Enforcing a Tenant Option to Purchase Under “Changed Circumstances”
Commercial leases sometimes contain an option allowing the tenant to purchase the property. If the option is properly exercised, an enforceable purchase and sale obligation is created, which can be enforced by the courts with a decree of specific performance.
But what happens if “changed circumstances” arise after the option is exercised and the court enters a specific performance judgment?
In an opinion recently published by California’s Fourth Appellate District — Petrolink, Inc. v. Lantel Enterprises — the court grappled with a case where the tenant exercised a purchase option, the purchase obligation was reduced to a specific performance judgment, but before closing of escrow an eminent domain action was filed affecting the property.
Facts: tenant exercises purchase option; court enters decree of specific performance; eminent domain action arises before closing
Petrolink — the tenant under a commercial lease with Lantel Enterprises — exercised its contractual option to purchase the leased property for fair market value. The parties disagreed as to the property’s fair market value and filed claims against each other for specific performance.
After years of litigation (including an appeal regarding the valuation), the court determined the sale price and entered a judgment ordering the parties to complete the transaction. Under the terms of the judgment, Petrolink was to deposit the sale price ($948,404) into escrow, and Lantel was to deliver title to the property “by grant deed free and clear of all encumbrances.”
Four days after Petrolink deposited the purchase funds into escrow but before escrow closed, the State of California Department of Transportation (Caltrans) filed an eminent domain action affecting the property. The eminent domain action prevented Lantel from being able to convey unencumbered title to the property as required by the court’s judgment.
Petrolink refused to close escrow on the grounds that Lantel could not convey unencumbered title. Lantel filed a motion to enforce the judgment and compel the closing of the sale.
Trial court: motion granted; sale enforced
The trial court granted Lantel’s motion, and enforced the sale.
Acknowledging that Lantel could no longer convey unencumbered title to the property as required by the judgment, the court nonetheless held that it was “legally proper and equitable that Petrolink bear the burden of the Caltrans action.” The court noted that if the parties had closed their transaction in the time frame contemplated by the lease — without the lengthy litigation detour — the sale would have closed long before the Caltrans action was filed.
Court of Appeal: affirmed
The Court of Appeal affirmed the trial court’s decision.
Petrolink cited to well-established law holding that a trial court may not modify a judgment that it has issued in such a way as to alter the substantial rights of the parties under the original judgment. The court agreed with those holdings as a general rule, but noted that “the general rule gives way to a more specialized rule in situations in which the judgment governs future events … including orders requiring specific performance, and a change in circumstances renders modification of the judgment necessary or appropriate.” In those situations, the court held, “the court retains the inherent authority to modify that judgment[.]”
The court observed that the Caltrans action was beyond either party’s control, and outside the scope of the original judgment. If the trial court had not modified the judgment as it did, “it would have had to modify it in some other way. It was simply not possible to continue to require both parties to perform as ordered” in the judgment. Due to the Caltrans action, full compliance with the original judgment was impossible.
The court found no error in the trial court’s exercise of its discretion to modify the judgment in light of the changed circumstances. “The burden of the Caltrans eminent domain action had to fall somewhere, and the equities did not clearly favor one party over the other.” The court noted that Petrolink had been in possession of the property during the entire time that the case was litigated (almost a decade), and without the litigation Petrolink would have closed on the purchase and owned the property at the time Caltrans filed its eminent domain action. Given those facts, the Court of Appeal held that trial court’s ruling was reasonable.
Lesson
Under the holding of the Petrolink opinion, a decree of specific performance for the purchase of property pursuant to an option exercised by a commercial lease tenant may be reasonably modified by the trial court due to “changed circumstances.”