NO. 91-132
IN THE SUPREME COURT OF THE STATE OF MONTANA
1991
JOE R. LEE and FLOIE N. LEE,
Plaintiffs and Appellants,
-vs-
0 M. SHAW, Personal Representative of
.
the Estate of Fred Pelzman, Deceased,
APPEAL FROM: District Court of the Ninth Judicial District,
In and for the County of Teton,
The Honorable R. D. McPhillips, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
Patrick F. Hooks; Hooks Law Firm, Townsend, Montana
For Respondent :
John P. Wuerthner; Wuerthner & Wuerthner, Great
Falls, Montana
Kenneth R. Olson; Baiz & Olson, Great Falls, Montana
Submitted on Briefs: July 25, 1991
Decided: December 12, 1991
Filed:
Clerk
Justice Fred J. Weber delivered the Opinion of the Court.
Joe R. and Floie N. Lee appeal from the judgment of the
District Court of the Ninth Judicial District, Teton County, which
followed a bench trial in which the court concluded that the March
20, 1978 document was not an option but probably a right of
refusal, and that because no notice of intent to sell was ever
given to the plaintiffs, the right of first refusal did not come
into effect. we affirm.
All parties concede that no notification of intent to sell was
given by Fred Pelzman, or his estate, to the Lees. A s a result,
the sole issue is whether the March 20, 1978 document constituted
an "option contract" or Ita right of first refusal".
Joe R. Lee and Floie N. Lee (the Lees) moved to the Teton
County area in 1977 and became acquainted with Fred Pelzman (Mr.
Pelzman), owner of an 800-acre ranch near Choteau. Mr. Pelzman, 79
years old at the time, had suffered a stroke and was unable to
operate the ranch. In September of 1977, Lees began operating the
ranch under a work-share agreement. Subsequently they operated
under written leases, with the last lease ending on December 31,
1985.
This action for specific performance concerns two documents
entered into by the parties in 1978. As found by the District
Court, on February 15, 1978, Mr. Pelzman signed an agreement with
Lees giving them "first option" to purchase the ranch for fair
marRet value "when it becomes available for sale". The agreement
provided that It [o]ther offers being considered at that time must be
2
in writing, signed by the party making the offer and presented to
Joe R. and Floie N. Lee for final consideration". The February 15,
1978, agreement was not recorded.
The District Court also found that on March 20, 1978, Mr.
Pelzman and Lees entered into a second agreement, recorded in Teton
County, giving Lees "first option" to purchase the ranch for
$120,000 "upon or before my passing", and omitting the language
about other offers. According to Joe Lee, he gave Mr. Pelzman
$10.00 nominal consideration at the time the agreement was signed.
The agreement contained the condition that "the option holders
will reside and maintain the said property until time of sale."
The agreement also stated that a "ledger of time and improvements
will be kept for the purpose of reimbursement by the landowner.**
Lees testified that the reason for the second agreement was that
they wanted credit for capital improvements on the ranch paid for
with their own funds. Lees also testified that Joe R. Lee drafted
and dictated the March 20, 1978 document and Floie N. Lee typed it,
using the February 15, 1978 document as a guide.
Following Mr. Pelzman's death on May 18, 1986, Lees notified
the attorney for the estate of their intent to exercise their
option to purchase the ranch. Their offer was refused. On
September 20, 1986, Lee's filed this action to compel specific
performance of the March 10, 1978 agreement.
I
Did the March 20, 1978 document constitute an "option
contract" or "a right of first refusal"?
3
Lees contend that the February 15, 1978, document comprised a
"right of first refusal" and that the March 20, 1978, document
constituted a valid lloptionll
contract. The Pelzman estate
maintains that the second document is not an option contract.
The District Court concluded that whether the second document
was a right of first refusal or an option contract could not be
determined from the face of the document because the wording was
ambiguous. Employing the basic rule of construction that
ambiguities are to be construed against the party who drafted the
document, the District Court ruled that the document was a right of
first refusal. The District Court reasoned that because neither
Mr. Pelzman nor the Pelzman estate had ever given notice of intent
to sell, the second document, as a right of first refusal, did not
come into effect.
