchase contained in the lease is assignable. Berrien County Fruit Exchange, Inc v Pallas, 314 Mich. 66, 72; 22 N.W.2d 74 (1946). As a general rule, contractual restrictions against assignability are strictly construed, Miller v Pond, 214 Mich. 186, 190; 183 N.W. 24 (1921), and in cases of options to purchase, the lease is to be construed with the purpose of benefit to the lessee in view. Holt v Stofflet, 334 Mich. 272, 274; 54 N.W.2d 593 (1952).
Masland's contention that the use of "lease," as opposed to "Lease," in paragraph 12 supports its position is both strained and mistaken. The parties' lease consists of two separate contracts, which were simultaneously made. The first, entitled "Lease," is a one-page document which merely gave to Standard the right to possession and use of the property. The second document, entitled "Agreement," consists of four pages and sets forth all of the remaining terms of the parties' contract. In paragraph 1 of the agreement, reference is made to the "Lease," and the agreement is incorporated into the Lease. Elsewhere in the agreement, when reference is made to the overall terms of the contract, the documents together are referred to as the "lease." Thus, the use of "lease" in paragraph 12 of the parties' contract actually leads to the opposite conclusion than that urged by Masland here. That is, since "lease" refers to all of the terms of the contract and "Lease" refers to the one-page document which granted possession of the property, paragraph 12 clearly allows assignment of the lease and all of its terms, including the purchase-option provision.
Moreover, Masland's interpretation of the lease does not comport with Michigan law. Unless expressly excluded, the assignment of a lease vests the assignee with all the rights of the former lessee. Weatherwax Investment Co v PPG Industries, Inc, 43 Mich. App. 546, 549; 204 N.W.2d 353 (1972). Contrary to Masland's contention, the purchase option clause is not separable from the leasehold interest. Meadow Heights Country Club v Hinckley, 229 Mich. 291, 293-294; 201 N.W. 190 (1924). The documents in question did not expressly exclude assignment of the option to purchase and consequently the trial court did not err in ruling that the option was assignable.
V
Masland's final argument is that genuine issues of material fact exist with respect to its contention that Amoco waived its option to purchase the leased premises.
Joseph Petovello, Masland's president, testified during his deposition that in 1981 and 1982 he was told by certain Amoco employees that Amoco would not be releasing or purchasing the subject property. Only later in 1982 or in early 1983 did Amoco appear to reverse its position and exercise its purchase option.
Stenke and Amoco assert Petovello's deposition does not raise a genuine issue of material fact that there was a waiver of the option and, in any event, that the purported oral waiver was ineffective as a matter of law under MCL 556.1; MSA 26.978(1), since it was not in writing. We need not consider whether the purported oral waiver was ineffective since we agree that Petovello's own testimony establishes that he was well aware from his own experience as an Amoco employee that the Amoco employees with whom he discussed the matter had no authority to waive the purchase option and that any statement by them that Amoco would not be exercising the option was not binding on the company.
Petovello testified to Amoco's management hierarchy, which did not vest in its field representatives the authority to enter into leases. While the field representatives and their managers conducted the negotiations with outside parties, authority to agree to contractual terms was reserved to personnel two and three tiers higher in the management scheme. Petovello's conversations with Amoco employees regarding Amoco's release or purchase of the property all took place with employees who did not have contractual authority on behalf of Amoco, or at least no authority to waive the purchase option. Significantly, Petovello was aware that he was not dealing with employees who could speak with finality for Amoco. Moreover, Petovello never acted in reliance upon the purported waiver. Rather, he testified that he did not enter into a lease or sale agreement with any third persons because he was bound to the Amoco lease, including the possibility that the purchase option would be exercised, even after the purported waiver.
Thus, Masland itself, by its president, director, and sole owner, has established that the presentations made to Masland by Amoco were not made by persons who had authority to waive Amoco's contractual rights, that Masland was aware that the employees making the representations had no such authority, and that Masland was never induced to believe that Amoco had waived its purchase option right. Conversely, Masland has not submitted any affidavit or any other documentation that would dispute Petovello's testimony and raise a genuine issue of material fact. Under the circumstances, summary disposition of the issue was proper. Durant v Stahlin, 375 Mich. 628, 638; 135 N.W.2d 392 (1965).
Accordingly we affirm the trial court's well-reasoned opinion and order granting summary disposition against Masland.
Affirmed.