Jimmy Kyle v. J.A. Fulmer Trust

IN THE COURT OF APPEALS OF TENNESSEE

AT JACKSON

October 23, 2008 Session

JIMMY KYLE, ET AL. v. J.A. FULMER TRUST

Direct Appeal from the Chancery Court for Shelby County

No. CH-01-1921-1 Walter L. Evans, Chancellor

No. W2008-00220-COA-R3-CV - Filed December 9, 2008

This appeal concerns a purchase option in a lease of a tract of land in Shelby County, Tennessee.

Executed in 1950, the lease had an initial term of 50 years and six months. In 1953, the Lessee

exercised its option to renew, allowing possession for an additional 50 years through 2050. In 2001,

the Lessee attempted to exercise its option to purchase the leased property. Lessor then sought a

declaratory judgment determining the validity of the purchase option, and if valid, the value to be

paid for the Lessor’s interest in the property. The trial court found that the Lessee properly exercised

the purchase option and that the value of the Lessor’s interest should be based upon the property as

unencumbered by the remaining 50-year lease term. We affirm the trial court’s finding regarding

the purchase option, but reverse its determination of the value of the Lessor’s interest in the property.

Affirmed in part, reversed in part and remanded.

Tenn. R. App. 3; Appeal as of Right; Judgment of the Chancery Court Affirmed in Part,

Reversed in Part and Remanded

J. STEVEN STAFFORD , J., delivered the opinion of the court, in which ALAN E. HIGHERS, P.J., W.S.,

and DAVID R. FARMER , J., joined.

John McQuiston, II, Memphis, TN, for Appellant

John S. Golwen, Memphis, TN, for Appellee

William G. Whitman, Memphis, TN, for Appellee

OPINION

Facts and Procedural History

This dispute arises from a lease of land in Shelby County, Tennessee entered into on July 1,

1950. Jack Talley was the initial lessor; J.A. Fulmer, Jr. and J.A. Fulmer Sr. were the lessees. The

Appellants/Lessees and the Appellees/Lessors are the successors in interest to the original parties.

As tenant, Mr. Fulmer planned to develop the land by constructing buildings and finding subtenants.

In the intervening years, a number of subtenants have also constructed buildings and conducted

business on the property.

The initial term of the lease was 50 years and six months. Because Mr. Talley wished to

avoid additional income taxes, the rent was modest: $50 per month for the first six months; then

$100 per month for 25 years; and $150 per month for the final 25 years. Under the lease, the Lessees

were required to pay all taxes on the property. The lease also provided the Lessees an option to

renew the lease for a second 50-year term. The rent for the second 50-year term is $150 per month

or $1800 per year. The Lessees exercised this option on August 31, 1953, creating an additional

lease term from January 1, 2001 through December 31, 2050. Finally, the lease sets forth an option

for the Lessees to purchase the property. On February 18, 2000, the Lessees informed the Lessors

that they were exercising the option to purchase.

The dispute in this case arises from differences in the interpretation of the lease provisions

providing the option to renew and the option to purchase. These provisions are set forth below:

28. The Lessees shall have the option of remaining in possession of said demised

premises for a further period of fifty years (50) after the expiration of this lease,

under the same terms and conditions thereof, at the same rental last paid of $1800 per

annum, to be paid in monthly installments of $150, in advance, but if the Lessees

desire to exercise this option, they shall give the Lessor a six months advance written

notice of their intention to renew this lease, but said written notice must be given to

Lessor at least six months before the expiration of the term.

29. At the end of the term of fifty (50) years and six months from the date hereof, the

Lessees may at their option purchase said demised premises for a consideration to be

agreed upon with the Lessees. Should the Lessor and the Lessees fail to agree upon

such consideration, the Lessor and the Lessees shall each name one arbiter who shall

in turn choose one umpire; the three thus named shall act with promptness; the

decision of any two as to a proper consideration for the purchase of said demised

premises shall be binding upon all the parties hereto; but if the Lessees desire to

exercise this option, they shall give the Lessor a six months advance written notice

of their intention to purchase the demised property, but said written notice must be

given to Lessor at least six months before the expiration of the term.

On September 18, 2001, Lessors commenced an action for declaratory judgment in the

Chancery Court of Shelby County. The Complaint asked the court to declare the purchase option

invalid. In the event that the Lessee had validly exercised the purchase option, the Lessor argued that

Lessee should not be entitled to purchase the property based upon the property’s value as

encumbered by the remaining lease term. Instead, Lessor asserted that the consideration for the

property should be the fair market value of the property unencumbered by the lease. In response,

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Lessee also sought a declaratory judgment asking the court to declare the rights and obligations of

the parties under the lease. Both parties subsequently moved for summary judgment.

