An Option to Purchase clause gives the holder the exclusive right to exercise an option to purchase a property so long she has complied with the option’s terms. Tenants entering commercial leases often negotiate an Option to Purchase within an expressly stated period for exercise. But what happens when a tenant is late in seeking to exercise the option? Will a court allow a grace period for the tenant to complete the purchase anyway?
In Washington, courts generally hold that options to purchase property which are untimely exercised may still be allowed to avoid inequitable forfeiture or potential loss if the option holder has made significant improvement to the property. On July 16, 2019, Washington’s Court of Appeals released its decision in Borton & Sons, Inc. v. Burbank Properties, LLC, in which the court clarified the standard and held that to excuse the untimely exercise of an option to purchase, the tenant must have made permanent improvements to the property.
Burbank Properties, LLC farmed a 164-acre plot of land it owned in Walla Walla County adjacent to apple orchards owned Borton & Sons, Inc. Burbank used its land to grow early season potatoes which require strict crop rotation. Historically, Burbank would plant potatoes one year, followed by two years of grass or hay planting. In 2016, Burbank sought to secure what was essentially a short-term loan using the land it owned. Burbank negotiated an agreement to sell the land to its neighbor Borton for approximately $300,000 below the appraised value, to lease and continue farming the land through 2018, and for an option to repurchase the land by December 31, 2018 upon sending notice via certified or registered mail by December 31, 2017. (Borton required the one-year notice because it would order trees for its orchard one year in advance of its needs.)
In 2017, Burbank harvested a crop of potatoes and planted hay on the leased land for harvest in 2018 and 2019. On at least two occasions during 2017, Burbank advised Borton that it planned to exercise the purchase option. However, Burbank did not mail its formal notice until January 4, 2018. Burbank also sent the notice by regular mail rather than certified or registered mail as required. The notice was not received until January 8, 2018. Borton contended that the notice was ineffective and that the purchase option had expired. Burbank argued for an equitable grace period to exercise the option due to the potential forfeiture of hay and equity it would have obtained by repurchasing the property. Both parties sought declaratory judgment to determine the status of the purchase option and moved for summary judgment.
Ultimately, the Court of Appeals agreed with Borton, finding that Burbank had failed to show it made valuable permanent improvement to the land. The planting of an annual crop, as Burbank had done for years in its normal farming operation, was not a permanent improvement to the land. The Court of Appeals further held that the cost of an option is not a component of an inequitable forfeiture, finding that Burbank’s sale of the land in 2016 at a $300,000 discount, while significant, was the cost of inducing Borton to agree to the option, rather than a loss upon which a court might excuse the untimely exercise of the option.
This ruling serves as a reminder that courts typically do not favor excusing contractual obligations but they are willing to assess the equity of an untimely exercise even at pretrial summary judgment. Commercial lease landlords and tenants contemplating or already a party to an option to purchase agreement should always be diligent about protecting their contractual rights. If you are engaged in a real estate dispute about an untimely exercise of a purchase option, please feel free to contact us to help you determine the best way to proceed.