An option is a right acquired by contract by which the owner
of property agrees with another person that he shall have the right
to buy his property at a fixed price within a certain time. Miller
v. Meredith (1967), 149 Mont. 125, 128-29, 423 P.2d 595, 597. The
offer is continuing and irrevocable by the optionor, creating in
the optionee a power to compel the owner to sell property at a
stipulated price whether or not the owner wishes to sell. Klein v.
Brodie (1975), 167 Mont. 47, 49, 534 P.2d 1251, 1252-53. When the
optionee accepts the offer, a binding bilateral contract results
which can be enforced by specific performance. Naylor v. Hall
(1981), 201 Mont. 59, 67, 651 P.2d 1010, 1015.
A right of first refusal or "preemptive right" is closely
4
related to an option, but "very dissimilar in the legal relations
of the parties . . . .I1 1 A Corbin on Contracts 5 261, at 468
(1963). A right of first refusal or preemptive right '*does not
give to the preemptioner the power to compel an unwilling owner to
sell; it merely requires the owner, when and if he decides to sell,
to offer the property first to the person entitled to the pre-
emption, at the stipulated price." Tribble v. Reely (1976), 171
Mont. 201, 206, 557 P.2d 813, 816 (emphasis added) (citation
omitted).
Property subject to a preemptive right should adequately
describe the property and the price must be stated or otherwise
ascertainable. Klein, 167 Mont. at 50, 534 P.2d at 1253. Often
the agreement requires the property owner to offer the property to
the party holding the preemptive right at the same price agreed
upon by the third party. See, e.g., Tribble, 171 Mont. at 204, 557
P.2d at 815 (lease provided that "in the event of sale, the Lessees
shall have the first refusal under terms similar to that offered
:
any third partyn1) 1A Corbin on Contracts 5 261A, at 136-37 (Supp.
1991).
The language of the first agreement clearly indicated a right
of first refusal, rather than an option contract:
I, Fred Pelzman, Sr. agree to give Joe R. and Floie N.
Lee first option to purchase property I own in the above
Legal Description for fair market value when it becomes
available for sale. Other offers beina considered at
that time must be in writinq, siqned by the partv making
the offer and presented to Joe R. and Floie N. Lee for
final consideration. Upon notification of intent to
sell, a period of 45 days will be allowed for payment.
(Emphasis added).
5
Although this document contains the term "first option", courts
have generally read the instrument as a whole to determine whether
the parties intended an option or a right of first refusal. See
Straley v. Osborne (Md. App. 1971), 2 7 8 A.2d 64, 69. By indicating
that the property would be offered to Lees "when it becomes
available for sale," by stipulating that the property would be sold
at the current fair market value, and in supplying a legal
description of the property, the first agreement satisfied the
criteria for a right of first refusal.
The second agreement of March 20, 1978, provided in pertinent
part:
I, Fred Pelzman, Sr., agree to give Joe R. and Floie N.
Lee first option to purchase property I own in the above
Legal Description upon or before my passing for the sum
of one hundred and twenty thousand dollars. It is agreed
by the undersigned that the option holders will reside
and maintain the said property until time of sale. A
ledger of time and improvements will be kept for the
purpose of reimbursement by the landowner. Upon
notification of intent to sell, a period of 4 5 days will
be allowed for payment.
Lees' attorney conceded that the insertion of the notification of
intent to sell sentence at the end of the agreement admittedly
created an ambiguity. The District Court concluded that the
agreement was ambiguous on its face as it could be argued to be
either an option or a right of first refusal and that because the
Lees drafted the agreement, any ambiguity must be interpreted
against them and in favor of the defendants. The rules of
construction of a contract where ambiguity exists are summarized in
Rumph v. Dale Edwards, Inc. (1979), 183 Mont. 359, 367, 600 P.2d
163, 168:
6
An ambiguity exists when, taken as a whole, the
contract's wording or phraseology is reasonably subject
to two different interpretations. Where the terms of an
agreement are uncertain and ambiguous, parol evidence is
admissible to prove the interpretation meant by the
parties. (Citation omitted.)