As the matter progressed, two of the subtenants on the property, Regions Bank and Six

Continents Hotels, Inc., intervened. In July 2006, the court entered a Consent Order providing that,

regardless of the outcome of the litigation, the subleases of both intervenors would remain valid and

enforceable through 2050. The Order did not address the rights of the non-intervening subtenants. 1

While the summary judgment motions were pending, the court, on May 26, 2006, entered a

second Consent Order referring the matter to Allen Blair to act as Special Master. The Court asked

the Special Master to make a report and recommendation on two questions:

1. Whether [Lessee], having previously exercised its option pursuant to Paragraph

28 of the [Lease] entered into by the parties on July 1, 1950, also has the right to

exercise the option to purchase set forth in Paragraph 29 of the Lease?

2. If the Special Master determines that [Lessee] still has an option to purchase in

addition to its prior exercise of its option to extend the Lease, should the

determination of the consideration for the property be as encumbered by the

additional 50 year term or as unencumbered by the 50 year extension of the lease

term.

While serving as Special Master, Mr. Blair also acted as mediator between the parties in an attempt

to reach a settlement. The mediation was unsuccessful.

On August 17, 2007, the Special Master filed his Report and Recommendation with the

court. After a thorough analysis, the Report answered the two questions:

1. The [Lessee], having previously exercised its option pursuant to paragraph 28 of

the [Lease] entered into by the parties on July 1, 1950, had the right to exercise the

option to purchase set forth in paragraph 29 of the Lease.

2. Having determined that the [Lessee] still had an option to purchase in addition to

its prior exercise of its option to extend the Lease, the determination of the

consideration for the property should be based upon the property as encumbered by

the additional 50-year term.

Pursuant to Tenn. R. Civ. P. 53.04(2), the Lessor objected to the Special Master’s Report.

After yet another round of briefs and a hearing, the trial court entered its Order and Final

1

In its brief on appeal, Lessor attempts to stipulate that this consent order applies to all of he Lessees’ subleases, not

just the two intervenors. Lessee disputes the validity of this proposed stipulation.

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Judgment on January 10, 2008. The Order partially adopts and partially rejects the Special Master’s

recommendations:

1. The court adopts the Report and Recommendation of the Special Master on the

issue of whether the Defendant may exercise its right to purchase the property.

Accordingly, the Court finds that the Defendant, having previously exercised in 1953

its option to extend the lease term pursuant to paragraph 28 of the Indenture of Lease,

had the right to exercise the option to purchase set forth in paragraph 29 of the Lease

and did in fact exercise the option to purchase the property.

2. The Court rejects the Special Master’s finding that the consideration for purchase

by Defendant of the subject property should be based upon the property as

encumbered by the additional 50-year term. The Court modifies the Report and

Recommendation of the Special Master and finds that the consideration for the

property should be based upon the property as unencumbered by the additional 50-

year lease extension rather than encumbered by the additional 50-year lease term.

The Court concluded that these findings disposed of any pending matter in the litigation, including

the motions for summary judgment.

Lessee filed its Notice of Appeal on January 22, 2008.2 In its brief, Lessee presents a variety

of interrelated issues. For clarity, we restate these issues slightly: whether the trial court erred by

ruling that the property should be valued as if it were not encumbered by a lease running until 2050

at an agreed low rent. Lessor asks the Court to uphold the trial court’s ruling, and alternatively,

presents two additional issues, as stated in its brief:

1. Whether the option-to-purchase clause within the lease agreement is too vague

with respect to price, rendering it unenforceable?

2. Whether the Lessee can both exercise the option to extend the lease and exercise

the option to purchase the Property?

Standard of Review

The issues presented require the interpretation of a lease. It is well settled law that “[t]he

interpretation of a written agreement is a matter of law.” Wills & Wills, L.P. v. Gill, 54 S.W.3d 283,

285 (Tenn. Ct. App. 2001); Guiliano v. Cleo, Inc., 995 S.W.2d 88, 95 (Tenn. 1999). Our review

of questions of law is de novo. Johnson v. Johnson, 37 S.W.3d 892, 894 (Tenn. 2001). Therefore,

we must review the written agreement de novo to determine its meaning. Hamblen County v. City

of Morristown, 656 S.W.2d 331, 335-36 (Tenn. 1983).

2

Tenn. Code Ann. § 29-14-112 permits appellate review of judgments in actions for declaratory judgment like any other

order or judgment.

