American Federal Bank, f/k/a American Federal Savings and Loan Association, Appellant, vs. F & W Properties, Respondent.

American Federal Bank, f/k/a American Federal Savings and Loan Association, Appellant, vs. F & W Properties, Respondent. A06-1981, Court of Appeals Unpublished, August 14, 2007.

This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. § 480 A. 08, subd. 3 (2006).

 

STATE OF MINNESOTA

IN COURT OF APPEALS

A06-1981

 

American Federal Bank,

f/k/a American Federal Savings and Loan Association,

Appellant,

 

vs.

 

F & W Properties,

Respondent.

 

Filed ­­­August 14, 2007

Affirmed

Dietzen, Judge

 

Clay County District Court

File No. C3-05-2118

 

Thomas H. Boyd, Winthrop & Weinstine, P.A., 225 South Sixth Street, Suite 3500, Minneapolis, MN 55402; and

 

Roger J. Minch, Serkland Law Firm, 10 Roberts Street, P.O. Box 6017, Fargo, ND 58108-6017 (for appellant)

 

Travis D. Stottler, Miller Law Office, P.A., 26357 Forest Boulevard, Suite 6, P.O. Box 807, Wyoming, MN 55092 (for respondent)

 

            Considered and decided by Stoneburner, Presiding Judge; Kalitowski, Judge; and Dietzen, Judge.

U N P U B L I S H E D   O P I N I O N

 

DIETZEN, Judge

 

            Appellant challenges the district court order and resulting judgment interpreting the sublease agreement of the parties, arguing, among other things, that the district court erred by (1) issuing an order inconsistent with the previous order of the court, (2) concluding that the sublease provision did not provide an option to extend the lease, and (3) concluding that consent was reasonably withheld.  We affirm.

FACTS

            Burlington Northern Inc. previously owned property in Moorhead, Minnesota, which it leased to Center Avenue Investment Co. (Center Avenue).  Center Avenue obtained financing from American Federal Savings & Loan Association (S&L) for construction of a shopping center on a portion of the land that it leased from Burlington Northern.  In 1975, Center Avenue entered into a 30-year sublease agreement for a portion of the leased land adjacent to the shopping center (subject property) with S&L.  S&L agreed to build a branch office on the subject property and to pay rent of one dollar per year, plus all taxes and assessments levied against the property. 

Paragraph 17 of the sublease agreement is entitled "Option to Extend Lease" and provides that sublessor Center Avenue grants to sublessee S&L "the first right of refusal" to extend this lease subject to certain conditions.  The agreement sets forth a method for determining rent in the event that the parties are unable to agree.  It provides that each party choose an appraiser to evaluate the leased property, exclusive of improvements made by the lessee. 

BNSF later became the successor and assign of Burlington Northern.  Subsequently, BNSF conveyed its interest in the subject property to F&W Properties (F&W).  Following various transactions, appellant American Federal Bank (Bank) became the successor and assign of S&L, and respondent F&W Properties (F&W) became the successor and assign of Center Avenue.  F&W therefore became both the owner and sublessor of the subject property. 

In April 2005, Bank sent notice to F&W seeking to extend the sublease under paragraph 17 of the sublease agreement.  The letter stated:

            In any event, let this notice represent the written notice that [Bank] desires to extend the lease, which notice is required at least three months prior to the expiration date (October 31, 2005).

 

            If we are not able to reach an agreement or if the provisions of the sublease become difficult or cumbersome, we will invite court supervision under the Minnesota Uniform Declaratory Judgments Act, Chapter 555.

 

When F&W did not respond, Bank commenced a declaratory judgment action, seeking a determination of the court that the sublease agreement provided it with an option to extend the lease and that it had properly exercised the option to extend the lease.  F&W then contacted Bank and offered to extend the lease for a one-year term with rent of $2,000 per month, plus taxes and assessments, but Bank declined.  Subsequently, Bank, relying on a new appraisal of the property, determined that $487 per month was a reasonable rental amount and began paying that amount to F&W.      

