Opinion ID: 2221338
Heading Depth: 1
Heading Rank: 3

Heading: Severance of Contract

Text: [¶ 6.] The trial court found that the second ten-year lease option was an agreement separate from both the original lease term and the first ten-year option now in effect. It also found that the second ten-year option could be severed from the rest of the lease without voiding the remaining agreement. The Reuers assert that the lease violates SDCL 43-32-2, and therefore it cannot be severed. Citing Hedges v. Dixon County, 150 U.S. 182, 192, 14 S.Ct. 71, 74, 37 L.Ed. 1044 (1893), they argue that a void instrument cannot be reformed. We believe, however, that the proper approach is to consider first whether the agreement's terms can be severed and then move to the question of whether the lease is invalid under the statute. 1st American Systems, Inc. v. Rezatto, 311 N.W.2d 51, 56 (S.D.1981) (so long as an illegal covenant is divisible, the remaining legal covenants are enforceable.) (citations omitted). [¶ 7.] Under South Dakota law, certain contracts are divisible: Where a contract has several distinct objects, one or more of which are lawful and one or more of which are unlawful in whole or in part, the contract is void as to the latter and valid as to the rest. SDCL 53-5-4. In Commercial Trust and Sav. Bank v. Christensen, 535 N.W.2d 853 (S.D.1995), we set forth the requirements of a severable agreement: (1) the parties' performances must be separable into corresponding pairs of part performances and (2) the parts of each pair must be regarded as agreed equivalents. Id. at 857 (citing E. Allen Farnsworth, Contracts, § 5.8, at 382 (2d ed 1990); Restatement (Second) of Contracts § 183 (1979)). Additionally, the agreement must not be an integrated scheme to contravene public policy, and the party seeking enforcement must not have engaged in serious misconduct. Id. at 857 n. 2. A court may divide a contract into corresponding pairs of part performances, and then enforce only those parts which do not materially advance the improper purpose of the agreement. Farnsworth, supra, § 5.8, at 381-82. See Russell Miller Milling Co. v. McLean, 48 S.D. 198, 203 N.W. 498, 499 (1925) (illegal penalty imposed under parties' agreement was separable from rest of contract and did not render entire contract void). [¶ 8.] In Christensen, the parties contracted to lease agricultural land. 535 N.W.2d at 855. At the time, SDCL 43-32-2 prohibited leases of agricultural land for periods longer than twenty years, just as it currently does. Id. at 856. The lease spanned ten years and included an option to buy the property, exercisable by the tenant before the lease expired. Id. at 855. When the lease had been in effect for seven years, the parties made another agreement (Addendum) restating the original lease terms, and giving the tenants the option to extend the original lease for an additional twenty-year period. This Addendum also contained the option to buy the property, stating that it could be exercised any time before the expiration of the additional twenty years. This Court concluded that there was no distinct and separate consideration to support both the option to buy and the Addendum. Id. at 858. Although the Addendum increased the purchase price by $1,000, that amount was only an additional sum to be paid for the land if the option was exercised. Therefore, the contract was not divisible, as the option was not supported by any additional consideration, and the only consideration tendered was for the lease itself. [¶ 9.] We also addressed the question of divisibility in Mattson v. Rachetto, 1999 SD 51, 591 N.W.2d 814. There, the contract stated that the land was conveyed by warranty deed from the Mattsons to the Rachettos for the sum of $26,959.50. Id. ¶ 24, 591 N.W.2d at 819. The contract also provided that, [f]or and in consideration of the agreement by Mattsons to sell the above-described property to Rachettos, Rachettos hereby lease to Mattsons the above-described property. Id. The Rachettos argued that there were two subject matters and therefore the contract should have been severed and the void agricultural lease rescinded, leaving the rest of the contract intact. Id. ¶ 22, 591 N.W.2d at 818. We rejected this argument, as well as the assertion that each part of the contract was supported by its own consideration and was therefore divisible. Id. ¶ 25, 591 N.W.2d at 819. [¶ 10.] Looking at the requirements for a severable agreement, as stated in Christensen, first, the obligations of the parties here can be separated into corresponding pairs of part performances. [A] distinguishing mark of a divisible contract is that the consideration is not single, but can be apportioned to correspond with separate consideration offered by the other party. Christensen, 535 N.W.2d at 857 (citation omitted). Unlike the contracts in Christensen and Mattson, the agreement here contains distinct consideration for each ten-year option. There was a separate annual rent set for each of the two corresponding extension terms: $33,000 for the first extension, and $36,000 for the second extension. [¶ 11.] Second, each pair must be an agreed equivalent. This means that the parts of the pair must be of roughly equivalent value.... Farnsworth, supra, § 5.8, at 382-83. The Reuers do not dispute that the amounts to be paid by Thunderstik in exchange for the lease of the land are agreed equivalents, nor do we find otherwise. The terms of the options were negotiated between the parties, and while the precise value of the land lease may be debatable, the amount in the contract was of roughly equivalent value. [¶ 12.] Third, mindful of the limitation stated in Christensen, that the agreement must not be an integrated scheme to contravene public policy, the Reuers contend that the lease contravenes public policy, with little explanation other than the assertion that there was an intent to create an invalid thirty-year lease. In Schara v. Thiede, 58 Wis.2d 489, 206 N.W.2d 129 (1973), the parties agreed that one would operate a tavern as his own business under the other's liquor license for the remainder of the term of that license. Id. at 130. This was done to avoid the expense of obtaining a new liquor license. Although the agreement purported to be an employment contract, the parties clearly understood that it was a front for the underlying agreement. In a dispute over the terms of the lease, the court held that the right to the lease was expressly conditioned upon his faithful performance as `manager' pursuant to the illegal agreement. Id. at 132. The court concluded that the contract was so permeated with illegality that it was not severable. Id. at 133. Here, the lease manifests no intrinsic scheme to violate public policy. While the Reuers contend that the intent of the parties was to create an illegal thirty-year lease on agricultural land, the core design of the agreement was to access land for hunting. None of the limitations on divisibility, therefore, apply here. [¶ 13.] Finally, the lease agreement specifically states that should part of the contract be invalid, the rest shall remain in effect. This express provision that an unenforceable portion may be severed from the agreement supports our conclusion. See Whorton v. Dillingham, 202 Cal.App.3d 447, 248 Cal.Rptr. 405, 407 (1988). Because the requirements for severability have been met, and because the parties themselves anticipated possible severance, we uphold the court's ruling that the last ten-year option was severable.