Summary
remanding to trial court to reconsider attorney's fees issue when trial court's declaratory judgment was reversed
Summary of this case from Galveston v. Saint-PaulOpinion
No. 01-06-00002-CV
Opinion issued July 26, 2007.
On Appeal from the 151st District Court Harris County, Texas, Trial Court Cause No. C-2003-23823.
Panel consists of Justices NUCHIA, JENNINGS, and BLAND.
OPINION
The issue presented by this appeal is whether a lessee can exercise a purchase option after he has been notified by the lessor that he is in default on the lease, but before the contract terminates. Here, because the lease did not contain language in the option clause conditioning its exercise on performance of the terms of the lease, the purchase option could be exercised by the lessee at anytime before the contract terminates. Because the trial court held otherwise, we reverse and render in part and reverse and remand in part.
BACKGROUND
The 1928 lease
In 1928, Lucy G. Travis, as lessor, and Edwin H. Wilder, as lessee, entered into a 99-year lease of a tract of property located in Harris County, Texas. The lease was freely assignable by either party, and its terms are binding upon the heirs, legal representatives, and assigns of the original parties. Two terms of the lease are relevant to the case before the Court.
Article XV of the lease, hereinafter referred to as the "purchase option," provides as follows:
In consideration of the amount of the rental payments hereunder, paid and to be paid, and of the other valuable considerations inuring to the benefit of the LESSOR hereunder, the LESSOR hereby gives and grants to the LESSEE, and LESSEE shall have an optional right at any time within a period of the term of this lease, to purchase the interest of Lessor in and to the demised premises described in ARTICLE 3 hereof, as follows
At and for an agreed purchase price of FIFTY THOUSAND DOLLARS ($50,000.00) to be paid either in cash, or one-half cash, and balance in five (5) equal annual payments, with interest at seven percent (7%) per annum, payable as it accrues, with Vendor's Lien reserved to secure payment.
If, and when LESSEE notifies the LESSOR, of his election to exercise said option to purchase and demonstrates his readiness to pay the amount specified above, LESSOR binds and obligates herself to forthwith execute and deliver to LESSEE a conveyance of her interest in the demised premises and all rights incident thereto, with covenants of general warranty, conveying her said interest and title to said premises free and clear of all encumbrances, judgments, or other liens, subject only to this present lease and anyone claiming hereunder. After receipt of notice of such election to purchase, the LESSOR agrees to promptly furnish LESSEE a complete Abstract of Title to the demised premises so that he may have the title examined before the deed is executed. If and when said option is exercised and the purchase price paid, all future rentals which otherwise would become due under this lease shall cease and the LESSEE shall be under no obligation to the LESSOR for anything accruing hereunder from and after the date of the consummation of said sale.
The 1927 lease also contained the following language in Article X:
At no time during the life of this contract shall LESSEE permit to be carried on in the demised premises, or any part thereof, any kind or character of business whatsoever which is not permitted by law; and LESSEE agrees at all times to perform any and all lawful requirements in regard to the use and occupancy of the demised premises and improvements, as well as to the use and occupancy of the streets and sidewalks adjacent thereto, and agrees that he shall at all times conform to such requirements and perform the same in such manner as to relieve the LESSOR and the demised premises from any liability therefor. The LESSEE shall have the right to use the demised property during the lease term for any lawful purposes.
The Subsequent History of the Lease
Wilder, the original lessee, assigned the lease to Scott Shambaugh in 1929. In 1930, Shambaugh assigned the lease to The Texas Company ("Texaco"). Texaco operated a service station on the property for almost 50 years. The undisputed evidence shows that during the time the service station was in operation there were no environmental regulations to report or remediate contamination of the soil. The lease remained with Texaco until 1989, when it was assigned to Hamid Liaghat and Hassan Naghavi.