In December 2005, Bank brought a motion for declaratory judgment.  Following arguments, the district court filed an order (first order) concluding that Bank was the successor in interest to S&L under the sublease and had the right to extend the lease, and that proper written notice to extend was given within the required time, but that F&W, as a successor of Burlington Northern, had the right to withhold its consent to the extension if reasonable.  It concluded that the issue of the reasonableness of F&W withholding its consent had not been developed in discovery, and, therefore, "it would be premature to grant [Bank's] motion at this time."

During discovery, a representative of F&W testified that it was withholding its consent to extend the sublease agreement on the grounds that F&W intended to develop the subject property, had subdivided the property, and was exploring options for developing the land for a stand-alone retail use.  Following completion of discovery, Bank renewed its motion for declaratory judgment, and a hearing was held before a different district court judge.  Following the hearing, the district court filed an order (second order), concluding that paragraph 17 was not an option to extend but merely a "first right of refusal" (or right of first refusal) and that because F&W had not offered to sublease the property to a third party, the right of first refusal was not triggered.  This appeal followed.

D E C I S I O N

I.

Bank argues that the district court erred in concluding that it did not have an option to extend under the sublease agreement.  Initially, Bank argues that the district court's decision was erroneous because it violated the "law of the case."

            But the district court does not normally apply the law-of-the-case doctrine to its own decisions.  Kornberg v. Kornberg, 542 N.W.2d 379, 386 n.2 (Minn. 1996) (declining to apply law-of-case doctrine when district court judge overruled findings of previous district court judge).  Therefore, because the law-of-the-case doctrine does not require a later district court to conform to the decisions of an earlier district court, the district court had the discretion to file a second order that made a different legal determination than the first order.

More importantly, on matters of interpretation of a legal instrument, such as a sublease agreement, our review is de novo.  Stewart v. Stewart, 400 N.W.2d 157, 158 (Minn. App. 1987).  We are not bound by and need not give deference to a district court's decision on a purely legal issue.  Modrow v. JP Foodservice, Inc., 656 N.W.2d 389, 393 (Minn. 2003). 

            "A lease is a contract which should be construed according to ordinary rules of interpretation."  Amoco Oil Co. v. Jones, 467 N.W.2d 357, 360 (Minn. App. 1991).  And a contract's language must be given its plain and ordinary meaning.  Turner v. Alpha Phi Sorority House, 276 N.W.2d 63, 67 (Minn. 1979).  "Giving full effect to the intent of the parties is primary in interpreting a lease."  Medinvest Co. v. Methodist Hosp., 359 N.W.2d 714, 715-16 (Minn. App. 1984), review denied (Minn. Mar. 21, 1985).

The operative language of the sublease agreement states:

17.       Option to Extend Lease. Lessor hereby grants to Lessee, subject to the approval of Burlington Northern Inc., its successors and assigns, the first right of refusal with respect to the right and privilege to extend this lease beyond the present term, provided Lessee gives Lessor written notice that it desires to so extend the same for a specified period at least three months prior to the expiration date hereof and at least three months prior to the expiration date of any additional term.

 

F&W argues that any rights of Bank contained in paragraph 17 are "subject to the approval of Burlington Northern Inc., its successors and assigns."  Thus, F&W argues that it is the successor and assign of Burlington Northern and that it has not granted its "approval" under the sublease agreement.  Bank argues that F&W is not the successor and assign of Burlington Northern regarding the ownership of the subject property and that BNSF is the only successor to Burlington Northern's railroad operation.  We disagree with Bank's analysis. 

Here, it is undisputed that BNSF acquired the subject property from Burlington Northern and sold its interest in the subject property to F&W.  Bank has not presented any evidence that suggests the transfer and assignment of ownership in the subject property from Burlington Northern to BNSF, and then to F&W, was anything less than a complete transfer of all rights to the property.  Thus, F&W was assigned Burlington Northern's ownership interest in the subject property, and it stepped into the shoes of Burlington Northern with respect to the lease.  See generally Borer v. Carlson, 450 N.W.2d 592 (Minn. App. 1990) (holding that when landlord assigns interest in lease, new landlord is subject to obligations and duties if directly assumed).

