Title: Target Stores, Inc. v. Twin Plaza Co.
Citation: 153 N.W.2d 832
Docket Number: 40136, 40274
State: Minnesota
Issuer: Minnesota Supreme Court
Date: September 1, 1967

153 N.W.2d 832 (1967) TARGET STORES, INC., Plaintiff, Respondent, v. TWIN PLAZA CO., Allen I. Nilva, as trustee in dissolution of Twin Plaza Co., Defendant, Appellant, Red Owl Stores, Inc., et al., Defendants. TWIN PLAZA CO., Third-Party-Plaintiff, Appellant, v. The DAYTON COMPANY et al., Third-Party-Defendants, Respondents. Nos. 40136, 40274. Supreme Court of Minnesota. September 1, 1967. Rehearing Denied October 27, 1967. *834 Gordon Rosenmeier and John E. Simonett, Little Falls, Nilva, Shaw &amp; Frisch, St. Paul, for appellant. Faegre &amp; Benson, and Robert J. Christianson, Armin M. Johnson, and Lawrence C. Brown, Minneapolis, for respondents. SHERAN, Justice. Appeal from an order of the district court denying defendant's motion for amended findings of fact and conclusions of law or, in the alternative, for a new trial, and from the judgment entered thereafter. On June 22, 1961, Twin Plaza Company was the owner of a 23-acre tract of land near the intersection of Rice and Montana Streets in the city of St. Paul. Efforts to develop this site as a mercantile shopping center occurring before and after that date brought about litigation between plaintiff Target Stores, Inc., standing in the shoes of the buyer, and defendant Twin Plaza Company, the seller, raising the question of whether an agreement to purchase the realty made on that date constitutes a specifically *835 enforceable contract and, if not, whether either of the parties is entitled to other relief because of the events which followed the execution of said agreement. On June 22, 1961, an agreement to purchase the 23 acres was executed. By its terms, the seller agreed to deliver (in the future) a warranty deed conveying marketable title to the premises, subject only to this relevant exception: No tenancies were specified. In addition, the agreement contained this representation: No restrictions now significant were noted in the purchase agreement. The seller made available to the buyer a certificate of title and registered property abstract for examination. Certain defects in proceedings involving the vacation of streets and alleys which affected the title adversely were noted by the buyer's attorney on July 28, 1961. It was not until September 21, 1961, that these defects were corrected to the buyer's satisfaction. While these additional steps were being taken, a supplemental agreement dated August 28, 1961, was entered which recognized postponement of the closing date as provided in the June 22 contract and provided: Following execution of this agreement, expenses of about $75,000 were incurred by the buyer in anticipation of transfer to it of a marketable title to the premises. This work commenced about September 11, 1961, and continued until about the middle of October. In early October, the buyer became aware that there were in existence four agreements executed during the period from 1956 to 1958 in connection with a shopping center, the plans for which failed to materialize. Its attorney considered that these agreements created interests in third persons making the seller's title unmarketable. So informed, the seller's position was that the agreements did not adversely affect its title but that it would nevertheless secure releases of any claims assertable under the agreements in question. While this effort was being made, the buyeras a result of negotiations which began in November and culminated in Decembersecured an alternate site for the purpose intended. On February 23, 1962, at a time when the seller had secured a release of only one of the four *836 agreements which caused the difficulty, the buyer rescinded the purchase agreement of June 22 upon the ground that the title had not been made marketable and demanded the return of the $13,750 downpayment and recompense for the expense incurred in preparing the land for its use.