Contos v. LipskyContos v. Lipsky
Katz, Rollnick & Squitero and Neil P. Linden, Miami, for appellee.
DANIEL S. PEARSON, Judge.
In 1957, the Contoses leased certain land and a restaurant located thereon known as Gallaghers to Evalyn Lipsky.1 The lease was for a thirty-year term. It contained an option to renew for an additional twenty years and, as well, an option to purchase to be exercised during the last ten years of the initial term, that is, between 1977 and 1987.
In 1960, certain imprоvements and additions to the building were made. The cost of these improvements and additions was borne by the lessee in the form of additional annual rent equal to ten per cent of the improvements until paid. In 1962, the parties entered into a second addendum to the lease. Under this addendum, the term of the lease was extended an additional twenty years to 2007, the rent to be paid during the extended term was increased to $16,500 per year, and the lessee became immediately obligated to pay — in addition to taxes, assessments, and personal property and liability insurance already being paid by her — the cost of insuring the premises against fire and windstorm.
In 1965, the lessee sublet the premises to one Sloane, who continued operating the restaurant until 1975 under this sublease. During that period, Sloane paid rent to the lessee of approximately $35,000 per year and made physical improvements to the property at a cost of more than $100,000, which improvements were to, and did, revert to the lessee at the end of Sloane‘s subtenancy. In 1977, the lessee entered into a new sublease of the premises with a company known as Promaxrimin, Inc. This sublease was for a term of slightly more than seventeen years with an option to extend the term to 2007, that is, the date upon which the underlying Contos-Lipsky lease would terminate. The subleasе to Promaxrimin called for it to pay rent to Lipsky of $80,000 per year and assume all of Lipsky‘s obligations in respect to taxes, assessments, and insurance. Thus, by the late 1970‘s, it was apparent that Mrs. Lipsky‘s leasehold estate had measurably increased in value over the years, while the leased fee estate of the Contoses had measurably decreased in value.2
In 1981, Mrs. Lipsky exercised her option to purchase the property under that provision of the lease which reads:
“The Lessees shall have the option to purchase the leased premises anytime between the 20th and 30th year of this lease; that the purchase price is to be based on the true market value at the time of exercising the option; that the true market value shall be determined as provided in ... paragraph 17 above.” (emphasis supplied).
Paragraph 17, in turn, reads:
“The Lessees and the Lessors each shall sеlect a registered real estate appraiser and the two appraisers shall select a third real estate appraiser for determining the
true value of the land and building; that the amount so agreed upon by the said three appraisers shall be considered as the purchase price for subject property.”
The owners, contending that the true market value3 of the property is its value unencumbered by the twenty-six years remaining on the lease, sought a declaratory judgment to that effect. After a non-jury trial, the trial court rejected the owners’ contention and entered a final judgment (1) declaring that the true market value of the leased premises is its value encumbered by the lease, (2) adjudging that value to be $172,000,4 and (3) awarding the owners interest from the date of the lessee‘s notice of exercise of the option to purchase. The owners appeal from the court‘s determination of the true market value; the lessee cross-appeals from the court‘s award of interest.
Whether the true market value of the property is its value unencumbered by the lease or its value encumbered by the lease turns on the question whether the leasehold estate was merged into the fee when the lessee exercised her option to purchase. The parties agree that the once inflexible common law rule — that is, that whenevеr a greater estate and a lesser estate coincide in the same person without any intermediate estate, the lesser estate merges into the greater — has given way to the rule that equity will prevent or permit a merger as will best serve the purpose of justice and the actual and just intent of the parties, whether express or implied. See Matter of Herring‘s Estate, 265 N.W.2d 740 (Iowa 1978); Evans Products Co. v. Decker, 52 A.D.2d 991, 383 N.Y.S.2d 457 (N.Y. Sup. Ct. 1976); Waite Lumber Co. v. Masid Bros., Inc., 189 Neb. 10, 200 N.W.2d 119, 74 A.L.R.3d 320 (1972); Browning v. Browning, 23 Tenn. App. 338, 132 S.W.2d 359 (1939); William P. Rae Co. v. Courtney, 250 N.Y. 271, 165 N.E. 289 (N.Y. 1929). See also Jackson v. Relf, 26 Fla. 465, 8 So. 184 (1890); Annot. 143 A.L.R. 93 (1943). Thus, the issue for our determination is whether the trial court abused its discretion when, in applying these equitable principles, it found that the lessee‘s tenancy was not merged in the fee either at the time of the exercise of the option or as of 1987, when the initial term of lease was to terminate.
