Michigan Supreme Court Lansing, Michigan

Chief Justice: Justices: Clifford W. Taylor Michael F. Cavanagh Elizabeth A. Weaver Marilyn Kelly 

# Opinion

Maura D. Corrigan Robert P. Young, Jr. Stephen J. Markman

FILED MARCH 19, 2008
In re EGBERT R SMITH TRUST

___________________ ______________ GLEN PHILLIPS and DALE PHILLIPS, Petitioners-Appellees,

v No. 133462 BETTY HOMER, Successor Trustee, Respondent-Appellant.

BEFORE THE ENTIRE BENCH WEAVER, J. We granted leave to appeal to consid er whether a right of first refusal is revocable once the ho lder of the right receives notice of a third party’s offer and whether the petitioners-tenants are entitled to summary disposition and specific performance of the right of first refusal. We affirm the judgment of the Court of Appeals an d hold that, under the lease agreement in this cas e, the petitioners had an i rrevocable option to buy the leased property after the respondent pres ented to the petitioners a bona fide purchase offer from a third party (giving the petitioners the right of first refusal)and that the respondent breached the l ease agreement by fa iling to h onor the option. Furthermore, because real prop erty is unique, and the petitioners timely exercised their option to purchase the prop erty, specific perform ance is the proper remedy in this case.

I. FACTS AND PROCEDURAL HISTORY This case arises out of a residentia l lease agreement fo r a 75-acre tract of land between the respondent-successor trust ee and the petitioners-tenants. In the early 1980s, Egbert Smith died owning a 75-acre tract of farmland. By the terms of his will, the property became an asset of Smith’s testamentary trust. In May 1982, Donna Sutton qualified as th e trustee of Smith’s trust. As trustee, Sutton entered into a lease agreement with Glen and Dale Phillips, the petitioners. The lease was for a period of five years, with an option to renew under the same terms for an additional five ye ars. The petitioners timely renewed the lease for a second term. On March 27, 2001, the petitioners and Sutton executed an additiona l five-year extension of the lease. As extended, the lease was to expire by its terms in 2005. Paragraph 15 of the lease contained th e following right of first refusal: Landlord hereby grants to Tenant the option to purchase the leased premises upon the following terms: Tenant shall have the right of first refusal to match any bona fida [sic] offer to purchas e made with regard to the subject property. In the event Tenant fails to ex ercise his option wi thin 30 days

2following presentment of said bona fida [sic] offer to purchase the option herein granted shall terminate. This option to purchase shall continue through the primary term of this lease and any exte nsions thereof. Upon Tenant notifying Landlord in wr iting of his intent to exercise his option to purchase closing for said purchase shall be scheduled at a reasonable time mutually agreeable to the parties. Upon Tenant’s exercising his o ffer to purchase, Tenant shall pay to Landlord in ca sh the purchase price less the deposit herein specified and less any and all renta l payments made during the lease term.
The respondent, Betty Homer, was appointed successor trustee of the Egbert R. Smith Trust in 2001. In 2004, the respondent received an offer to purchase the property for $225, 000. She asserts that sh e never accepted the offer. However, on July 28, 2004 , the respondent’s attorney sent a letter to the petitioners stating in pertinent part: Pursuant to the Lease, it is requi red that you have the right to match any bona fide offer presented. This letter is to inform you that Ms. Homer has a signed purchase agreement with the offer of $225,000 for the farm. You must no tify our office of your decision to exercise your option within 30 days. The thirty days will expire on August 30, 2004. Your offer will be referred to Ms. Homer for her review and final decision. U pon the expiration of that time period, Ms. Homer will be selling the farm. On August 9, 2004, the respondent’s counsel wrote to the petitioners stating that Ms. Homer had declined the original offer and was not selli ng the farm at that time. On August 13, 2004, within the 30-day period set forth in the lease and the July 24, 2004, letter, but after the August 9, 2004, letter info rming the petitioners

3that the offer to sell had been rejected, the petitioners gave written notice that they were exercising their option to purchase the property. The respondent refused to sell the property to the petitioners. The petitioners filed a petition in the Sanilac C ounty Probate Court, seeking to compel the sale of the land pursuant to the leas e agreement. The proba te court heard oral argument on the parties’ cross-motions for summary di sposition on December 16, 2005, and granted the respo ndent’s motion for summary disposition. The probate court ruled that the respondent’s July 28, 2004, letter tri ggered the petitioners’ opportunity to exercise their option to purchase the pr operty. However, the court determined that the respondent’s August 9, 2004, letter had countermanded the July 28 notice befo re the petitioners exercised thei r right of first refusal and therefore precluded the petitioners from exercising their right of first refusal. As a result, the probate court held that no enforceab le agreement existe d. The probate court entered an order to th at effect on January 12, 2006. The petitioners appealed. On Febru ary 15, 2007, the Court of Appeals issued an opinion reversing the judgment of the probate court. 1 The Court of Appeals reasoned that after petitioners receive d notice of the orig inal offer on the property from the respondent, the right of first refusal becam e an opti on contract that was not revocable by the respondent dur ing the 30-day period specified in the lease.

