Nov. 14, 2017 – Two parties entered into a commercial lease agreement with an option-to-purchase. Recently, a state appeals court upheld the option despite an argument that the parties disagreed on how the property would be valued if the option was exercised.
National Centers for Learning Excellence (National) exercised its option to purchase property in Waukesha under its lease agreement with Headstart Building (Headstart). The lease included a process to determine the fair market value of the property.
Each party would commission an appraisal. If the difference between appraisals was greater than five percent, the parties would commission an independent third appraisal, which would contractually bind the parties on purchase price.
The first two appraisals were not close. The Headstart appraisal of $6.8 million estimated the value based on National’s lease. That is, Headstart’s appraisal looked to the value of National’s lease to determine fair market value, the leased fee interest.
The National appraisal of $4.07 million was based on the fair market value on the open market. Headstart implored National to perform a new appraisal to assess the leased fee interest. National declined and withdrew its offer to purchase the property.
Litigation commenced before any third appraisal was performed. Headstart sued to compel the purchase price at $6.8 million and asserted that National acted in bad faith.
National rejected those claims and asked the circuit court to declare the method of appraisal that controlled since the lease did not specify.
The circuit court dismissed Headstart’s claims, concluding the option was void and unenforceable because the parties had not reached agreement about the proper appraisal methodology. It declined to issue a declaratory judgment.
Recently, the District II Appeals Court reversed. In Headstart Building LLC v. National Centers for Learning Excellence, Inc., 2016AP434 (Nov. 8, 2017), a three-judge panel ruled the option was enforceable because the price could be reasonably determined.
“First, the option calls for appraisals of the fair market value of the property, and the law is clear that a price term based on the appraised or fair market value is sufficiently definite,” wrote Judge Brian Hagedorn, noting the lease called for a third appraisal. “Thus, the price is capable of being determined with reasonable certainty.”
The circuit court had not ruled on National’s declaratory request, and the appeals court remanded for consideration of that claim, noting the lease called for a price based on fair market value and contract law does not require a literal meeting of the minds.
That is, contract law requires terms to be definite as to basic commitments and obligations – price by fair market value and a mechanism for resolving disagreements is enough to make the contract provision reasonably definite and enforceable.
The panel concluded that a price can be ascertained. On remand, the circuit court will determine which appraisal method is proper, a question of first impression in Wisconsin.