[1] By May 8, 1962, the seller had secured releases of all four of the agreements. It tendered performance. The tender was refused. Then, on May 24, 1962, the seller served notice of cancellation of the June 22, 1961, purchase agreement pursuant to Minn. St. 559.21. An action was instituted by the buyer to recover sums paid by it under the June 22 agreement and the August 28 supplemental agreement and to secure compensation for the expense incurred in improving the property. The seller counterclaimed for specific performance. The trial judge, who heard the case without a jury, decided in plaintiff's favor. Essential to the decision embodied in its findings of fact, conclusions of law, and incorporated memorandum are these propositions: (1) The agreements disclosed in early October 1961 were leases or specifically enforceable agreements to lease which created adverse interests in the land covered by the June 22 agreement. (2) The June 22 agreement contains affirmative representations that no such adverse interests were then in existence. In addition, the failure of the seller to disclose the existence of the agreements was equivalent to an affirmative representation that no such interests were outstanding. *837 (3) These representations were material and fraudulent. (4) The buyer, acting reasonably on these representations, was entitled not only to rescind the June 22 agreement and recover the money it had paid, but also to recover the damage proximately caused by its reliance on the fraudulent assertions. (5) There was no waiver of the right to rescind and the act of rescission did not abate the buyer's right to recover the damages attributable to the fraud. The seller's post-trial motion for amended findings and conclusions or, alternately, for a new trial was denied, and so this appeal. As will be evident from this summary of the facts, the case, in its present posture, turns on the significance to be given to the agreements made between the seller and third persons, which agreements were outstanding when the buyer rescinded. This is so because the trial judge found the failure to disclose these agreementsand affirmative representation that no such agreements existedto be the fraud for which consequential damages were allowable. The matters as to which the misrepresentation allegedly occurred in this case were three instruments each entered into by defendant and a different retailing concern.[2] Each is quite comprehensive in treating the matters normally included in leases. One such instrument, denominated a "lease," was made with Red Owl Stores, Inc., on December 4, 1956. (a) Description. It stated that the lessor "does hereby demise and lease unto the Lessee, and Lessee hereby hires and takes from the Lessor," property described as: (b) Duty to Construct. Another portion of the document provided: The term of the lease was described as In addition, the lessee was given the privilege to renew for two successive 5-year periods. A specified rent was to be paid "during the term." The document further provided: The instrument entered into with the National Tea Company on November 30, 1956, was denominated a "lease agreement." (a) Description. That instrument stated that the lessor "demises and leases" to the lessee the premises described as follows: The rider provided: (b) Duty to Construct. By other provisions of the instrument, defendant covenanted to begin construction on or before September 1, 1957, and to proceed with due diligence to complete the premises by March 1, 1958. Another provision stated: The lessee was empowered to cancel if construction were not commenced on said date, by giving the lessor written notice of cancellation prior to actual commencement of construction, whereupon, if the lessor did not commence construction within 30 days of such notice, the lease would terminate and be of no force and effect. If construction were not completed (except by reason of enumerated extraordinary causes) by September 1, 1959, the lessee was empowered to cancel the lease by written notice given at any time thereafter prior to its actual acceptance of the premises. Still another provision stated: Another such instrument, called a "lease agreement," was entered into with Falcon Dry Cleaners, Inc., on November 18, 1958. (a) Description. The agreement states that the lessor "does hereby demise, lease and let unto the said Lessee, and the Lessee does hereby hire and take from the said Lessor," premises described as follows: (b) Duty to Construct. A later provision in the instrument is as follows: The term was stated as being "fifteen (15) years from and after the 1st day of June, 1959, to the 31st day of May, 1974." A 5-year option was also provided. Provisions as to delivery of possession and commencement of duty to pay rent are as follows: Immediately following defendant's agreement to complete the premises, a proviso appeared: 1. In our opinion these agreements created neither an interest in the land here involved nor a contract to make a lease specifically enforceable as against the buyer. Consequently, the failure to disclose the leases was not, in and of itself, a fraud. Further, if negative reference to "rights of tenants" and "restriction on use" in the June 22, 1961, contract could be considered