Edgar v. Mills

#27891-aff in pt, rev in pt & rem in pt-LSW
2017 S.D. 7

IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA

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THOMAS G. EDGAR and
ELIZABETH J. EDGAR,
husband and wife, Plaintiffs and Appellees,

v.

BOYD D. MILLS and
MERLYN J. MILLS,
husband and wife, Defendants and Appellants.

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APPEAL FROM THE CIRCUIT COURT OF
THE FIFTH JUDICIAL CIRCUIT
FAULK COUNTY, SOUTH DAKOTA

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THE HONORABLE TONY L. PORTRA
Judge

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ROBERT M. RONAYNE
THOMAS J. COGLEY
Ronayne & Cogley, PC
Aberdeen, South Dakota Attorneys for plaintiffs
and appellees.

JAY R. GELLHAUS
CHAD LOCKEN of
Gellhaus & Gellhaus, PC
Aberdeen, South Dakota Attorneys for defendants
and appellants.

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CONSIDERED ON BRIEFS
ON FEBRUARY 13, 2017
OPINION FILED 03/15/17
#27891

WILBUR, Justice

[¶1.] In this breach of contract action, the circuit court found a lease

agreement ambiguous and considered parol evidence. The court concluded that the

parties intended the lease agreement to be a lease with an option to purchase. The

court ordered specific performance, compelling the owners of the real estate to

execute a warranty deed in favor of the lessees. The owners appeal. We affirm in

part, reverse in part, and remand.

Background

[¶2.] In 2003, Thomas and Elizabeth Edgar entered into a written

agreement with Boyd and Merlyn Mills concerning land in Faulk County, South

Dakota, legally described as the West Half of Section 26, Township 118, Range 71

West of the Fifth Principle Meridian, Faulk County, South Dakota (Section 26).

The agreement was titled, “Lease Agreement.” The Edgars agreed to pay the

Millses $8,641.20 in rent yearly on January 1st following the previous crop year.

The lease agreement was set to terminate on February 28, 2013, and contained an

option for the Edgars to renew the lease.

[¶3.] The lease agreement contained a provision titled, “Right of First

Refusal.” That provision provided:

It is hereby agreed that should said land become subject to sale
after completion of the crop season in the final year of this lease,
that in such an event, the Lessee shall have the right of first
refusal to buy said property at a price set by making the final
lease payment as described above plus the additional sum of
Seven Thousand Two Hundred One and no/100 Dollars
($7,201.00). This first right of refusal shall be only during the
term of this lease.

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The lease agreement also contained a provision requiring the Millses’ written

consent before the Edgars could sublease the real estate.

[¶4.] Beginning in 2003, the first year of the agreement, the Edgars made a

late lease payment. In the following years, the Edgars continued to make late

payments and paid less than the full amount owed. The Edgars made no payment

for the payment due January 1, 2007. Two provisions in the agreement concerned

lease payments. Under a section titled, “Terms of Lease,” the agreement provided

in part:

Further, should Lessee fail to tender payment as described
above on any of the due dates described above, then within sixty
(60) days this lease shall become null, void, and of no force and
effect and the Lessor shall be free to obtain another Lessee for
the above described real estate.

In a subsequent section entitled, “Default,” the agreement provided in part:

If any one or more of the following occurs; (1) a rent payment
from Lessee to Lessor shall not be paid when due and
payable . . . then Lessor may, at Lessor’s sole option, declare this
lease forfeited and the term of the lease ended and the Lessor
may reenter said premises with or without due process of law
using such reasonable force as may be necessary to remove all
persons or chattels therefrom.

It is undisputed that the Millses never declared the lease forfeited and that neither

party considered the lease agreement null and void after the late payments.

[¶5.] In 2012, Thomas Edgar contacted Attorney Timothy Bormann to

prepare a warranty deed so that the Millses could convey the real estate to the

Edgars. Thomas later testified that he contacted Attorney Bormann because he

believed that he had an option to purchase the real estate at the conclusion of the

lease term. Thomas claimed that the “Right of First Refusal” gave the Edgars an

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option to purchase the property so long as the Edgars made all their payments

under the lease, plus $7,201. Thomas presented Attorney Bormann a check for

approximately $16,146, representing the amount the Edgars believed they owed to

pay off the contract. Attorney Bormann drafted the deed and presented it to the

Millses. The Millses refused to sign.