This agreement gives the legal description of the property and the
purchase price which fulfills the first two requirements of both an
option contract and a right of first refusal. In addition, the
agreement sets a certain time, "upon or before my passing," for the
offer to be held open as required by an option. In contrast, the
last sentence requires the giving of a notification of intent to
sell and grants a period of 45 days for payment. In analyzing this
agreement, we conclude that in substance it may be interpreted as
follows:
(a) At any time during his lifetime, Mr. Pelzman
could have notified the Lees of his intent to sell - at
that point, the Lees had an immediate right to purchase
the property for $120,000 less elements under the ledger
which may be deductible, with payment to be made within
a period of 45 days.
(b) In a similar manner, if Mr. Pelzman failed to
give any such notification of intent to sell during his
lifetime, there still was the opportunity for the legal
representative of his estate to give notification to the
Lees of intent to sell effective upon the date of Mr.
Pelzman's death. Again, had such notification of intent
been given by the P.R. to the Lees, they had the right to
purchase the property for the $120,000 less any credits
as indicated by the agreement from the ledger, with
payment to be made within 45 days from notification.
A s a result, we agree with the determination by the District Court
that this agreement was not an option which was entitled to be
enforced. Since no notice was given to the Lees either before or
at the time of Mr. Pelzman's death, and because 45 days elapsed
following the death of Mr. Pelzman, we agree with the determination
of the District Court that any right of first refusal did not come
into effect.
We hold that the District Court's conclusion that the second
agreement constitutes a right of first refusal was correct for the
above reasons.
Affirmed.
v u k t i c e
We Concur:
/
Justices
8
Justice John Conway Harrison, dissenting.
I dissent. The issue in this case is whether the District
Court erred in determining that the March 20, 1978, agreement was
ambiguous on its face and constituted right of first refusal"
rather than an option contract.
The Lees contend that the first agreement of February 15,
1978, comprised a "right of first refusalr1and that the second
agreement of March 20, 1978, was a valid "option" contract. In the
view of the District Court, whether the second agreement was a
right of first refusal or an option contract could not be
determined from the face of the document because the wording was
ambiguous. Employing the basic rule of construction that
ambiguities are to be construed against the party who drafted the
document, the District Court ruled that the document was a right of
first refusal. The District Court reasoned that since neither Mr.
Pelzman nor the Pelzman estate had ever given notice of intent to
sell, the second agreement, as a right of first refusal, did not
come into effect.
An option is a right acquired by contract "by which the owner
of property agrees with another person that he shall have the right
to buy his property, at a fixed price, within a certain time."
Miller v. Meredith (1967), 149 Mont. 125, 128-29, 423 P.2d 595,
597. The offer is continuing and irrevocable by the optionor,
creating in the optionee a power to compel the owner to sell
9
property at a stipulated price whether or not the owner wishes to
sell. Klein v. Brodie (1975), 167 Mont. 47, 49, 534 P.2d 1251,
1252-53. When the optionee accepts the offer, a binding bilateral
contract results which can be enforced by specific performance.
Naylor V. Hall (1982), 201 MOnt. 59, 67, 651 P.2d 1010, 1015.
A "right of first refusal" or "preemptive right" is closely
related to an option, but V e r y dissimilar in the legal relations
of the parties . . . . 'I 1A Corbin on Contracts 5 261, at 468
(1963). A right of first refusal requires the owner of property,
when he or she decides to sell, to offer the property to the person
holding the preemptive right. If the holder of the preemptive
right declines the offer to buy the property, the owner may sell to
anyone. Tribble v. Reely (1976), 171Mont. 201, 206, 557 P.2d 813,
816.
Property subject to a preemptive right should adequately
describe the property and the price must be stated or otherwise
ascertainable. Klein, 167 Mont. at 50, 534 P.2d at 1253. Often
the agreement requires the property owner to offer the property to
the party holding the preemptive right at the same price agreed
upon by the third party. See, e.g., Tribble, 171 Mont. at 204, 557
P.2d at 815 (lease provided that "in the event of sale, the Lessees
shall have the first refusal under terms similar to that offered
any third party"); 1A Corbin on Contracts 5 261A, at 136-37 (Supp.