1 In re Egbert R Smith Trust , 274 Mich App 283; 731 NW2d 810 (2007).

4The respondent filed an application for l eave to appeal in this Court. This Court granted leave to appeal and ordered the parties to brief, among other issues, (1) whether a right of first refusal is re vocable once the holder of the right receives notice of a third party’ s offer and (2) wh ether the petitioners are entitled to summary disposition and speci fic performance of the right of first refusal. 2

II. STANDARD OF REVIEW This Court reviews de novo ruli ngs on summary disposition motions, viewing the evidence in the light mo st favorable to th e nonmoving party. 3 Additionally, this case involves an issue concerning the proper interpretation of contracts, which is a questi on of law that is subject to review de novo by this
Court. 4

III. ANALYSIS The resolution of this case involves interpretation of the contractual lease agreement between the petitioners and the respondent. In interpreting a contract, it is a court’s obligation to determine the intent of the parties by examining the

2 In re Smith Trust ( Phillips v Homer ), 479 Mich 853 (2007). 3 Wilson v Alpena Co Rd Comm , 474 Mich 161, 166; 713 NW2d 717 (2006). 4 Archambo v Lawyers Title Ins Corp , 466 Mich 402, 408; 646 NW2d 170 (2002).

5language of the contr act according to its plai n and ordinary meaning. 5 If the contractual language is unambiguous, co urts must interp ret and enforce the contract as written because an unambiguous contract reflects the parties’ intent as a matter of law. 6 However, if the contractual la nguage is ambiguous, extrinsic evidence can be presente d to determine the intent of the parties. 7 In this case, the plain language of the parties’ lease agreement characterized the petitioners’ right of first refusal as an option. The l ease agreement stated: Landlord hereby grants to Tenant the option to purchase the leased premises upon the following terms: Tenant shall have the right of first refusal to match any bona fida [sic] offer to purchas e made with regard to the subject property. In the event Tenant fails to exercise his option within 30 days following presentment of said bona fida [sic] offer to purchase the option herein granted shall terminate. This option to purchase shall continue through the primary term of this lease and any exte nsions thereof. Upon Tenant notifying Landlord in writing of his intent to exercise his option to purchase closing for said purchase shall be scheduled at a reasonable time mutually agreeable to the parties. Upon Tenant’s exercising his o ffer to purchase, Tenant shall pay to Landlord in ca sh the purchase price less the deposit herein specified and less any and all renta l payments made during the lease term. [Emphasis added.]

5 Frankenmuth Mut In s Co v Masters , 460 Mich 105, 112; 595 NW2d 832 (1999). 6 Id. at 111. 7 New Amsterdam Cas Co v Sokolowski , 374 Mich 340, 342; 132 NW2d 66 (1965)

.

6This section of the lease agreement expre ssly granted the petition ers an option to purchase the leased premises in the event that the res pondent decided to sell the land. The plain language of the lease agreement demonstrates that the parties intended that when a third party made a bona fide offer to purchase the property and the respondent p resented the offer to the petiti oners, the petitioners had the irrevocable option to purchas e the property for the purcha se price within 30 days of the notice. “An option is basically an agreement by which the own er of the property agrees with another that he shall have a right to buy the property at a fixed price within a specified time.” 8 As stated in 17 CJS, Contracts, § 55, p 502: An option contract is an enforceab le promise not to revoke an offer. It is a continuing offer or agreement to keep an offer open and irrevocable for a specified period. It is a contract right, and the optionor must keep the offer open. Until an option is exercised, the optionor has the duty not to revoke the offer during the life of the option. An option is an enforceable promise not to revoke an offer for a specified time, in this case 30 days. The respondent’s July 28, 2004, letter triggered th e petitioners’ right to exercise their option under the lease agree ment to purchase the property. The letter expressly stated that the respond ent had received a bona fide offer for the