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Lessor, however, argues that we should apply the demanding “abuse of discretion” standard

of review. Lessor contends that the trial court, rather than simply interpreting the terms of the Lease,

based its ruling on what was equitable under the circumstances. In John P. Saad & Sons, Inc. v.

Nashville Thermal Transfer Corp., 715 S.W.2d 41 (Tenn. 1986), the Court held that, when a trial

court applies the equitable doctrine of laches, a reviewing court will not reverse absent an abuse of

discretion. Id. at 46. Because the trial court was exercising similar equitable discretion, Lessor

argues that we can only overturn its decision if that discretion was abused. We disagree.

Lessor presents no evidence that the trial court acted for equitable reasons. The trial court’s

final Order simply reveals its interpretation of the lease; it does not provide an equitable, or even

legal, rationale for that interpretation. Furthermore, Lessor’s reliance on Saad & Sons is misplaced.

In that decision, the Court dealt solely with the doctrine of laches. Neither party in this case

contends that the doctrine of laches is applicable here. If we were to follow Lessor’s argument and

expand the rule of Saad & Sons, we would commit to the trial court’s discretion virtually every

question involving fairness. Such a result would preclude meaningful appellate review of a host of

legal issues.

Therefore, we will follow the traditional standard of review. This case involves the

interpretation of a lease—a question of law. Our review is de novo.

Law and Analysis

Before we can discuss the issue of encumbrance, we must address Lessor’s two challenges

to the purchase option itself. Clearly, the option must be valid for the Lessee to exercise it. First,

Lessor asserts that Lessee forfeited the right to exercise the purchase option when Lessee exercised

the option to renew. Next, Lessor contends that the purchase option is an unenforceable “agreement

to agree.” We address each issue in turn.

The first question requires an interpretation of the Lease. Specifically, what effect, if any,

does paragraph 28 of the Lease (option to renew) have on paragraph 29 (option to purchase)?

Tennessee case law does not provide specific guidance on this question. Accordingly, we must rely

on the general rules of contract interpretation.

When interpreting a contract, the court’s aim is to ascertain and give effect to the parties’

intent. Harrell v. Minnesota Mut. Life Ins., 937 S.W.2d 809, 814 (Tenn.1996). Each provision

must be construed in light of the entire agreement, and the language in each provision must be given

its natural and ordinary meaning. Buettner v. Buettner, 183 S.W.3d 354, 359 (Tenn. Ct. App.2005).

If the language is ambiguous, however, courts cannot enforce the contract according to its plain

meaning. Johnson v. Johnson, 37 S.W.3d 892, 896 (Tenn. 2001). A provision is not ambiguous

simply because the parties interpret it differently. Staubach Retail Servs. Southeast, LLC v. H.G.

Hill Realty Co., 160 S.W.3d 521, 526 (Tenn. 2005); Cookeville Gynecology & Obstetrics, P.C. v.

Southeastern Data Sys., Inc., 884 S.W.2d 458, 462 (Tenn. Ct. App. 1994). “A contract is

ambiguous only when it is of uncertain meaning and may fairly be understood in more ways than

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one.” Farmers-Peoples Bank v. Clemmer, 519 S.W.2d 801, 805 (Tenn.1975).

When viewed separately, the two provisions are clear: paragraph 28 grants an option to

renew, and paragraph 29 an option to purchase. Lessor argues that either one or the other may be

exercised, but not both. Lessor points out that the Lease itself does not explicitly provide for the

Lessee to exercise both options. Paragraph 29 provides for the purchase of the property “at the end

of the term of fifty (50) years and six months.” When Lessee exercised the option to extend, Lessor

argues that the lease term effectively became 100 years and six months. Therefore, Lessor contends,

Lessee could not exercise the purchase option because the lease term had not ended.

We disagree with Lessor’s reading of the two provisions. Lessor is correct that the Lease,

by its plain terms, does not explicitly allow the Lessee to exercise both options. The Lease, however,

does not explicitly recognize an either/or relationship between the provisions. Critically, the lease

does not prohibit the Lessee from exercising both options.

Similarly, we disagree with the Lessor’s characterization of the timing requirements in the

Lease. The only apparent precondition for the exercise of both options is notice. Paragraph 28

provides that notice must be given at least six months before the end of the term. The term ended

in 2000. Lessee was free to give notice any time at least six months prior to the term’s end, and

Lessee did so in 1953. The purchase option in Paragraph 29 contains the same notice requirement.

Accordingly, the purchase option is conditioned only upon notice; it is not conditioned upon Lessee’s

failure to exercise the option to renew.