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Moosavideen Obtains the Lease and Attempts to Exercise Purchase Option
On November 9, 2000, shortly before he acquired the lease, Moosavideen sent a letter to three of the original lessor's heirs — Lucy Foote McKinstry, John Travis Garrett, and John G. Meador, Jr. — expressing his interest in acquiring the lease for the purpose of exercising the purchase option. He received no response. Three months later, on January 22, 2001, Moosavideen acquired the lease from Liaghat and Naghavi.
Moosavideen was informed by his predecessors that Lucy G. Travis, the original lessor, had four heirs to whom they had forwarded rent payments: (1) Lucy Foote McKinstry, (2) John Travis Garrett, (3) Bank One Texas, N.A., as guardian of the estate of Mildred Webster Garrett, and (4) John G. Meador. On May 18, 2001, Moosavideen sent notice to these four heirs that he intended to exercise the option to purchase.
Having received no response, on August 6, 2001, Moosavideen again notified these four heirs that he intended to exercise the option contract in the lease. Moosavideen also included a warranty deed he had obtained and requested that the heirs correct any error in the listing of the owners and their percentage of ownership. The deed listed 15 owners and included signature blocks for each. Again, the heirs did not respond to Moosavideen's request to exercise the option.
Moosavideen Files Suit and Sends Notice to More Heirs
On November 1, 2001, Moosavideen filed suit, seeking a declaratory judgment that he had validly exercised the option contained in the lease and was entitled to a deed transferring the lease property to him, and for specific performance of the option. During the course of discovery, Moosavideen determined the names of more heirs and provided notice to them of his intent to exercise the option. However, Moosavideen did not provide notice to the Estate of William Mosely Garrett until October 17, 2002.
The Heirs give Moosavideen Notice of Default
On May 15, 2002, and again on September 13, 2002 (before Moosavideen had provided notice to the Estate of William Mosely Garrett) the heirs notified Moosavideen that he was in default of Article X of the lease. Specifically, their letter to him provided
Pursuant to Article X of the Lease, the Lessee is required to perform any and all lawful requirements in regard to the use and occupancy of the Lease Property and improvement and to at all times conform to such requirements and perform the same in such matter as to relieve the undersigned Lessor from any liability therefore [sic]. You have subjected the Lessor and Lease premises to liability as a result of the use and occupancy of the Lease Property as a service station, in a manner inconsistent with applicable environmental laws/regulations.
The default provision of the lease provides as follows:
If default be made by LESSEE in the performance of any one or more of the covenants contained in this lease (other than the covenants to pay rents or other monies . . .) and LESSOR shall, in writing, notify LESSEE . . . of such default or defaults, and if such defaults are not corrected by LESSEE . . . within one hundred and eighty (180) days from the date of said notice, then LESSOR may forthwith declare said lease cancelled in the manner and with the results specified in subdivision (a) next above.
Thus, under the express terms of the lease, Moosavideen had 180 days — until November 12, 2002 — to cure the claimed default.
Moosavideen Finally Gives Notice to All Heirs
Moosavideen did not cure the claimed default. Instead, on October 17, 2002, during the "cure period," Moosavideen finally gave notice of his intent to exercise the purchase option to the Estate of William Mosely Garrett, the last remaining heir to whom notice had not been given. In response, the heirs claimed that they were no longer required to transfer the property pursuant to the option because, at the time he gave notice to all heirs, Moosavideen was in noticed, but uncured, default.
The Trial Court's Ruling
The case proceeded to trial before the court. Most of the evidence was stipulated by the parties, with the exception of testimony from the environmental experts. The trial court made the following findings of fact, which are relevant to this appeal:
16. At all times relevant to this cause (but certainly from 11/09/00) Plaintiff was in material default and breach of the Lease by virtue of the environmental contamination [in violation of Article X of the lease].
17. On 05/15/02 and again on 09/13/02, Defendants notified Plaintiff of his material default/breach under the Lease by virtue of the environmental contamination (collectively the "default notice"), and of their intent to forfeit and cancel the Lease if such default and breach was not cured within 180 days of such default notice, all in accordance with and as was their right under Article V(b) of the Lease.
18. Under Article V(b) of the Lease, Plaintiff had until November 12, 2002 to cure his Lease default and material breach by virtue of the environmental contamination, but failed and refused to do so.