as affirmative representations of what the state of the title was on that date (rather than what it would be upon delivery of a warranty deed), the agreements did not create tenancies or use restrictions binding on the buyer. *840 The trial court concluded otherwise, stating: It has been stated that the fact that a term is to commence in future does not prevent the instrument from operating as a present demise, 51 C.J.S. Landlord and Tenant § 185, p. 788, and that a valid term for years may be created to begin in futuro. Id. § 28. Occasionally it is said that a lease may be made of property not in existence or not completed at the time of the contract. Id. § 207. But this does not mean that an interest in land is created by the "lease" of a building not yet built. The 1956-1958 agreements refer to a "building" or "store" and make no reference to an interest in land being passed. Although this might be less significant in short and abbreviated documents, the ones in question were not of that type. In a lengthy and detailed lease, where the conveyance purports to be only of a "store" or "building," it seems fair to say that if the parties had intended the conveyance to be of something additional thereto, they would have said so. The 1956-1958 agreements were not operative leases. Except where the proposed lessee is in possession, see Bradley v. Metropolitan Music Co., 89 Minn. 516, 95 N.W. 458; Galante v. Hathaway Bakeries, Inc., 6 A.D.2d 142, 176 N.Y.S.2d 87; 51 C.J.S., Landlord and Tenant, § 194; contra, United States v. 257.654 Acres of Land (D.Hawaii) 72 F. Supp. 903, an executory agreement to lease does not convey an interest in land. See, Whalen v. Galy, 211 Mich. 30, 177 N.W. 954; Dan Cohen Realty Co. v. National Sav. &amp; Trust Co. (E.D.Ky.) 36 F. Supp. 536; Jackson ex dem. Bulkley v. Delacroix, 2 Wend. (N.Y.) 433; 51 C.J.S. Landlord and Tenant §§ 185, 194. The fact that a document covers a building yet to be constructed implies that the transaction is at most an agreement to lease rather than a lease. See, Donovan v. P. Schoenhofen Br. Co., 92 Mo.App. 341; 51 C.J.S. Landlord and Tenant § 185, p. 788; cf. Minn.St. 336.2-105(2), (Uniform Commercial Codepurported present sale of future goods operates as contract to sell). In point is Jackson ex dem Bulkley v. Delacroix, supra. In that case the plaintiff had entered into an arrangement with the defendant whereby the latter would make certain improvements upon a 2-story building and lease a part of the building to the former. The defendant found that the building was so much damaged and had such a weak foundation that the specified improvements could not safely be made, so he had the building demolished and constructed in its place a 4-story building, differing considerably from the old one. The plaintiff, arguing that he could waive exact compliance, brought an action for ejectment against the defendant. The court held as a matter of law that the action would not lie on the ground that the instrument in question was not a lease but merely an agreement to lease. The court stated (2 Wend. [N.Y.] 441): One of the documents in the present case was denominated a "lease" and the other two were called "lease agreements," but the name given to the document by the parties is not controlling. Bradley v. Metropolitan Music Co., supra. It is not possible to pass a present interest in property not in existence.[3] The 23-acre tract was, of course, in existence when the agreements were made. But the parties to the agreements were not interested in a lease of the land as such. The owner of the tract, it is clear, was proceeding during the 1956 to 1958 period on the theoryor in the hopethat a sufficient number of prospective tenants could be secured to make a shopping center feasible. None of the prospective tenants was interested in renting a building, even if constructed, unless other mercantile establishments were to be in operation on the site. It is generally true that the lease of a building is a lease of the land on which it stands. Lanpher v. Glenn, 37 Minn. 4, 33 N.W. 10. But here (in addition to the dependence of each prospective tenancy on the existence of others) there never was a building constructed.