Lessor’s argument that the lease term, after Lessee exercised the option to renew, became 100

years and six months is also unpersuasive. Paragraph 28 specifically allows the Lessee to remain

in possession of the property for 50 years after the expiration of the initial lease term. The option

to “renew” means that the end of the 50 year and six month term marks the beginning of a second

50 year term. It does not create a single 100 year and six month lease term. Therefore, contrary to

Lessor’s assertion, the initial lease term ended in 2000. By giving notice more than six months prior

to the end of that initial term, Lessee fulfilled the requirement necessary to exercise the option.

Lessor next contends that the purchase option is unenforceable because the lease is too vague

with respect to a material term—price. The option, Lessor argues, creates nothing more than an

“agreement to agree.” Such agreements are unenforceable under Tennessee law. Four Eights, LLC

v. Salem, 194 S.W.3d 484, 487 (Tenn. Ct. App. 2005).

For a contract to be enforceable, the parties must agree on the material terms. Gurley v.

King, 183 S.W.3d 30, 35 (Tenn. Ct. App. 2005). Courts are reluctant to enforce contracts that leave

material terms open for further negotiations. Four Eights, 194 S.W.3d at 487. Tennessee courts,

however, do “not favor the destruction of contracts because of indefiniteness and if the terms can be

reasonably ascertained in a manner prescribed in the writing, the contract will be enforced.” Id. at

487. Accordingly, “where price is the unspecified material term, courts have enforced contracts that

call for the price to be set by vague but ascertainable standards, such as ‘market price’ or ‘prevailing

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rate.’” Huber v. Calloway, No. M2005-00897-COA-R3-CV, 2007 WL 2089753, at *5 (Tenn. Ct.

App. Jul. 12, 2007).

To support its argument, Lessor relies on two recent decisions of this Court. In the first,

Four Eights, the lease provided the lessee an option to purchase at fair market value. Under the

lease, “fair market value” would be “determined by the Lessor and Lessee, negotiating in good faith,

within thirty (30) days of Lessee [sic] notice to Lessor of the election to purchase the Premises.” 194

S.W.3d at 485 n. 1. Because the fair market value would be determined by the parties solely through

good faith negotiations, the purchase option was simply an “agreement to agree.” Id. at 486.

Therefore, the purchase option was unenforceable. Id. at 488.

Likewise, in Huber, the court found a purchase option unenforceable because it was too

vague with respect to price. The agreement at issue contained the following purchase option

provision:

In lieu of attaching purchase agreement, Buyer and Seller agree to complete an

agreement at time of notice to sell. Purchase price to be mutually agreed upon

based on independent [sic] appraisal at time of notice to sell.

Id. at *1 (emphasis added). The Court found that the “language mandating an appraisal does nothing

to change the requirement of mutual agreement.” Id. at *5. Despite the independent appraisal, the

parties in Huber were required to reach an independent agreement on price. Accordingly, the

purchase option was a “classic example of the ‘agreement to agree,’” and therefore, unenforceable.

Id.

Lessor’s reliance on Four Eights and Huber is misplaced. In those two cases, the options

were unenforceable because they were conditioned on the parties negotiating to reach an independent

agreement. Here, the lease first calls for the parties to negotiate. If negotiation fails, however, the

lease requires that the price be determined by a group of two arbiters and one umpire, with the

decision of any two binding on the parties. Therefore, while the lease does not set a specific

purchase price, it does provide a specific method of determining the price. This method—the panel

of arbiters—does not call for independent negotiations between the parties. Our conclusion on this

issue is supported by the decision in William P. Rae Co. v. Courtney, 165 N.E. 289 (N.Y. 1929).

In Courtney, the court enforced a purchase option providing for a nearly identical method of

determining price.

Therefore, we conclude that the purchase option was both enforceable and validly exercised

by the Lessee. Accordingly, we affirm the trial court’s judgment on this issue.

Having found that the Lessee properly exercised a valid purchase option, we turn to the final

issue: whether the consideration to be paid should be based upon the value of the property as

unencumbered by the lease. The difference in value is not trivial; the appraised value of the property

is $125,000 if encumbered by the lease and $1,758,626 if unencumbered.

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Neither Tennessee law nor the lease itself provides clear guidance on this particular issue.

Accordingly, we look to decisions from other jurisdictions that address the question. In William P.

Rae Co. v. Courtney, 165 N.E. 289 (N.Y. Ct. App. 1929), a New York court examined a lease

containing a similar purchase option:

At any time subsequent to five years from the date hereof, the Tenant or his assigns,

may at his option purchase said premises for a consideration to be agreed upon with

the Landlords. Should the parties hereto, in such a case, fail to agree upon such

consideration, the Landlords and Tenants shall each name one arbiter who shall in

turn choose one umpire; the three thus named shall act with promptness; the decision

of any two as to a proper consideration for the purchase of said premises shall be

binding upon all the parties hereto.