19. The Lease was thereupon validly terminated and canceled by Defendant for duly noticed but uncured material breach, thereby entitling Defendants to immediate possession of the Lease Property.
20. Plaintiff attempted to notify Defendants of his intent to exercise the Lease Purchase Options earlier (by letters dated May 18, 2001, August 6, 2001, August 2, 2002, and October 14, 2002), but such notice was not effective and Plaintiff was already in material breach of Article X of the Lease because of the environmental contamination of which he was aware.
21. On 10/17/02, Plaintiff effectively notified Defendants, the Lessor, of his intent to exercise the Lease Purchase Options ("Notice of intent to exercise Lease Purchase Option"), but Plaintiff was not entitled to exercise the rights and purchase option granted in Article XV of the Lease by virtue of his previously noticed but uncured material breach of Article X of the Lease.
The following conclusions of law are also relevant to this appeal:
1. Plaintiff was not entitled to exercise the rights and option granted in Article XV of the Lease so long as he was in noticed but uncured material breach and default of the Lease under Article X.
2. Notice of intent to exercise Lease Purchase Option was not effective under the Lease until such notice was received by all of the Defendants.
3. As a matter of law, Plaintiff was at the time he acquired the lessee interest in the Lease, on constructive notice of the Estate of William Mosely Garrett, deceased's undivided 25% lessor ownership of the Lease and of the Lease Property, by virtue of the probate records on file in Cause No. 96649, Harris County Texas, yet he failed to notify the Estate of William Mosely Garrett, deceased of his intent to exercise the Lease Purchase Option until 10/17/02, more than 4 months after Defendants' notice of Lease default and of intent to forfeit the Lease.
5. Plaintiff was in noticed but uncured breach of the Lease at the time he attempted to take advantage of the Lease Purchase Option therein and, therefore, was not entitled to do so.
Based on these findings and conclusions, the trial court awarded the heirs $88,456.16 in damages, plus attorneys fees, for Moosavideen's breach of the lease. The trial court also awarded Moosavideen a $150,268.02 equitable offset against the judgment — an amount equal to the purchase price of the lease, plus taxes Moosavideen paid on the leased property.
EXERCISING PURCHASE OPTION AFTER NOTICE OF DEFAULT
In issue one, Moosavideen contends the trial court erred in concluding that he was barred from exercising the purchase option. In issue two, Moosavideen contends the heirs did not validly terminate the lease before he exercised the option. Specifically, Moosavideen claims that (1) he validly exercised the option on May 18, 2001, when he gave notice of his intent to exercise the option to the four heirs who had been accepting rental payments, or (2) he validly exercised the option on August 2, 2002, when he gave notice to all of the heirs except the estate of William Mosely Garrett, because he had given effective notice to the Garrett estate by notifying Bank One, as he had been instructed by an attorney for the estate, or (3) he validly exercised the option on October 14, 2002, when he finally gave notice to all heirs, including the estate of William Mosely Garrett. Because we believe that Moosavideen's third claim is dispositive of this appeal, we need only address it.
Moosavideen claims that his right to exercise the purchase option was not conditioned on his compliance with the other clauses of the lease. He further argues that because the contract had not been terminated by the time he attempted to exercise the option, the heirs should be required to specifically perform the option contract by transferring the property to him. The heirs respond that Moosavideen's right to exercise the option was conditioned on his compliance with the other terms of the lease, and that once they notified him that they intended to terminate the lease [after a 180-day cure period], he no longer had the right to exercise the option to purchase. The issue presented to the court is thus: Can a lessee exercise an option-to-purchase contract in a lease even though he is in noticed, but uncured, default of other terms of the lease? Put more simply, could Moosavideen exercise the option contract during the 180-day cure period?
