Government Appropriation Trumps Tenant’s Option to Purchase

Facts: A trust that owned property that had been used as retail space signed a lease with a tenant that planned to use the space as a fast-casual restaurant. The lease gave the tenant the option to purchase the property at any time for $110,000. The tenant spent $300,000 on buildouts.

Six years later, the Ohio Department of Transportation (ODOT) appropriated the entire leased property for highway improvements. The tenant moved out of the space and stopped paying rent. More than five months later, the tenant tried to exercise the option to purchase the property. The trust informed the tenant that due to the ODOT appropriation, it wasn’t able to sell the property to the tenant, and that the tenant wasn’t entitled to either $110,000 or the amount of money that ODOT had offered the trust for the property. The tenant sued the trust. The trust asked a trial court for a judgment in its favor without a trial. The trial court ruled in favor of the trust. The tenant appealed.

Decision: The appeals court upheld the judgment of the trial court in favor of the trust.

Reasoning: The appeals court noted that, an option, by its nature, is an incomplete contract that doesn’t become a binding obligation creating an interest in land until it’s exercised by the optionee—here, the tenant. An optionor—here, the trust—as owner of the property, is only bound to convey the property in its present condition, whether damaged or destroyed. The tenant assumes this risk of casualty, the appeals court pointed out. However, if the owner conveys part of the property to a third party, in violation of the lease agreement, and makes it impossible to convey that part of the property to the tenant, the owner is liable in damages for the value of the property wrongfully conveyed to the third party.

However, that wasn’t the case here, said the appeals court. While the rule holding the owner liable in the event he conveys part of the property is clear, the liability of the owner in the case of an appropriation is less clear since the owner had no choice but to convey the property, the appeals court noted. From the tenant’s perspective, though, the value of the property for which he negotiated an option to purchase for a fixed sum—here $110,000—was, nevertheless, reduced just the same as it would’ve been reduced by the owner’s voluntary conveyance of part of the fee estate, said the appeals court. 

But when the tenant vacated the property and failed to pay rent, the lease agreement terminated along with the tenant’s option to purchase, said the appeals court. Moreover, the lease contained a provision specifying the parties’ respective rights in the event of an appropriations action: The tenant didn’t have any right to compensation for the tenant-made improvements because they either became part of the realty, and consequently, the freehold estate, or became property of the owner because the tenant failed to remove the trade fixtures prior to the termination of the lease.

• ISHA, Inc. v. Risser, May 2013