[4] If the agreements could be construed as leases to become operative upon the erectionor even the partial erectionof a satisfactory building, we would still lack an essential point of reference here. No building of any kind was ever commenced. An executory agreement to lease a building when and if constructed cannot convey an interest in land. The fact that the result might be different when the prospective lessee takes possession of the premises does not aid plaintiff in the present case, where the persons thought of as lessees never did so. The fact that an agreement is called a lease does not make it one. Whatever liability the owner may have under agreements of this kind if he fails to erect a shopping center as visualized at the time the agreements with prospective tenants were made, no such rights are created as would give a prospective tenant of the building any estate in the land before the building comes into existence. The conclusion that these "leases" created no interest in the land, as the building to be leased never came into existence, is supported by practical as well as logical considerations. The public policy which encourages the best possible present use of landand underlies the rule against perpetuities would be ill served by finding that an agreement to lease upon a contingency which has not occurred creates an interest in the land preventing its use for another purpose capable of realization.[5] A number of law review articles have been written to aid drafters of shopping center leases, but none of them are helpful in determining what the effect of such *842 leases should be when construction and other prerequisites to completion have not been commenced approximately a year and a half to three years subsequent to the scheduled date of completion.[6] 2. The "lessees" named in the 1956-1958 agreements could not have secured specific performance as against Target, the buyer, for this combination of reasons: (1) The plans attached to the agreements are not in sufficient detail to be used as a basis for accurate directions to build.[7] (2) The court could not compel the owner to secure leases from other tenants unwilling to participate in the venture.[8] (3) The agreements were terminable at the will of the prospective lessees, and equity is reluctant to act in situations where the parties have dealt on equal terms to compel one party to enter a continuing relationship where the other party could not be so compelled.[9] (4) Up to the point, at least, where the prospective lessee's had taken some irrevocable steps contemplating the operation of a business on the leased premises, the remedy of damages, as against the owner for breach of contractor of duty arising from the existence of the contractwould be adequate.[10] (5) Inaction by the persons said to be lessees until 1961 weakened their claim for specific performance of an unrecorded agreement relating to land.[11] In Boulevard Plaza Corp. v. Campbell, 254 Minn. 123, 94 N.W.2d 273, this court held that the plaintiff, who took no action under a purchase agreement for 18 months, could not enforce it against the vendor. The facts are distinguishable on the ground that the inaction included failure to make payments due and requested by the defendant under the agreement, but the following reasoning bears upon the present case (254 Minn. 134, 94 N.W.2d 283): We conclude therefore that the agreements created no interest in the land and were not specifically enforceable as against the buyer. Sands v. United States (W.D. Wash.) 198 F. Supp. 880, and Maida v. Kroger Co. (E.D.Tex.) 230 F. Supp. 668, cited by plaintiff, do not persuade us otherwise. Because the trial court was of the opposite view, a new trial is necessary. *843 3. Our conclusion that the 1956-1958 agreements did not in fact adversely affect the seller's title does not mean that the title was a marketable one. This is so because the marketability of a title turns not only on what interest can be successfully asserted as against a prospective buyer, but also on what a prudent buyer might reasonably, though erroneously, apprehend to be the resolution of a doubtful question affecting the title. In the present caseand until nowthe resolution of the question of whether these agreements created an interest in the realty was in serious doubt. In Hubachek v. Maxbass Security Bank, 117 Minn. 163, 169, 134 N.W. 640, 642, we said: The doubt in that case resulted from the circumstance that a deed in the chain of title was by a guardian who had failed to give a bond as required by the statute of North Dakota. The opinion concludes (117 Minn. 169, 134 N.W. 642): In the present case the existence of the 1956-1958 agreements put the seller's title in doubt. The trial judge in a scholarly memorandum has reasoned that an adverse interest was created by those agreements. Recognizing the closeness of the question, we have held otherwise. The attorney who examined for the buyer was on valid grounds when, as of February 1962, he recommended rescission for non-marketability and, in our opinion, he had adequate reason