Condition Precedent
We first consider whether Moosavadeen's compliance with the terms of the lease is a condition precedent to his right to exercise the purchase option. In Cook v. Young, 269 S.W.2d 457, 458 (Tex.Civ.App. — Fort Worth 1954, no pet.), a lessee filed suit, seeking specific performance of an option-to-purchase clause in a lease contract. The trial court granted summary judgment in the lessee's favor. Id. On appeal, the lessor argued that the summary judgment was improperly granted because there was a fact issue regarding whether the lessee had complied with the terms of the lease by paying all water, gas, and other utility bills accruing on the leased property. Id. at 460. The court of appeals held that compliance with the terms of the lease was not a condition precedent to the optionee's right to exercise the purchase option. Id. "While we find such a provision in the lease contract, we do not find it in that part of the instrument containing the option to purchase. The option is unconditionally granted and there is no requirement creating any condition precedent or otherwise limiting the right to exercise the option." Id.
In Giblin v. Sudduth, 300 S.W.2d 330, 332 (Tex.Civ.App.-Austin 1957, writ ref'd n.r.e.), the following purchase option was included in the contract of sale of an adjoining tract of land:
The seller agrees to give the purchaser an option on the acre tract joining the property they are buying from the seller on the east; this option will be for 5 years and the purchasers can take up their option at any time within 5 years from the date by pay [sic] the seller $1500.00 in cash. The purchaser agrees to pay a yearly rental of $10.00.
The purchaser brought an action for specific performance of the option contract. Id. at 331. The court of appeals held that the purchaser's failure to pay the annual rental amount did not operate to bar the action for specific performance. Id. at 334. "The option was not conditioned upon the payment of the annual rental, the option was for five years and the purchasers were allowed to take up their option at any time within five years by paying the seller $1500.00 in cash." Id.
As in Cook and Giblin, the option clause in this lease agreement is not conditioned on the lessee's performance of the terms of the lease. The option provides that "[i]n consideration of the amount of the rental payments hereunder, paid and to be paid, and of the other valuable considerations inuring to the benefit of the LESSOR hereunder, the LESSOR hereby gives and grants to the LESSEE, and LESSEE shall have an optional right at any time within a period of the term of this lease, to purchase the interest of Lessor in and to the demised premises . . ." (Emphasis added.) While the option provision recites the rental payments as consideration, it does not condition the right to exercise the option on compliance with any of the terms of the lease. Instead, the language clearly states that the option can be exercised "at any time within a period of the term of this lease." It is undisputed that, at the time Moosavideen was able to finally give notice to all of the heirs, on October 14, 2002, the lease had not yet terminated, and could not be terminated until November 12, 2002, when the "cure" period expired.
Had the parties wished to create a condition precedent to the lessee's right to exercise the option agreement on the lessee's compliance with the terms of the lease, they certainly could have done so. For example, in Tidwell v. Lange, 531 S.W.2d 384, 385 (Tex.Civ.App.-Waco 1975, no writ), the option to purchase in the lease read as follows:
[P]rovided that lessee while not in default hereunder and during the final month of this lease term, is hereby given the privilege of purchasing said premises for the sum of $26,000 ($2,600 cash down payment and a note for the balance payable in monthly installments at 8% interest for a 15 year period). (Emphasis added.)
At the time he gave notice of his intent to exercise the purchase option, the lessee was two months in default on the monthly lease rental payments. Id. The court held that the lessee's notice of his intent to exercise the option was ineffective because, contrary to the terms of the option, the lessee was in default [due to nonpayment of the lease] at the time he attempted to exercise the option. Id. at 386. Put another way, the lessee's right to exercise the option to purchase was specifically conditioned on the fact that he not be in default at the time he exercised the option. In contrast, there in no language in the present lease that requires the lessee to free from default before exercising the option contract.
Another instructive case is Tye v. Apperson, 689 S.W.2d 320, 321 (Tex.App.-Fort Worth 1985, writ ref'd n.r.e). In Tye, the purchase option provided:
[T]his Option Agreement is conditioned upon the true and full performance of all of the Lessee's obligations under the terms and conditions of that Lease Agreement. Should [lessee] default or otherwise be in violation or breach of any of the terms and conditions of that Lease Agreement, then, at Optionor's election, this Option Agreement shall lapse and be null and void for all purposes.