Since, as we have already noted, merger will be permitted or prevented in accordance with equitable principles, it is of no significance that the true market value necessarily had to be arrived at prior to the actual closing of the sale and delivery of the deed. Although the lessee contends that merger is legally impossible until the fee and the tenancy actually unite at closing, prior to which the true market value could be ascertained only by taking into account the encumbrance of the then-existing lease, this contention is in obvious derogation of the concededly applicable rule of equity concerning merger. Thus, courts which have addressed the like contention have, where merger was otherwise justified, found a unity of the greater and the lesser estates prior to the actual transfer of the deed, see, e.g., Sid Farber Hempstead Corp. v. Buckley, 65 Misc. 2d 237, 317 N.Y.S.2d 30 (N.Y.Dist.Ct. 1970) (upon acceptance of option to buy contained in a lease, option became binding contract of sale and tenant became purchaser in possession); Paullus v. Fowler, 59 Wash. 2d 204, 367 P.2d 130 (1961) (status of tenant changed to that of purchaser upon exercise of option contained in lease); Pitman v. Sanditen, 626 S.W.2d 496 (Tex. 1981) (same), and where merger was inequitable, found no such unity, see, e.g., William P. Rae Co. v. Courtney, 165 N.E. 289 (owner‘s acceptance of option and attempt to have proper consideration fixed in accordance with agreement did not merge leasehold estate in the fee); Northwest Television Club, Inc. v. Gross Seattle, Inc., 96 Wash. 2d 973, 634 P.2d 837 (1981) (implying
We turn, then, to the applicable equitable principles.
“When a mortgage on lands and the equity of redemption in the same lands have becоme united in the same person, ordinarily the mortgage is merged, — in other words, ceases to be an incumbrance, — and the owner will hold the lands with an unincumbered title, if there be no other mortgage or lien. But this is not always and necessarily the result. Whether it is or not, depends upon the intention of the person in whom the interests are united, and that intention is to be determined by his declarations at the time, or, in the absence of these, by his interests, as shown in the conditiоn of things then existing, or by the attending circumstances. When there is no evidence of the intention of the owner in uniting the legal and equitable estates in himself it is proper to presume that he intended that effect which is most beneficial to him.” Jackson v. Relf, 26 Fla. at 467-68, 8 So. at 185.
These same principles are equally applicable in the case of the lesser estate of a leasehold and the greater estate of a fee.
“Whether in equity there is a merger of a lessеr estate in a greater ... is largely a question of the intention of the parties, to be gathered to a great extent from the situation of the parties and the surrounding circumstances.
... .
“In the absence of an expressed intent, equity will look for and ascertain it from all the circumstances surrounding the parties and the transaction. If it appears to be against the interest of the party acquiring both estates to have a merger take place, then equity will presume that it was his intention that there should not be a merger.” William P. Rae Co. v. Courtney, 165 N.E. at 290.
In the case at hand, we first observe that there is a total absence of expressed intent concerning merger; neither the lease between the parties nor its addenda contain any statement by the parties that they intended either that the leasehold and fee merge or not. Next, there is no evidence in the record from which an intent to merge or not can be implied. In the absence of evidence showing an express or implied intent, we must presume that the lessee (the party acquiring both estates) intended the result most beneficial to her, that is, no merger.
The expenditures made by the lessee and her subtenants for improvements had, along with obviously favorable economic conditions, increased the rental value of the property. The fixed rental of $16,000, which the lessee was obliged to pay, was $64,000 less than she was able to earn by subletting the property. Thus, it is clear that the lessee had a valuable assignable interest in the property, and equally clear that if the lessors were to sell the property subject to their unfavorable lease, the sale price would be measurably reduced by the encumbrance of the lease. A merger of the leasehold estate would result in a loss to the lessee of the valuе of her profitable annual fair return for the length of the unexpired term. Were merger to be permitted, the lessee would have to pay as much for the premises as any stranger to the lease transaction and lose the value of her lease and the improvements made in reliance on the lease. On the other hand, the owners would receive for their property in 1981 that which they would be entitled to receive only after the lease expired.
While the appraisers in the case at hand differed on the ultimate figure, they agreed that the present worth of the owners’ future earnings from rent (“the income stream“) plus the present worth of the owners’ reversionary interest constituted what an investor would pay for the property in 1981. That this figure falls well below the value of the property unburdened by the lease is simply a function of the owners having saddled the property with an unеconomic long-term lease. As one appraiser stated below:
“Q Now, when you refer to a burden of the lease, which is a term all of us have used, what does that mean, Mr. Dilmore? “A It means that at some point a lease has been imposed and if the contract rent, of course, is below the current market rent or economic rent, then a positive leasehold estate is created, and if the rent is in excess of current market rеnt, a negative leasehold estate has been created, and I have seen instances of both.
“Q In this particular case there is in evidence both the lease, which you examined, showing its rent at $16,000 per year and the increase for the 20-year extension, $16,500 rent ... per year, and the sublease that was in effect, showing a rent of $80,000 per year. Does that create the situation of a positive leasehold estate?
“A Yes.
“Q That is the contrаct rent, the rent that Mrs. Lipsky was paying to Mr. and Mrs. Contos, is less than the price which the property could be rented?
“A Right.
“Q That creates a favorable benefit to the tenant?