for doing so. 4. But to say that a buyer is entitled to rescind because of a reasonable belief that a title is not marketable is not to say that the party rescinding is entitled to recover damages sustained prior to rescission. Either he is or he is not depending on whether the damage was caused by the seller's fraud. As we have decided, fraud in this case cannot be based upon the theory that the agreements created a tenancy or a restriction upon the use of the premises by the buyer. It can be argued, of course, that active concealment of material facts which would give rise to a reasonable doubt as to the marketability of the title is fraudulent; or that a partial disclosure of some such facts is active concealment of material facts not disclosed; or that by reason of a disparity of competence or fiduciary status, a positive duty to disclose facts which would be material in the opinion or judgment of a reasonable prospective buyer arises and that the failure to disclose an assertable but not sustainable unrecorded claim involving the realty is the equivalent in such circumstances to an affirmative representation that such claims, though actually untenable, do not even exist. But, probably because the case was tried and decided on the theory that the leases created an adverse *844 interest in the realty, there is no finding that any such special situation existed here. In the absence of such a finding, fraud cannot be premised on mere nondisclosure of a dubious claim to an interest in realty which is the subject of a purchase agreement. The applicable rule is as stated in Restatement, Torts, § 551, as follows: 5. It may be that even if there was no fraud the buyer is entitled to recover, by way of restitution, the reasonable value of any improvement made to the realty before rescission. Prosser, Torts (3 ed.) § 100, pp. 701 to 703, and cases cited in footnote 64; Restatement, Restitution, § 8, comment e. But that problem is not before us at this time. 6. We do not agree that the seller is entitled to specific performance as a matter of law on the theory that the buyer has made an irrevocable election to affirm. The trial judge commented in this respect: We agree. Upon retrial the evidence on the issue of waiver should be reevaluated in light of our holding that the 1956-1958 agreements did not in fact create an adverse interest in the land although the doubt created by the leases justified rescission for non-marketability. We do not believe that the execution of "confirmation of assignments" after discovery of the agreements; the asserted claim for damages on the theory of fraud; the cooperation of the buyer with the seller in the effort to secure releases of the 1956-1958 agreements; or the buyer's delay establish waiver as a matter of law. Target Stores, Inc., has moved that the judgment heretofore entered in its favor should not be vacated pending the outcome of the new trial. We could, no doubt, direct that the lien of the judgment be preserved pending retrial. See, Ayer v. Chicago, M. St. P. &amp; P. R. Co., 189 Minn. 90, 248 N.W. 749. Respondent urges that we do so here, being apprehensive that an attachment lien on the realty involved which it established prior to the entry of the judgment became merged in the judgment when it was entered and will be lost now if the judgment is vacated. Its concern comes about because of our decision in McDonald v. Clark, 53 Minn. 230, 231, 54 N.W. 1118, where this court held that a motion to vacate an attachment was properly denied after entry of judgment in the action giving rise to the levy because "its lien had become merged in that of the judgment." But the rationale of McDonald v. Clark, supra, does not apply where the merging judgment is vacated on appeal. In such a case, we now hold, the lien of the attachment is revived and stands as if judgment had never been entered. Reversed. [1] The letter reads in part: "On or about October 6, 1961, * * * the undersigned first received notice of * * * at least four leases of long duration with respect to portions of the real estate which was the subject matter of such Purchase Agreement. * * * [T]he undersigned received notice thereof only by reason of communication to them by the lessee of one of the leases and by reason of inquiry made of you by the undersigned on or about October 6, 1961 regarding leases upon said real estate, which inquiry was prompted in part by said communication and in part by contemporaneous statements of your representative. * * * "On or about October 6, 1961 you were advised by the attorneys for the undersigned that the existence of these leases rendered title to the land