Id. The lessee attempted to exercise the purchase option, and the lessor responded that the option had lapsed. The court noted as follows:
The right to terminate the grant of the option . . . is not self-executing. The grant of the option does not self-destruct even though the lease terms are breached; before the option lapses, . . . the optionors, must have elected to terminate the option and agreement and declare it null and void for all practical purposes.
Id. at 323. The court held that the lessor did not declare the option agreement to be lapsed and terminate the contract until after the lessee exercised the option, therefore the lessee had properly exercised his right under the option agreement and the lesee was entitled to specific performance. Id. at 323-24. Thus, even when an option contract requires compliance with the terms of the lease, if termination of the contract is at the option of lessor, and the lessor has not declared the option lapsed, the lessee may exercise the purchase option. But, as we stated earlier, the option contract in this case does not condition the right to exercise the option on the lessee's compliance with the terms of the lease.
Material Default
We also consider whether Moosavadeen was in material default, thus excusing the heirs from the obligation to comply with the terms of the purchase option. The heirs rely on Mustang Pipeline Co. v Driver Pipline Co., 134 S.W.3d 195, 196 (Tex. 2004) for the proposition that once a party has materially breached a contract and has been notified, but has failed to cure such breach, that party may no longer insist on the enforcement of other terms of the contract and the other party is discharged from further performance. The heirs argue that because Moosavadeen was notified, but had not cured breach of Article X of the lease, he was prohibited from enforcing the purchase option. However, under Mustang Pipeline, not all breaches will excuse the nonbreaching party's performance — the breach must be a material breach.
A material breach of a contractual covenant can lead immediately to liability. See McMahan v. Greenwood, 108 S.W.3d 467, 484 (Tex.App.-Houston [14th Dist.] 2003, pet. denied) (emphasis added). "A fundamental principle of contract law is that when one party to a contract commits a material breach of that contract, the other party is discharged or excused from any obligation to perform." Hernandez v. Gulf Group Lloyds, 875 S.W.2d 691, 692 (Tex. 1994).
We look then to the terms of the contract to determine whether Moosavadeen's breach of Article X of the contract gave rise to immediate liability, permitting the heirs to be released from their obligations under the lease. Article V(b) of the contract provides:
If default be made by LESSEE in the performance of any one or more of the covenants contained in this lease (other than the covenants to pay rents or other monies, as provided in subdivision (a) above, and LESSOR shall, in writing notify LESSEE . . . and if such defaults are not corrected by Lessee . . . within one hundred and eighty (180) days from the date of said notice, then LESSOR may forthwith declare said lease cancelled in the manner and with the results specified in subdivision (a) next above. (Emphasis added.)
Under this clause, even if Moosavadeen breached Article X of the lease, the heirs were not discharged or excused from their obligations under the contract until after they gave notice of default, and the 180-day cure period provided for in Article V(b) of the contract had expired. Put another way, Moosavadeen's breach of Article X was not a material breach, i.e., a breach excusing the heirs' performance, until the expiration of the cure period.
Summary
In sum, the parties could have, but did not, condition the lessee's right to exercise the purchase option on the lessee's not being in default of the lease. Because Moosavideen's compliance with the terms of the lease, including Article X of the lease, was not a condition precedent to his right to exercise the purchase option, the trial court erred in finding that "[Moosavideen] was not entitled to exercise the rights and purchase option granted in Article XV of the Lease by virtue of his previously notice but uncured material breach of Article X of the Lease." Also, Moosavadeen was not in material breach of the contract during the 180-day cure period. Moosavideen exercised the option to purchase on October 17, 2002, when he gave notice to all heirs of his intent to purchase. The lease contract did not terminate and could not be terminated until November 12, 2002 — when the 180-day cure period expired. That Moosavideen was in default of Article X on October 17, 2002 is irrelevant because his nondefault was not a condition precedent to his right to exercise the purchase option, and his breach of Article X was not material until the 180-day cure period expired. Moosavideen validly exercised the purchase option before it terminated. On that date, the purchase option was converted into a contract of purchase and sale. See Sinclair Refining Co. v. Albritton, 218 S.W.2d 185, 188 (Tex. 1949) ("[T]he act of delivering the notice [of intent to exercise purchase option], if performed within the time limit and not otherwise invalid, forthwith converts the [purchase] option into a contract of purchase and sale.").