1991).
I feel the language of the first agreement clearly indicated
10
a right of first refusal, rather than an option contract:
I, Fred Pelzman, Sr. agree to give Joe R. and Floie N.
Lee first option to purchase property I own in the above
Legal Description for fair market value when it becomes
available for sale. other offers beinq considered at
that time must be in writinq, siqned by the ?Jartv makinq
the offer and nresented to Joe R . and Floie N. -Lee for
final consideration. Upon notification of intent to
sell, a period of 4 5 days will be allowed for payment.
[Emphasis added.]
By indicating that the property would be offered to the Lees "when
it becomes available for sale," by stipulating that the property
would be sold at the current fair market value, and in supplying a
legal description of the property, the first agreement satisfied
the criteria for a right of first refusal.
The second agreement of March 20, 1978, provided:
I, Fred Pelzman, Sr., agree to give Joe R. and Floie N.
Lee first option to purchase property I own in the above
Legal Description upon or before my passing for the sum
of one hundred and twenty thousand dollars. It is agreed
by the undersigned that the option holders will reside
and maintain the said property until time of sale. A
ledger of time and improvements will be kept for the
purpose of reimbursement by the landowner. Upon
notification of intent to sell, a period of 4 5 days will
be allowed for payment.
The second agreement fulfilled the first two requirements of both
an option contract and a right of first refusal in that a legal
description of the property was given and the price of $120,000 was
fixed. In addition, the agreement revealed a certain time, "upon
or before my passing," for the offer to be held open as required by
an option.
Although the second agreement meets the criteria for an
option, the use of the term "first option" and the inclusion of the
11
sentence requiring a period of 45 days after notification for
payment creates an ambiguity. Mr. and Mrs. Lee each testified that
the sentence requiring a 45-day waiting period was inadvertently
included in the second agreement by Mrs. Lee. An ambiguity exists
when the wording of the contract is subject to two different
interpretations. Parol evidence is admissible to prove the
interpretation the parties intended. Proctor v. Werk (1986), 220
Mont. 246, 248, 714 P.2d 171, 172. "[Iln the construction of
contracts, the courts may look not only to the language employed
but to the subject matter and the surrounding circumstances and may
avail themselves of the same light which the parties possessed when
the contract was made." Morning Star Enterprises v. R.H. Grover
(1991), 247 Mont. 105, 111, 805 P.2d 553, 557.
When confronted with the term "first option," courts have
generally read the instrument as a whole to determine whether the
parties intended an option or a right of first refusal. See
Straley v. Osborne (Md. App. 1971), 278 A.2d 64, 69; but see Blau-
Par Corp. v. Reliance Chemical Corp. (N.Y. App. Div. 3 1991), 565
N.Y.S.2d 910 ("first option" constitutes option; otherwise,
adjective "first" rendered meaningless). For example, in Steen v.
Rustad (1957), 132 Mont. 96, 313 P.2d 1014, this Court, relying on
the intent of the parties as revealed by the "light of the entire
instrument," interpreted the words "first option to buy" as giving
the holder an option rather than a right of first refusal. Steen,
132 Mont. at 102, 313 P.2d at 1018.
12
According to Pruner v. Brown (Va. 1976), 223 S.E.2d 890,
although courts are evenly divided, the better view when the terms
of the lease or agreement specify the purchase price and legal
description of the property is that an absolute option is created
by use of the word "first" with "right, option, or privilege."
Pruner, 223 S.E.2d at 892. Generally, the interpretation of the
instrument as an option is more likely when the words "first
option" are utilized than when the expressions "first privilege" or
"first right" are employed. 1A Corbin on Contracts 5 261A, at 4 8 6 -
89.
Instructive in interpreting the second agreement in the
context of surrounding circumstances is a comparison with the terms
of the first agreement, drafted about a month before the second
agreement. In the second agreement we note the addition of a
specific amount as the sale price, which according to Pruner is an
indication of an option, rather than a right of first refusal.