[¶6.] After the Edgars’ subsequent attempts to execute the deed with the

Millses failed, the Edgars sued the Millses for specific performance and fraud. The

Millses answered and asserted multiple counterclaims, including that the Edgars

breached the terms and conditions of the lease agreement by failing to make full

lease payments and by subletting the property without the Millses’ permission. The

Edgars replied to the Millses’ counterclaims but did not raise any affirmative

defenses. The parties set April 14, 2016 as the date for a court trial. The record

indicates that the parties agreed to procedurally expedite the case because of the

upcoming crop season.

[¶7.] On April 1, 2016, the Millses moved for summary judgment. They

asserted that the Edgars’ failure to make timely payments of rent rendered the

lease agreement null and void by its terms. The Millses further asserted that the

plain language of the lease agreement did not contemplate conveyance of the real

estate, only a right of first refusal under the specific terms described. On April 12,

2016, the Edgars filed an amended reply to the Millses’ counterclaims, raising the

affirmative defenses of waiver, laches, statute of limitations, fraud, and

misrepresentation. The Edgars also responded to the Millses’ motion for summary

judgment, asserting that the lease agreement was ambiguous.

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[¶8.] On April 14, 2016, the circuit court held a court trial. Before the court

took evidence, the Millses orally requested that the court strike the Edgars’

amended reply to the Millses’ counterclaim. The Millses argued that they would be

prejudiced by the addition of affirmative defenses because, according to the Millses,

they “were only given two days’ notice to prepare for affirmative defenses[.]”

Counsel for the Edgars responded that they would agree to a continuance if the

Millses “think[] this prejudices them and they want to continue this trial[.]”

Counsel for the Millses responded, “Your honor, the defendants are not requesting a

continuance. We would simply request that the amended reply be stricken.” The

court denied the Millses’ request, stating, “[I]t appears to me that all parties are

aware of the issues and would have had adequate opportunity to prepare today

knowing full well the other party’s positions and the relative strength and

weaknesses of their own case.”

[¶9.] Counsel for the Millses then requested that the court rule on the

Millses’ motion for summary judgment. The court indicated that it did not intend

on making a ruling on the summary judgment motion before the court trial and

reserved the right to rule on the motion after the trial. It said, “[W]hether [it] has

found questions of fact and have resolved them for, or against one side or the other,

or if the [c]ourt finds as a matter of law that one side or the other is entitled to a

decision today,” the court would clearly indicate what it based its decision on when

it made its ruling.

[¶10.] Counsel for the Millses then brought up its concern about the court

considering parol evidence prior to finding the contract ambiguous. Counsel

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objected to the admission of any testimony related to the creation of the lease

agreement without a prior ruling that the lease agreement was ambiguous. The

court informed the parties that it would receive testimony prior to making a

determination of ambiguity. It explained that, because this was a court trial, the

evidence would come before the court regardless. It would come as an offer of proof

or as evidence. The court informed the parties that it would sift through the

evidence to determine what evidence would be appropriate to consider in deciding

the issue of ambiguity.

[¶11.] After addressing the preliminary matters raised by the Millses, the

court began the trial and heard testimony from Kathleen Boysen, Thomas Edgar,

Attorney Bormann, Cara Nelson, and Merlyn Mills. We summarize the evidence as

follows. The Edgars had originally leased the real estate in Section 26 from its

previous owner, F.B. Family, Inc. Kathleen was the president of F.B. Family, Inc.

She testified that from 1999-2003, the lease agreements between F.B. Family, Inc.

and the Edgars gave the Edgars an option to purchase the land for $72,000 on a

certain date at the end of the given lease terms. Although the Edgars did not

exercise the option in the first year, in 2003, the Edgars gave Kathleen notice of

their intent to exercise the option to purchase the property. The parties scheduled a

closing for April 4, 2003, and the Edgars agreed to pay $10 for the recording fee at

the closing.

[¶12.] According to Thomas, on April 4, 2003, he approached Kathleen at

church and explained that he was unable to come up with the necessary funds to

close the sale. He asked Kathleen if she would be willing to sell the land to him on

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a contract for deed. In her role as president of F.B. Family, Inc., she declined.

Thomas claimed that he then asked if she would allow Boyd Mills, a local

veterinarian, to finance the transaction on the Edgars’ behalf and allow the Edgars

to assign their option to purchase to Boyd. Kathleen agreed. Kathleen testified

that she documented her conversation with Thomas with a handwritten note and

filed the note with F.B. Family, Inc.’s corporate records.