Accordingly, we sustain issues one and two. We reverse the portion of the judgment declaring that Moosavideen was not entitled to exercise the purchase option.
DAMAGES FOR BREACH OF THE LEASE
In issue three, Moosavideen contends that the trial court erred by awarding damages against him for breaching the lease. Specifically, Moosavideen contends that the heirs did not incur these damages until after he exercised the purchase option.
The trial court judgment provided that the heirs "have and recover damages against Moosavideen for breach of the Lease contract in the amount of $88, 456.16 for cost to assess the environmental contamination of the Lease Property." However, the undisputed evidence is that the heirs did not incur these damages until after October 17, 2002, when the option contract was converted to a purchase and sale agreement and the landlord-tenant relationship ceased. As such, the heirs no longer had any right or responsibility "to assess the environmental contamaination" of the property. Thus, their damages were not caused by Moosavideen's breach of the contract.
We do not hold that Moosavideen can never be liable to the heirs for breaching Article X of the lease simply because he purchased the property. Our holding is simply that his breach did not cause the damages awarded — to assess the environmental contamination of the leased property — because at the time the expenses were incurred, the heirs were no longer Moosavideen's landlord, and there is no evidence that they were under any duty to perform such an environmental assessment.
Accordingly, we sustain issue three. We reverse the portion of the judgment awarding breach of contract damages because the damages were not caused by Moosavideen's breach.
EQUITABLE OFFSET
In their cross-appeal, the heirs argue that the trial court erred by awarding Moosavideen an equitable offset against their judgment for the amounts that he spent to acquire the lease and on taxes. Moosavideen agrees that, if the Court holds that he validly exercised the purchase option, the equitable offset should be reversed. Accordingly, because we have reversed the damages awarded to the heirs and declared that Moosavideen validly exercised the purchase option, we also reverse the equitable offset that the trial court awarded him.
ATTORNEY'S FEES AND COSTS
The trial court also awarded the heirs attorney's fees pursuant to Tex. Civ. Prac. Rem. Code Ann. § 37.009 (Vernon Supp. 2006), which allows the trial court to award attorney's fees and costs that are "equitable and just" in a declaratory judgment action. Moosavideen argues that we should reverse the attorney's fees and costs awarded to the heirs and render an award of attorney's fees and costs to him.
It is appropriate to award attorneys' fees to the prevailing party in a declaratory judgment action if the trial court believes such fees to be reasonable and necessary and the award of such fees to be equitable and just. State Farm Lloyd's v. Borum, 53 S.W.3d 877, 894 (Tex.App. — Dallas 2001, no pet.). However, the trial court is not required to award attorney's fees to the prevailing party in a declaratory judgment, and, indeed, may award attorney's fees to the nonprevailing party. Id. Because we have reversed the declaratory judgment, and the judgment does not indicate whether the award of attorney's fees and costs to the heirs was made because they were the prevailing party at trial, we reverse the award of attorney's fees and costs and remand both parties' claims for the same to the trial court for its reconsideration in light of this opinion. See id. at 894-95.
CONCLUSION
We reverse the declaratory judgment in favor of the heirs and render judgment declaring that Moosavideen is entitled to specific performance to exercise the purchase option granted in Article XV of the lease. We also reverse the portion of the judgment awarding the heirs $88,456.16 in damages against Moosavideen on their breach of contract claim and render judgment that the heirs take nothing on such claim. We also reverse the portion of the judgment granting an equitable offset to Moosavideen and render judgment that he take nothing on such claim. Finally, we reverse the award of attorney's fees and costs to the heirs and remand both parties' claims for attorney's fees and costs to the trial court for further proceedings.