8 Oshtemo Twp v City of Kalamazoo , 77 Mich App 33, 37; 257 NW2d 260 (1977).

7property and would be sellin g the property at the expi ration of the petitioners’ option period. Furthe rmore, the letter informed th e petitioners that they “must notify [the office of the respondent’s atto rney] of your decision to exercise your option within 30 days ” and that the “thirty days w ill expire on August 30, 2004.” Once the respondent notified the petiti oners of a third party’s offer to purchase the property, the option in the lease agreemen t became operative. As a result, the respondent did not have the right to rev oke her offer to sell the property to petitioners until after th e option period expired on August 30, 2004. Respondent’s argument that her July 28, 2004, letter was nothing more than an offer to sell that could be withdrawn at any time before acceptance is incorrect. Given that the respondent breached th e lease agreement by not honoring the petitioners’ option, we next consider the appropriate remedy for the breach. Land is presumed to have a unique and peculi ar value, and contracts involving the sale of land are generally subj ect to specific performance. 9 In this case, the petitioners seek specific performance of their op tion to purchase the property after the respondent claimed to have revoked her tender of the third-part y offer after she rejected it. However, since the respondent could not revo ke the option in the lease once she presented the bona fide offer to the petitioners, the respondent was contractually obligated to schedule a clos ing date to convey the property to the

9 Kent v Bell , 374 Mich 646, 651; 132 NW2d 601 (1965).

8petitioners. Because real property is unique, and the petitioners timely exercised their option to purchase th e property, specific perform ance is the proper remedy.

IV. CONCLUSION We conclude that, under the leas e agreement, the petitioners had an irrevocable option to buy the leased propert y after the respondent presented to the petitioners a bona fide purchase offer from a third party and th at the respondent breached the lease agreement by failing to honor the option. Furthermore, since real property is unique, and the petiti oners timely exercised their option to purchase the property, specific performance is the proper remedy in this case. Accordingly, we affirm the Court of Appeals judgment.

Elizabeth A. Weaver Clifford W. Taylor Michael F. Cavanagh Marilyn Kelly Maura D. Corrigan Robert P. Young, Jr. Stephen J. Markman

9v S T A T E O F M I C H I G A N
SUPREME COURT

In re EGBERT R SMITH TRUST GLEN PHILLIPS and DALE PHILLIPS, Petitioners-Appellees,
No. 133462 BETTY HOMER, Successor Trustee, Respondent-Appellant.

CORRIGAN, J. ( concurring ). I concur in the majority’s result on the basis of the language of the parties’ lease agreement. The agreem ent characterizes petitioners’ ri ght to purchase as an “option” that would be tr iggered by a notice from respon dent that she had received a bona fide third-party offer to buy the property. Therefore, th e lower courts did not err in holding that the right becam e an irrevocable option to buy once respondent notified pe titioners that she intended to accept a third party’s offer. I write separately to clarify that a right of first refusal does not always become an irrevocable option once triggered by a third- party offer. Rather, in any given case, the contract terms establishing a right of first refusal will cont rol whether the right either becomes an irrevocable option on ce triggered or, instead, may be revoked by the owner if he in g ood faith changes his mind— and withdraws his offer to sell—before the right is exercised.This Court has long reco gnized that rights of fi rst refusal and options to purchase are governed by the contract terms established by the parties. 1 Therefore, as the ma jority observes, ante at 5-6, the plain language of the contract determines the nature of th ose rights in a given case. 2 Accordingly, the Court of Appeals erred to the extent that it relied on a general proposition that, when an owner notifies the holder of a right of first refusal of a third party’s bona fide offer to purchase, the ri ght of first refusal automatically “transmute[s]” into an irrevocable option. In re Egbert R Smith Trust, 274 Mich App 283, 287-288; 731 NW2d 810 (2007), citing 17 CJ S, Contracts, § 56, p 503. Generally, the owner’s willingness to sell to anyone is a condition precedent that must be present for a right of first refusal to mature into a present option to buy. 17 CJS, Contracts, § 56, p 503 (“A right of first refusal is a conditional option which is dependent upon the decision to se ll the property by its owner.”). 3 Parties may agree that, if the owner notifies the holder of the right of

1 See, e.g, Ridinger v Ryskamp, 369 Mich 15; 118 NW2d 689 (1962); LeBaron Homes, Inc v Po ntiac Housing Fund, Inc, 319 Mich 310, 313; 29 NW2d 704 (1947). 2 Quality Products & Concepts Co v Nagel Precision, Inc, 469 Mich 362, 375; 666 NW2d 251 (2003). 3 See also Miller v LeSea Broa dcasting, Inc, 87 F3d 224, 226 (CA 7, 1996) (“All [a right of first refusal] entitles the holder to do is to match an offer from a third party should the gran tor of the option be mind ed to accept that offer.”); Chapman v Mut Life Ins Co of New York, 800 P2d 1147, 1150 (Wyo, 1990) (“[W]hen the condition precedent of the owner’s intent ion to sell is met the right of first refusal ‘ripens’ into an option . . . .”); Riley v Campeau Homes (Texas), (continued...)

2the owner’s intention to accept a bona fide purchase offer, the right matures into an option to purchase that the owner may not revoke during the acceptance period. But a right of first refusal does not automatically grant the holder of the right the power to force a sale if th e owner in good faith rem oves the condition precedent by deciding not to sell at all. As stated in 17 CJS, Contracts, § 63, p 520: “A right of first refusal does not create an irrevocable right to purchase which survives after a proposed third-party tran saction has been abandoned.” 4

(...continued) Inc, 808 SW2d 184, 187 (Tex A pp, 1991) (“[A] right of first refusal does not give the lessee the power to compel an unw illing owner to sell.”). 4 17 CJS, Contracts, § 63, p 520 n 58 cites Lin Broadcasting Corp v Metromedia, Inc, 139 AD2d 124, 133; 531 NYS2d 514 (1 988), aff’d 74 NY2d 54 (1989), which stated that “unless the language of the applicable contractual provisions state otherwise by expressly creating an i rrevocable right, there is nothing to prohibit [an owner] from in good faith changing [h is] mind about selling at any time prior to the invocation of the right of first refusal.” The opinion of the New York Cour t of Appeals affirming Lin Broadcasting also helpfully observed that there is nothing to prev ent the contracting partie s, if they choose, from simply agreeing on a provision that a first refusal offer, once made, must remain open for a specifi ed time, making it an option. Moreover, to read into a right of first refu sal such an unspecified additional provision wo uld be contrary to th e general rule at common law that an o ffer may be withdrawn at any time before it is accepted. [ Lin Broadcasting Corp v Metromedia, Inc, 74 NY2d 54, 62; 544 NYS2d 316; 542 NE2d 629 (1989) (citation omitted).] Here, petitioners and respo ndent generally agree that Lin Broadcasting and similar authorities conflict with cases like Henderson v Nitschke, 470 SW2d 410 (Tex Civ App, 1971), on which the Court of Appeals relied. Smith Trust, 274 Mich App at 289-290. I find Henderson unpersuasive to the extent that it, like the Court of Appeals in this case, relied on a general proposition that, once an owner decides to sell, a right of first refu sal automatically becomes an irrevocable option that (continued...)

3In sum, the terms of the parties’ c ontract will govern wh ether, when an owner expresses his intent to accept a third part y’s bona fide offer, a right of first refusal becomes an irrevocable option that allows the hol der of the right to force a sale during the contractual acceptance period even if the owner in good faith changes his mind and decides not to sell the property to anyone. I encourage parties to explicitly estab lish in the terms of their contracts whether such an irrevocable option is created or, instead , whether the owner may withdraw his

(...continued) prevents the owner fro m changing his mind. Henderson, 470 SW2d at 412-413. Otherwise, Henderson and Lin Broadcasting are distinguishable on the basis of their facts. In Henderson, as here, the contract referred to the lessee’s right to exercise an “option” after the owner notified the lessee of its intent to accept a third party’s offer. Id. at 411. In Lin Broadcasting, to the contrary, the right of first refusal was premised on the ow ner’s continuing desire to sell. Lin Broadcasting, 139 AD2d at 132-134. Further, cases commonly cited for the general proposition that a seller may not revoke a right to purchas e after that right has mature d into an option do not involve a seller’s decisi on to simply retain his own property, as in Henderson and Lin Broadcasting . Rather, these cases most often address (1) sales made to a third party without ever notifying the holder of the right of first refusal or (2) an owner’s attempt to cancel a sa le to the holder of the right after the holder exercised his option without the seller ha ving attempted to withdraw his offer before the holder did so . See, e.g., cases cited in 17 CJS, Contracts, § 56, p 503 nn 88 and 89, for the (o verbroad) proposition th at “[o]nce the holder of a right of first refusal receives notice of a third party’s offer, the right of first refusal is transmuted into an option”: Miller, 87 F3d at 226-227 (add ressing how precisely the holder of the right of fi rst refusal must match the th ird party’s offer in order to exercise his option and prevent a sale to the third party); Hyperbaric Oxygen Therapy Sys, Inc v St Joseph Med Ctr of Fort Wayne, Inc, 683 NE2d 243, 251 (Ind App, 1997) (holding that, once the holder of th e right of first refusal fulfilled the contractual requirements to exercise hi s option, the seller could not impose additional requirements in order to justif y the sale to the third party that it preferred).

4offer to sell at any time b efore the holder of a right of first refusal exercises that right to purchase.

Maura D. Corrigan

5