[¶13.] On April 9, 2003, the Edgars assigned their option to purchase to Boyd

Mills. On April 19, 2003, F.B. Family, Inc. and Boyd and Merlyn Mills completed

the sale, and the Millses recorded the deed. The Millses paid F.B. Family, Inc.

$72,010 for the real estate, which was valued at approximately $121,082. According

to the Edgars, after the sale, the Millses were to lease the land to the Edgars on a

contract for deed. Thomas testified that he met with Attorney Bormann and asked

that he prepare a contract for deed. Merlyn Mills testified that she contacted

Attorney Bormann and instructed him that the agreement should be a lease.

[¶14.] It is undisputed that in June 2003, Attorney Bormann presented the

Edgars with a lease agreement. Thomas testified that he read the lease agreement

prior to signing it. He acknowledged that the lease did not contain specific

language providing an option to purchase. He, however, testified that he believed

the contract allowed him to purchase the real property at the conclusion of the lease

term upon the payment of an additional $7,201. The Edgars signed the lease

agreement on June 25, 2003.

[¶15.] Attorney Bormann testified that the parties did not want a contract for

deed. He also testified that he explained the lease agreement to Thomas Edgar.

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Attorney Bormann claimed that the right of first refusal gave the Edgars the right

“if the land was for sale, he’d have the first option to buy it.” Attorney Bormann

admitted that at the conclusion of the lease term and at the request of Thomas, he

prepared a deed in an attempt to get the matter settled with the Millses.

[¶16.] Merlyn Mills testified that her understanding of the lease agreement

was that it was just that, a lease. She claimed that she came up with the rent

amount by multiplying the purchase price by 12%. She also asserted that the

Edgars would not be able to own the land if they did not make all the lease

payments. She believed that the lease would become null and void if the Edgars did

not make their payments. She agreed, however, that the Edgars would have a right

of first refusal to purchase the land if the Edgars made all their payments and the

Millses decided to sell the real estate.

[¶17.] At the conclusion of the court trial, the court ruled that there is no

fraud or misrepresentation. The court denied the Millses’ motion for summary

judgment because it found the lease agreement ambiguous, “especially as to the

right of first refusal.” The court also found the language concerning default and

failed lease payments ambiguous. Because of the ambiguities in the lease

agreement, the court informed the parties that it would consider parol evidence.

[¶18.] After considering the parol evidence, the court found that the Edgars

breached the contract when they failed to make a lease payment in the 2007 crop

year. The court also found that many of the Edgars’ payments were untimely. The

court, however, did not rule that the “only remedy” was “to forfeit the matter” or

“forfeit the lease” because the Millses “continued to accept those payments from

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him, including the last payment of roughly $15,000.” Instead, the court ordered the

Edgars to pay the Millses the delinquent payments and the missed payment with

interest at 5%. The court also ordered that the Edgars reimburse the Millses for

taxes paid by the Millses in 2013, 2014, and 2015 with 10% interest. The court held

that the lease agreement was in fact an agreement that upon payment in full at the

end of the lease term the Edgars would receive the real estate. Therefore, the court

granted the Edgars’ request for specific performance and ordered the Millses to

execute a warranty deed in favor of the Edgars “if [the Edgars] make[ ] these

payments as ordered by the [c]ourt[.]” The court entered findings and conclusions

and an order consistent with its oral ruling.

[¶19.] The Millses appeal, and we restate the issues as follows:

1. The circuit court erred when it granted the Edgars leave to
file an amended reply to include affirmative defenses.

2. The court erred when it admitted parol evidence prior to
ruling that the parties’ contract was ambiguous and prior to
ruling on the Millses’ motion for summary judgment.

3. The court erred when it interpreted the parties’ agreement to
be ambiguous.

4. The court erred when it ordered specific performance on an
ambiguous contract.

5. The court erred when it failed to declare the agreement null
and void and failed to apply the doctrine of unclean hands.

The Millses also request an award of appellate attorney’s fees.