Moreover, had the parties intended the second agreement as a right
of first refusal, it would seem reasonable that the parties would
have included the identical phrase, "when it becomes available for
sale," to establish their intent to negotiate a right of first
refusal. Instead, this phrase was omitted. Similarly, omission in
the second agreement of the sentence requiring other offers to be
presented to the Lees indicates that the parties did not intend the
second agreement to comprise a right of first refusal.
Even though construction of the second agreement as an option
13
is warranted, the contract contains a unique clause about the
duration of the agreement, giving the Lees "first option to
purchase property I own in the above Legal Description upon or
before my passing." As I read this passage, whether the second
agreement is deemed a right of first refusal or an option, Mr.
Pelzman's death constituted an event giving the Lees the right to
purchase the 800-acre ranch.
Taking into consideration the variations in wording of the
first and second agreements and the phrasing of the second
agreement, I would hold that upon the death of Mr. Pelzman, the
Lees had the right to buy the 800-acre ranch property at the agreed
upon price. The estate presents a number of arguments regarding
contract and estate law to support its position. I will briefly
address two of the more significant theories.
The estate asserts that the Lees are not entitled to specific
performance because they failed to tender the purchase price and
breached the option by failing to submit a ledger for reimbursement
purposes as required by the contract. The second agreement stated
that 45 days was allowed for payment after notification. The Lees
promptly attempted to exercise the option on June 5, 1986, two and
a half weeks after Mr. Pelzman's death, by a letter to Mr.
Pelzman's attorney. The attorney refused to recognize the validity
of the option and denied the Lees' second request to exercise their
option to buy the property later that same month. It is my view
that in light of the adamant refusal to recognize the Lees' right
14
to buy the property, neither the Lees’ failure to tender the
purchase price nor their failure to present a ledger affects their
right to specific performance since such actions on the Lees’ part
would have been futile.
The estate also contends the second agreement failed to recite
consideration for the option. Consideration is “[alny benefit
conferred or agreed to be conferred upon the promisor by any other
person, to which the promisor is not lawfully entitled, or any
prejudice suffered or agreed to be suffered by such person . . . as
an inducement to the promisor. .. .I1 Section 28-2-801, MCA. Mr.
Lee testified that he gave Mr. Pelzman $10.00 as consideration for
the option. We have held that nominal consideration is sufficient
to create a valid contract and allow the equitable remedy of
specific performance. Keaster v. Bozilc (1981), 191 Mont. 293, 299,
623 P.2d 1376, 1380 (five dollars sufficient consideration).
Although the $10.00 consideration was not recited in the contract
as is preferable, the Lees’ promise in the second agreement to
reside on and maintain the property until time of sale, as a
detriment suffered by the Lees and a benefit to Mr. Pelzman,
comprised adequate consideration. See Naylor v. Hall (1982), 201
Mont. 59, 651 P.2d 1010. In addition, “[a] written instrument is
presumptive evidence of a consideration.I’ Section 28-2-804, MCA.
The fact that some terms in the option contract were not
specifically expressed does not render it unenforceable. Absolute
certainty in every detail is not a prerequisite for specific
15
performance. Keaster, 191 Mont. at 302, 623 P.2d at 1381. I would
hold that the Lees provided sufficient consideration f o r the option
contract.
The judgment of the District Court should be reversed.
W
Justice Terry N. Trieweiler Joins in the foregoing dissent of
Justice John C. Harrison.
/ justice
16
December 12, 1991
CERTIFICATE OF SERVICE
I hereby certify that the following order was sent by United States mail, prepaid, to the following
named:
Patrick F. Hooks
HOOKS & BUDEWITZ
P.O. Box 1289
Townsend. MT 59644
John P. Wuerthner
WUERTHNER & WUERTHNER
P.O. Box 2503
Great Falls, MT 59403
Kenneth R. Olson
BAIZ & OLSON
Suite 316, 600 Central Plaza
Great Falls, MT 59401
ED SMITH
CLERK OF THE SUPREME COURT
STATE OF MONTANA
BY: