No. 84-50 IN THE SUPREME COURT OF THE STATE OF MOlJTANA 1984

MELVYN G. STEVENSON, Plaintiffand Respondent,

CLARENCE R. OWEN and MAR1 A. OWEN, Defendantsand Appellants, and MARK0MICI-IUNOVICH, Defendantand Respondent.

APPEAL FROM: District Court of the ThirteenthJudicial District, Inand for the County of Carbon, TheHonorable Diane G. Barz, Judgepresiding.

COUNSEL OF RECORD: ForAppellants: A.L. Craddock,Red Lodge,Montana

For Respondents: Towe, Ball,Enright and Mackey; Donald D. Sommerfeld, Billings, Montana

Submitted on Briefs: May 24p1984 Decided:

Filed:

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- - ClerkMr. Justice Frank B. Morrison, Jr. delivered the Opinion of the Court. In an action to quiet title, the District Court of the Thirteenth Judicial District in the County of Carbon entered a judgment ordering defendants Owens to vacate the premises. Owens appeal. Respondent Stevensonbrought this action to quiet title in Tract 1, Certificate of Survey No. 1055, Carbon County, Montana as to any claim, right, estate, title, lien or interest of appellants Owens and respondent Michunovich. The Owens, in a counterclaim against Stevenson and a cross-claim against Michunovich, sought relief of specific performance of contract for deed,money damages, foreclosure of purchaser's and mechanic's liens or, in the alternative, for reformationof contract. June 15, 1983 the matter was tried before the court sitting without a jury. The October 17 judgment favoring respondent Stevenson ordered appellants Owens to vacate the premiseswithin thirty days of the entry of judgment. Owen's cross-claim againstMichunovichwas denied. Michunovichpurchased Tract 1,Certificateof SurveyNo. 1055, consisting of 25.369 acres located in Carbon County, from the Brangers. The transaction was consummated in a contract for deed dated August 15, 1978, referred to as the "Branger contract". On May 5, 1980 Michunovich entered into a contract for deed with Owens, the "Owen contract", whereby Owens agreed to purchase a 1.7 acre parcel carved out of the 25.369 acres being purchased by Michunovich under the "Branger contract". Terms of the "Owen contract"provided for a $45,000 purchase price payable $12,000down, including $100 earnestmoney, the balance of $33,000 to be amortized inmonthly installmentsof $302.76 through June 1, 1985 when the outstanding balance became due and payable. At closing, Owen's $12,000 down payment, less real estate commission and minimal costs, was 2paid to and received by Michunovich. Pursuant to the contract, Owens took possession of the property on May 5,

Escrow provisions in the "Owen contract' provided that the parties place all documents in escrow with the Montana. Rank of Red Lodge. Payments were to be made to the escrow agent. An escrow account was never opened. Owens made no monthly payments under the contract,although Owens maintain they were, at all times, ready and willing to bring the contractpayments current. ParagraphXVIII of the "Owen contract"provided: "The parties agree that a certificate of survey prepared by a registered land surveyor eligible for recordingwith the Carbon County Clerk and Recorder is essential to the effective conveyance of the real property sold hereunder and that Seller shall pay all costs and expenses incurred in connection with the survey and the recording thereof. At such time as the sanitary restrictions of the Department of Health and Environmental Sciences of the State of Montana have been removed, and the certificate of survey has been recorded, the recordable 1ega.l descriptions will be attached to the deeds and Abstract ofAgreement." Michunovich had a certificate of survey prepared by a qualified surveyor. He failed to file the certificate of survey on the 1.7 acre parcel because he did not satisfy the sanitary restrictions as required by state law for recordation. Michunovich was also responsible for obtaining a deed release from his sellers, the Branqers, for the 1.7 acres being purchased by the Owens. The contract provision entitled Paragraph XIX: "Existing Encumbrances"provided in pertinentpart: 

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# .. Seller agrees thatwithin thirty days after the execution of this Contract,he willmake every reasonable effort to secure from David H. Branger and Marjorie A. Branger an agreement which will guaranty Buyer herein delivery of a warranty deed, free and clear of all liens and encumbrances, upon payment in full of all sums due under this Contract. In the event that Seller is unable to secure such agreement, the down payment provided for in Schedule B shallbe refunded to Buyer. And thisagreement shall thenbe void."The final phrase, "and this agreement shall then be void",

was hand written on the face of the typewritten contract following the word "Buyer1',a.nd initialled by all parties. Brangers refused todeliver awarranty deed. Mich.unovichdefaulted on the "Branger contract". On November 28, 1980 the Brangers filed suit in District Court against Michunovich alleging breach of contract for his default onpayments. Seven months after the execution of the "Owen contract" dated May 5, 1980,Michunovich served Owenswith a "Noticeof Termination"dated December 5, 1980. TheNotice informed the Owens that: (1) Michunovich was unable to secure a deed release agreement from the Brangers; (2) the Owen Contract for Deed was terminated and the down payment under that contract would be refunded to the Owens within thirty days after receipt of this Notice; and, (3) the Owens shall surrender possession of the property and any improvements made thereon. The down payment was never refunded and the Owens refused to surrenderpossession. The "Notice" provision of the "Owen contract" required all notices given by either party to be in writing and delivered personally to the parties tobe notified or sentby certified or registered mail to addresses specifically listed. Provisions for termination of the contract are established inparagraphVII,DEFAULT,as follows: "Should any default of the Buyer remainuncured for more than thirty days after written notice thereof to Buyer, then the whole of the payments due hereunder shallbecome due and payable within sixty days after said initialthirty day period, and upon nonpayment thereof, Seller may terminate this Contract without further notice. Said agreement shall be deemed terminated upon receipt by escrow agent of Seller1 s written, sworn, statement describing said default and the recording of a duplicate original thereof in the office of the Carbon County Clerk and Recorder. In the event of such termination, Buyer agrees, on demand, to surrender possession of said property and any improvements thereon, immediately and peaceably; and Seller shall

### be entitled to retain all paymentsmade hereunder as reasonable rental for the use of said property and as liquidated damages. The remedy herein given to Seller shall not be exclusive of any other remedy, and the Seller may use any appropriate remedy to enforce compliance with theprovisionsof this Contract and to enforce collection from Buyer of any amounts due Seller, without accelerating the maturity of the unpaid balance or terminating the Contract all without prejudice to the privilege of Seller to subsequentlyaccelerate thematurity of thebalance or to terminate the Contract." February 5, 1981,Michunovich assigned all ofhis right, title and interest in and to the "Brangercontractf' to Melvyn G. Stevenson, with the Branger's consent. Since Stevenson

was able to bring the Branger-Michunovich contract current, the Brangers stipulated to a dismissal with prejudice of their lawsuit initiated againstMichunovich. The Owens recorded a "Notice of Interest and Claim of Lien" on February 9, 1981 in Carbon County. They filed a "Purchaser'sLien" relativeto the $12,000down payment and a "Mechanic's Lien" for the labor and materials they invested in improvements to the property during their occupancy. No clause in the "Owen contract"prohibited the construction any improvements on the property. At no timedid Michunovich require that the Owens ceasemaking such improvements. A notice dated March 12, 1981 was served by Stevenson and Michunovich upon the Owens alleging Owen's default. No written, sworn statement by either Michunovich or Stevenson describing the default, as required by the "Owen contract",

was ever recorded in the office of the Carbon County Clerk and Recorder. Stevensoncommenced thepresent action on August 5, 1981 to clarify title to the 25-acre tract of land, to seek judicial termination of the Michunovich-Owen contract and to seek judicial determination of the damages which Stevenson suffered as a result of the Owen's refusal to peaceably vacate thepremises. At the date of this appeal, the Owens have refused to peacefully surrender possession and have failed to pay areasonable rent for the use of the premises during their occupancy. The district court entered judgment which provided: "(1) That the $12,000.00 down payment paid by DefendantsOwens shallbe used as an offset against the reasonablemonthly rental of $302.76 per month due from Defendants Owens to Plaintiff Stevenson fromand afterJune 1, 1980. 

### "(2) That DefendantsOwens are not entitled to the value of any improvements which they claim were made to theproperty. 

### " (3) That the liens filed by Defendants Owens are without basis and, by this Judgment, are extinguished;and "(4) That Defendants Owens are not entitled to possession of the property and must vacate the premises within 30 days of the entry of this Judgment." The judgment does not specifically ad.dressthe contract between Owens and Michunovich, subsequently assigned to Stevenson. However, the trial court's memorandum which accompanies the judgment shows the trial court intended to find the contract was terminated when Michunovich served Owens with a "Noticeof Termination" dated December 5, 1980. Although there is no conclusion of law or judgment which legally formalizes Michunivoch's action, such is necessarily the implication of the court's judgment directing Owens to relinquish possession within thirty days of the entry of judgment. Numerous issues have been raised by the parties. We find three issues dispositive of this appeal and the resolutionof those issues requires a new trial. The court erred inmaking the following determinations: 1. In finding that the "Owen contract" was terminated by the notice servedDecember 5, 1980. 2. Indirecting an offset against thedown payment of a reasonablemonthly rental in the amount of $302.76 per month in the absence of evidence regarding reasonable monthly rentalvalue.3. Inholding that Owenswere not entitled to thevalue of improvements made upon theproperty. Michunovich sought to terminate the "Owen contract" pursuant to the provisions of paragraph XIX which provided that: "In the event that Seller is unable to secure such agreement, the down payment provided for in ScheduleB shall be refunded to Buyer. And this agreement shall then be void.

### " (emphasis supplied) Return of the down payment was specifically provided as

a conditionwhich had tobemet before the agreementwould be void. The down payment was not returned. The trial court erred in finding Michunovich's notice terminated the contract. Upon remand the issue of whether Stevenson's default notice effectively terminated the "Owen contract" is an issue that will have to be resolved. If it is determined that the "Owen contract"was terminatedby virtue ofOwens' default in failing to make monthly payments, then attention nust be directed to the issues of reasonable rental value and value of improvements. If it isdetermined that the default notice

was ineffective and that Owens are entitled to possession, those issuesneed notbe reached. For guidance, we will briefly discuss our reasons for determining that the trial court erred respecting offset of reasonable rental value against the down payment, and in denying the Owens value of improvementsmade. If it be determined that Owens were in default and effectively terminatedby the notice givenby Stevensondated March 12, 1981, then the Owens would be liable for the reasonable rental value of the property during the period of their holding. That figure may or may not be the amount provided for as a monthly installment payment in the contract. Independent evidence must be produced showing thereasonable rental value of the premises. Mecham v. Nelson (1969), 92 Idaho 783, 451 P.2d 529,533. The issue of whether Owens are entitled to the reasonable value of improvements made, should it be determined thathemust vacate thepremises, is controlledby section 70-28-110,MCA,whichprovides: "When damages are claimed for withholding the property recovered upon which permanent improvements have beenmade by a defendantor those under whom he claims,holding under color of title adversely to the claim of plaintiff, in good faith, the value of such improvementsmust be allowed as setoffagainst suchdamage." Interpreting a similar statute, the Oregon Court of Appeals stated: "The allowance of a recovery from the owner forthe value of improvementsmistakenly put on the owner's premises is an application of the equitable rule which prevents unjust enrichment." Roesch v. FTachter (1980), 48 0r.App. 893, 618 P.2d 448, 451. ThisCourthas defined "improvement"as: "An improvment must be permanent and it must enhance the value of the premises for general purposes. 41Arn.Jur.2d Improvements§I." Overcast v. Akra (Mont. 1982), 642P.2d 1058, 1062. Pursuant to section 70-28-110, MCA, one having possession must establish two elements before recovery for improvements can be made: (1) that possession was retained under color of title; and, (2) that the improvements were placed on the property in good faith. "Colorof title" isdefined as: "Color of title has reference to something which has the appearance or gives the semblanceof title but is not such in fact 

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# ." Munkres v. Chatmon

(Kan.App. 1979), 599 P.2d 314, 316. Upon retrial a factual determinationmust be made as to whether Owens placed the improvementson theproperty in good faith. Owens certainly held under color of title. Here the trial courtmay have been influencedby its erroneous holding that Owens' interest in the property terminated pursuant to Michunovich's notice of May 5, 1980. Since Owens were rightfully in possession subsequent to that date, the issueof "good faith" on Owens1 part in making improvements will have to be reevaluated. We have found it unnecessary to treat the validity of Owens' counterclaim. If it is determined that Owens were not in default, or that the Stevenson default notice was ineffective, then it follows that Owens' counterclaim will have tobe addressed. The judgment of the trial court isvacated. The case is remanded for a new trial in accordance with the views herein expressed.

We concur:

Chief Justice - 

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