Analysis

1. Did the circuit court err when it granted the Edgars leave to
file an amended reply to include affirmative defenses?

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[¶20.] The Millses contend that they were unfairly prejudiced when the

circuit court granted the Edgars leave to file an amended reply two days before the

court trial. The prejudice occurred, according to the Millses, because they were “not

expecting any affirmative defenses, and did not have adequate time to prepare for

an affirmative defense.” In response, the Edgars assert that the amended reply

caused no prejudice. The Edgars claim that it was clear from the original pleadings

that both parties knew the positions alleged by the other. So, in the Edgars’ view,

“[i]t is difficult to fathom what additional information [the Millses] would have

needed or uncovered to defend against an affirmative defense such as waiver or

laches.”

[¶21.] Under SDCL 15-6-15(a), leave to amend “shall be freely given when

justice so requires.” We review a court’s decision to grant leave to a party to amend

a pleading for an abuse of discretion. Isakson v. Parris, 526 N.W.2d 733, 736 (S.D.

1995). Here, the court did not abuse its discretion. In response to the Millses’

objection to the Edgars’ amended reply, the Edgars offered to agree to a

continuance. The Millses declined and requested only that the court strike the

affirmative defenses. The court refused to strike the amended reply based on its

conclusion that the amended reply asserted defenses known to the Millses. The

court also believed that both sides had adequate time to prepare because they fully

knew the other side’s arguments. From our review of the record, the Millses were

aware of the Edgars’ defenses, and there is no evidence that the Millses suffered

specific prejudice.

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2. Did the court err when it admitted parol evidence prior to
ruling that the parties’ contract was ambiguous and prior to
ruling on the Millses’ motion for summary judgment?

[¶22.] The Millses contend the court improperly considered parol evidence

because the court admitted the evidence before finding the contract ambiguous and

before ruling on the summary judgment motion. As proof that the court erred, the

Millses rely on the fact the circuit court entered twenty-four findings of fact related

to parol evidence prior to making the legal conclusion that the contract was

ambiguous. The Millses further contend that the court’s failure to rule on their

summary judgment motion “amounts to an error of law in the proceedings.”

[¶23.] The Millses’ view requires us to assume that the circuit court in fact

considered parol evidence in making its decision on ambiguity and in deciding

whether to deny the Millses’ motion for summary judgment. But we have said “that

in an action tried to the trial court, there exists a presumption that the trial court

will disregard inadmissible evidence” and that a court is “equipped to sift through

any excess or perceived inadmissible evidence.” Shippen v. Parrot, 506 N.W.2d 82,

86 (S.D. 1993), overruled on other grounds by Jensen v. Kasik, 2008 S.D. 113, 758

N.W.2d 87. Moreover, South Dakota’s parol evidence rule “is in no sense a rule of

evidence, but a rule of substantive law.” Poeppel v. Lester, 2013 S.D. 17, ¶ 19, 827

N.W.2d 580, 584 (quoting Auto-Owners Ins. Co. v. Hansen Housing, Inc., 2000 S.D.

13, ¶ 14, 604 N.W.2d 504, 510).

[¶24.] Here, the court indicated that it would sift through the evidence

presented during the court trial and consider only admissible evidence when

making its legal ruling on ambiguity and on the Millses’ motion for summary

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judgment. The court also informed the parties that it would “let the parties know

for purposes of the record and any potential appeals” the basis of the court’s

decision. We conclude that the court did not err when it allowed the admission of

parol evidence before finding the lease agreement ambiguous and before denying

summary judgment.

3. Did the court err when it interpreted the parties’ agreement
to be ambiguous?

[¶25.] The Millses argue that the parties’ lease agreement is an unambiguous

lease with a provision for a right of first refusal under the described terms. The

Millses direct this Court to the fact that the agreement is titled, “Lease Agreement,”

in large, bold, and unambiguous terms. They note that the lease refers to the

parties as “lessor” and “lessee.” The Millses further claim that the language of the

lease agreement makes clear that it was not an option contract. They highlight that

the agreement contains no language requiring the lessor to sell the property.

Instead, according to the Millses, the right of first refusal appropriately requires a

condition precedent before ripening—“should the said land become subject to sale”

and “that in such an event.”

[¶26.] We review de novo the circuit court’s conclusion that the lease

agreement was ambiguous. Ziegler Furniture & Funeral Home, Inc. v. Cicmanec,

2006 S.D. 6, ¶ 14, 709 N.W.2d 350, 354. “A contract is ambiguous when application

of rules of interpretation leave[s] a genuine uncertainty as to which of two or more

meanings is correct.” Id. ¶ 16 (quoting Alverson v. Nw. Nat’l Cas. Co., 1997 S.D. 9,

¶ 8, 559 N.W.2d 234, 235). Under the rules of contract interpretation, “this Court

looks to the language that the parties used in the contract to determine their

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intention.” Poeppel, 2013 S.D. 17, ¶ 16, 827 N.W.2d at 584 (quoting Detmers v.