Id. at 290. The tenant accepted the option to purchase while the burden of the lease still had sixteen

years to run. Id. The issue presented was whether the remaining burden of the lease should be

deducted from the value of the lessor’s interest. The court found that the encumbrance should be

deducted from the market value of the property:

The [tenant] had a valuable interest in the premises which it could have sold and

transferred. If the lessors had desired to sell the premises subject to the lease, they

would have been obliged to deduct from the market value of the property the amount

of the incumbrance of the lease.

Id. at 290; see also, Petula Assocs. v. Dolco Packaging Corp., 240 F.3d 499 (5th Cir. 2001) (holding

that appraisers are to take into account the positive or negative impact of the existing lease held by

the optionee tenant in determining such value unless the language of the lease expressly precludes

such consideration); TCC Enterprises v. Estate of Erny, 717 P.2d 936, 937 (Ariz. Ct. App. 1986)

(holding that the “[Landlord’s] estate is not now in a position to sell unencumbered fee simple to the

subject property, for it does not own such a fee. The estate they now hold and could sell is a ‘leased-

fee estate.’”); Napleton v. Ray Buick, Inc., 704 N.E.2d 864, 871 (Ill. Ct. App. 1999) (holding that

the term used in the option clause, “demised premises,” indicates that the value of the property

should be encumbered by the lease); Milton R. Friedman, Friedman on Leases § 15.1 (4th ed. 1997)

(recognizing that when a lessee exercises a purchase option, “[t]he lease itself may be a burden on

the property and depress its value.”)

Lessor argues that we should adopt a different rule developed in a line of recent decisions by

the Florida courts. After a series of conflicting cases, the Florida Supreme Court developed its

current rule in Taylor v. Fusco Management Co., 593 So.2d 1045 (Fla. 1992). In Taylor, the Court

held that, in the absence of specific language to the contrary in the Lease, the market value of leased

property at the time a Lessee exercises an option to purchase the property should be computed as if

the property were unencumbered by the Lease. Any intent to value the property otherwise should

be clearly stated in the Lease. Id. at 1047; but see, Friedman, supra, § 15.1 n. 11 (stating that the

interpretations of the Florida courts merit “opprobrium”).

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We decline to adopt the rule developed in Florida, and instead, find that the property should

be valued as encumbered by the lease. In reaching this conclusion, we base our analysis, as the

Special Master did, on the fair market value of the property. The Lease, however, does not specify

the test to be applied to determine consideration. Because the Lease does not explicitly contemplate

a test, Lessor contends that we are precluded from performing a fair market value analysis. Lessor’s

Complaint, however, specifically asked the trial court to declare the following:

[T]he attempted exercise of the “option to purchase” by the [Lessees] requires a good

faith determination of the fair market value of the [property] unencumbered by the

[Lessees’] leasehold interest….

Accordingly, the measure for the consideration to be paid for the property is its fair market value.

Under Tennessee law, “[t]he fair market value of the land is the price that a reasonable buyer

would give if he were willing to, but did not have to, purchase and that a willing seller would take

if he were willing to, but did not have to, sell.” Nashville Housing Authority v. Cohen, 541 S.W.2d

947, 950 (Tenn. 1976) (citing Davidson County Board of Education v. First American National

Bank, 301 S.W.2d 905 (Tenn. 1957)). Here, the property is encumbered by a 50-year lease with low

rent. A purchaser would have to endure the lease and its low rent for more than 40 years before

acquiring a fee simple estate. If we were to accept Lessor’s argument, we would allow the Lessors

to sell more than they own. Lessors own an estate encumbered by a long term lease, but they wish

to sell an unencumbered fee simple. We agree with the decision in Petula Assocs., Ltd. v. Dolco

Packaging Corp., 240 F.3d 499 (5th Cir. 2001), in which the Court found that the “fair market value

must reflect the value of that which can be sold.” Id. at 503.

Therefore, we conclude that the consideration for the property should be based upon the

property as encumbered by the remaining leasehold interest.

Conclusion

The judgement of the trial court finding the purchase option afforded the Lessee to be valid

is affirmed. The judgement of the trial court finding that the value of the real estate should be

determined without considering the remaining lease term is reversed. This case is remanded to the

trial court for such further proceedings as are consistent with this opinion. Costs of appeal are

assessed against Appellees for which execution may issue if necessary.

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J. STEVEN STAFFORD, J.

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