“A Yes.
“Q If the contrary were the case, that is if Mrs. Lipsky were paying more to the Contos[es] than she could in a fair market rent the property for to a subtenant, would that create a positive benefit to the landlord?
“A It creates a negative leasehold interest which accrues to the leased fee interest, as to the lessоr‘s interest.”
It thus clearly appears that it would be against the interest of the lessee, the party acquiring both estates, to have a merger take place. That being the case, and in the absence of any evidence showing a contrary intention, it is proper to presume that it was the lessee‘s intention that there be no merger. Jackson v. Relf, 8 So. 184; William P. Rae Co. v. Courtney, 165 N.E. 289. The analysis of the court in William P. Rae Co. v. Courtney is persuasive here:
“Whether a lease is a burden and an incumbrance of such a nature as to diminish the value of the fee dеpends upon whether the rent reserved is more or less than the annual value of the premises. It appears from the testimony of real estate experts in this case that the rent reserved in the lease, $2,000 a year, was $4,000 a year less than a fair return on the market value of the property, which was $100,000, and that the burden and incumbrance of the lease was, therefore, more than $30,000, as the lease had sixteen years to run. The expenditurе of $41,348.71 by the plaintiff and its assignor on improvements had increased the rental value of the premises. The plaintiff 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.
“The acceptance of the option by the plaintiff, and its attempt to have the `proper consideration’ fixed by agreement or arbitration, did not merge the leasehold estate in the fee.
... .
“To permit a merger of the plaintiff‘s leasehold estate would result in a loss to it of $30,000, the value of the unexpired term of the lease of sixteen years. To permit a merger under such circumstances would be contrary to justice and equity. It would require the plaintiff to lose the value of its lease and pay as much for the premises as a third party would have to pay. Its option would be worthless and the improvements which it had made in reliance thereon would be lost.” 165 N.E. at 290-91.
We think these same equitable principles prevent a merger of the leasehold and the fee in 1987. While it is true that initially the lessee had a mere option to extend the lease for an additional twenty years to 2007, that option had been exercised in 1962, and the lease, at an increased rental agreed upon by the parties, had been extended to 2007. Since the lessors had an enforceable right to receive rent from the
Turning to the lessee‘s cross-appeal, we reject her contention that the trial court erred in awarding interest to the lessors on the sale price as of the time of her exercise of the оption to purchase. As the expert testimony so clearly indicates, the true market value, whether encumbered or unencumbered by the lease, was capable of ascertainment by well-established standards of value, see Florida East Coast Railway Company v. Hill, 233 So. 2d 845 (Fla. 3d DCA 1970), and although there may have been some differences in the appraisers’ testimony the very agreement of the parties to accept the average of the appraisals, see n. 4, supra, is a telling acknowledgment that the standards of value are well accepted.
Accordingly, the judgment under review is affirmed.5
HENDRY, Judge (concurring).
I concur in the legal views expressed by Judge Pearson and in the result.
SCHWARTZ, Chief Judge (dissenting).
It sometimes happens that judges, probably out of a sense of compulsion to give periodic evidence that they went to law school and learned a lot of complicated things there, decide a case upon a rationale discernible only to a select group of the legal cognoscenti instead of upon an analysis of the realities of the situation which any person of affairs would grasp at once. See Alonso v. Fernandez, 379 So. 2d 685 (Fla. 3d DCA 1980) (Schwartz, J., dissenting), receded from, McHale v. Farm Bureau Mutual Ins. Co., 409 So. 2d 238, 240 (Fla. 3d DCA 1982). In my judgment, that is what has happened here. The point of this case does not “turn on” the intricacies of the abstruse and deservedly obscure doctrine of merger of estates, but rather and simply
Indeed, there is every reason why this should be the outcome. A first principle in the art of contract construction is that, wherever possible, courts will try to read an agreement to effect a result which is just and fair — as opposed, of course, to one which is oppressive and inequitable. James v. Gulf Life Insurance Co., 66 So. 2d 62 (Fla. 1959); 11 Fla.Jur.2d Contracts § 105 (1979). Under the decision of the court, however, the lessors are required to sell their property for a fraction of its admitted value,1 with the resulting loss of much of their accumulated equity. On the other hand, although we are, of course, not empowered to relieve the landlords of the consequences of their improvident bargain in fixing the rent, when the cheеse has begun to bind the tenants — by virtue of their inability either to use the land because the building burned down or to finance a new one on the security of their leasehold alone — the majority has cheerfully stepped in to allow them to purchase the fee for a relative pittance. And all this manifestly unjust and non-evenhanded set of results has to recommend or support it is a medievalism: no misnamed “equitable”2 merger of estates may be deemed to occur. From what little I understand of it, I do not disagree with the court‘s exposition of this recondite doctrine; indeed, I am awe-struck by the legal scholarship which it represents.3 I just think that it all doesn‘t, and certainly shouldn‘t, make any difference. I would reverse.