Costner, 2012 S.D. 35, ¶ 20, 814 N.W.2d 146, 151). We examine the language of an

agreement as a whole to determine the terms and conditions. Id.

[¶27.] This issue concerns the provision titled, “Right of First Refusal.” The

Millses contend that the provision is just that—a right of first refusal. The Edgars,

on the other hand, claim the provision is an option to purchase that arises upon the

Edgars’ final payment under the lease plus $7,201. We have said that a right of

first refusal requires the owner to first offer the property to the holder of the right

on the same terms as a third-party offer when the owner receives a third-party offer

to purchase the premises and manifests an intention or desire to sell on those

terms. Dowling Family P’ship v. Midland Farms, 2015 S.D. 50, ¶ 16, 865 N.W.2d

854, 861; Laska v. Barr, 2016 S.D. 13, ¶ 6, 876 N.W.2d 50, 53.

[¶28.] From our review of the lease, the parties did not create a traditional

right of first refusal. That, however, does not mean that an ambiguity exists or that

the parties intended to create an option to purchase. When the language of a

contract is plain and unambiguous, it is our duty to interpret it and enforce it as

written. Discover Bank v. Stanley, 2008 S.D. 11, ¶ 17, 757 N.W.2d 756, 762. The

language of the right of first refusal is unambiguous in what right it creates. The

Edgars have a right of first refusal to buy the property if the property becomes

“subject to sale after completion of the crop season in the final year of this lease[.]”

To exercise the right, the Edgars must pay the Millses the final lease payment plus

$7,201. But the right only exists if the property is subject to sale after the

completion of the final crop year. Because the “Right of First Refusal” provision is

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unambiguous, the circuit court erred when it considered parol evidence to

determine the parties’ intent.

[¶29.] The court also erred when it used parol evidence to convert the lease

agreement into a purchase contract and to order specific performance against the

Millses. The court rewrote the lease agreement contrary to our well-established

rule that in ascertaining the parties’ intent, we will not rewrite the parties’ contract

or add to its language. Detmers, 2012 S.D. 35, ¶ 21, 814 N.W.2d at 151.

“Contracting parties are held to the terms of their agreement, and disputes cannot

be resolved by adding words the parties left out.” Gettysburg School Dist. 53-1 v.

Larson, 2001 S.D. 91, ¶ 11, 631 N.W.2d 196, 200-01.

[¶30.] Because the terms of the right of first refusal are unambiguous, we

reverse the court’s order directing the Millses to execute a warranty deed in favor of

the Edgars. We remand for the court to determine the parties’ remaining rights

and obligations under the lease agreement. In light of our holding on this issue, we

need not address the Millses’ other issues on appeal.

4. Appellate Attorney’s Fees

[¶31.] The Millses filed a motion for appellate attorney’s fees under SDCL 15-

26A-87.3. The Millses assert that an award of fees is allowable under the lease

agreement. The Millses request an award totaling $8,722.35 and have included a

verified and itemized statement of legal services rendered.

[¶32.] Appellate attorney’s fees may be granted ‘in actions where such fees

may be allowable[.]” SDCL 15-26A-87.3. The lease agreement provides:

If Lessor at any time, by reason of any breach of this lease by
Lessee, is compelled to incur any expense including reasonable

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attorney fees in instituting or prosecuting any action or
proceeding to enforce Lessor’s rights hereunder, the sum or
sums so paid by Lessor with interest at the legal rate per annum
from the date of payment thereof shall be deemed to be
additional damages hereunder and shall be due from Lessee to
Lessor on the 1st day of the month following the payment of
such respective sums or expenses.

It is undisputed that the Edgars breached the lease agreement and that as a result,

the circuit court ordered the Edgars to pay the two underpayments and one missed

payment, plus interest. Under the lease, the Millses are entitled to reimbursement

of their reasonable attorney’s fees incurred by reason of the breach. We award the

Millses $4,836.77 in appellate attorney’s fees.

[¶33.] Affirmed in part, reversed in part, and remanded.

[¶34.] GILBERTSON, Chief Justice, and ZINTER, SEVERSON, and KERN,

Justices, concur.

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