referred to in said Purchase Agreement unmarketable since the Purchase Agreement contained a representation by you that said land was not subject to tenancies. "On October 13, 1961 your attorneys by letter addressed to the attorneys for the undersigned acknowledged the existence of these leases and stated that your attorneys had decided to contact lessees thereunder for the purpose of obtaining mutual releases of their respective leases. * * * "As heretofore stated, the existence of any one or more of these leases renders title to the real estate in question unmarketable. Further, your inability to obtain the surrender and release of all these leases prior to this date constitutes such a delay in bringing about marketability of the title to said real estate as to render the Purchase Agreement as so amended void. As a consequence the undersigned, and each of them, hereby notify you of the election of the undersigned, and each of them, to treat the Purchase Agreement as so amended as void and no longer binding or obligatory upon the undersigned or any of them. "The undersigned, and each of them, hereby demand that you forthwith refund to said Target Stores, Inc. the $13,750 earnest money payment heretofore received by you under such Purchase Agreement. "In reliance upon the representation in said Purchase Agreement that the real estate therein described was not subject to any tenancies, the undersigned in pursuance of the amendment of the Purchase Agreement effected by said Agreement dated August 28, 1961 went into possession of portions of such real estate and expended sums in testing, exploring and improving such real estate. The total amount thus expended was $75,872. * * * "The undersigned, and each of them, do hereby surrender to you any possession or right to possession of said real estate which they or any of them may have heretofore had under the term of said Purchase Agreement as so amended or otherwise." (Italics supplied.) [2] A fourth agreement with Sinclair Refining Company will not be considered here because it was terminated on January 22, 1962, prior to plaintiff's February 23, 1962, rescission. [3] The discussions of leases by the text-writers imply the necessity that the thing leased be in existence. See, Jones, Landlord and Tenant, § 142; McAdam, Landlord and Tenant (5 ed.) § 84; Tiffany, Landlord and Tenant, § 62, p. 372: "* * * [A] contract for a lease gives the proposed lessee no right of possession which he can assert against the lessor or against third persons, * * *"; Woodfall, Landlord and Tenant (25 ed.) § 483. [4] 51 C.J.S. Landlord and Tenant §§ 28, 185; cf. Minn.St. 336.2-105(2). Compare, Rice v. Brown, 81 Me. 56, 16 A. 334; Arndt v. Ball, 342 Mich. 649, 70 N.W.2d 746; People ex rel. Ward v. Kelsey, 38 Barb. (N.Y.) 269, 14 Abb.Pr. 372. In all these cases the construction was completed by the time suit was brought. In Kelsey the court stated that the instrument took effect as a lease when the premises were completed. [5] There is authority for the proposition that a lease to commence upon completion of a building is void as a violation of the rule against perpetuities. Haggerty v. City of Oakland, 161 Cal. App. 2d 407, 326 P.2d 957, 66 A.L.R.2d 718; 47 Calif.L.Rev. 197. But note, Isen v. Giant Food, Inc., 111 U.S.App.D.C. 149, 295 F.2d 136; 37 Notre Dame Law. 561; Note, 47 Calif.L.Rev. 197. [6] See, Brummond, Shopping Center Leases, 1 Practical Law. 66; Colbourn, A Guide to Problems in Shopping Center Leases, 29 Brooklyn L.Rev. 56; Goldstein, Practical Aspects of Real Estate Developments: Illustrated by a Shopping Center Project, 18 N.Y.U.Inst.Fed.Tax. 119; Hemingway, Selected Problems in Leases of Community and Regional Shopping Centers, 16 Baylor L.Rev. 1; Pollack, Shopping Center Leases, 9 Kan. L.Rev. 379. [7] See, Johnson v. Skillman, 29 Minn. 95, 12 N.W. 149; Ham v. Johnson, 55 Minn. 115, 56 N.W. 584; 81 C.J.S. Specific Performance §§ 48, 74; Tiffany, Landlord and Tenant, § 67, p. 394; Woodfall, Landlord and Tenant (25 ed.) §§ 421, 428. [8] See, Carlson v. Doran, 252 Minn. 449, 90 N.W.2d 323; 51 C.J.S. Landlord and Tenant §§ 27, 215; 81 C.J.S. Specific Performance § 48. [9] See, 81 C.J.S. Specific Performance § 11(e); Reichert v. Pure Oil Co., 164 Minn. 252, 204 N.W. 882. See, Peterson v. Johnson Nut Co., 204 Minn. 300, 283 N.W. 561. Compare, Dahlberg Brothers, Inc. v. Ford Motor Co., 272 Minn. 264, 137 N.W.2d 314. [10] McClane v. White, 5 Minn. 178 (Gil. 139); Granva Corp. v. Heyder, 205 Va. 660, 139 S.E.2d 77; 81 C.J.S. Specific Performance § 6. [11] Johnson v. Fitzke, 234 Minn. 216, 48 N.W.2d 37; Melco Investment Co. v. Gapp, 259 Minn. 82, 105 N.W.2d 907.