Bank next argues that F&W, as a new owner of the subject property, takes the property subject to the sublease agreement, including Bank's right to extend.  Specifically, Bank argues that F&W cannot change its status from sublessor to owner to eliminate Bank's rights to extend the sublease agreement.

The rights and liabilities of the parties under the sublease agreement, and in particular paragraph 17, are governed by ordinary principles of contract law.  Here, we see no provision that prohibits either party from purchasing the underlying fee interest in the subject property.  Bank implies that F&W's conduct in acquiring the fee interest is improper or in bad faith.  But Bank cites no law or provisions of the contract that prohibits F&W from being simultaneously the owner and sublessor.  Thus, we reject Bank's argument.

Bank also argues that the right to withhold approval is "too unique and personal in character to be subject to unconditional assignment or successorship."  The cases relied on by Bank involve personal-services contracts rather than real property and, therefore, are factually distinguishable.  See Smith v. Zuckman,203 Minn. 535, 536, 282 N.W. 269, 270 (1938) (holding that contract to sell advertising not transferable upon death of original salesperson); Koehler & Hinrichs Mercantile Co. v. Illinois Glass Co., 143 Minn. 344, 348, 173 N.W. 703, 704 (1919) (stating contract to deliver goods may be assigned, unless based on relationship of personal confidence).   

Here, Burlington Northern's rights as owner of the property are fully transferable and exercisable by the successor owner.  And the sublease agreement specifically contemplates that Burlington Northern may transfer its interest to its "successors and assigns." 

II.

Bank argues that F&W's refusal to approve the extension of the lease was unreasonable.  Specifically, it contends that economic reasons are not sufficient to reasonably withhold consent. 

Minnesota case law recognizes the right of a landlord to refuse consent to sublease under certain circumstances.  See Medinvest, 359 N.W.2d at 717.  In Medinvest, this court reviewed lease language that "all tenants in the building shall be subject to the approval of the lessor but that the lessor's approval of such tenants shall not be unreasonably withheld."  Id.at 715.  The landlord-hospital declined to approve a sublease to a tenant in the adjoining building that would compete directly with the hospital.  Id.  The tenant argued, and we agreed, that the term "unreasonable" was ambiguous, and we looked to the parties' intent in entering the lease.  Id. at 716.  Rent was one dollar per year, supporting the conclusion that the primary purpose was not to collect rent, but rather to "facilitate use of the hospital's facilities."  Id.  This court held that the landlord's refusal to consent to a sublease was reasonable because the proposed sublessee would compete with services offered by the landlord and, therefore, would defeat a primary purpose of the lease.  Id. at 717. 

Bank relies on Torgerson-Forstrom H.I. of Willmar, Inc. v. Olmsted Federal Sav. and Loan Ass'n, 339 N.W.2d 901, 904 (Minn. 1983) to argue that a lessor may not withhold approval based on self-serving economic motives.  Torgerson states, "the purpose of an anti-assignment clause in a lease is to assure the suitability of the tenant for the protection of the landlord in his ownership and operation of his propertynot for his general economic protection."  Id.  But Torgerson is factually distinguishable.  It addresses the assignability of a lease or mortgage to another property, rather than the renewal of a lease beyond the agreed-on period.  Id. at 902-03.  When a tenant seeks to assign an existing lease, the landlord's duties and obligations do not change.  Thus, from the landlord's perspective, the lease continues under the same terms but with a substituted tenant.  See City of Rochester v. Northwestern Bell Telephone Co., 431 N.W.2d 874, 877 (Minn. App. 1988) (stating "[a] sublessee is bound by whatever language affecting his title is found in the principal lease"), review denied (Minn. Jan. 13, 1988).  But when the tenant seeks to extend the lease beyond the agreed period, the landlord's duties are expanded.  It is reasonable that a property owner may decide upon the lease's expiration that he no longer wishes to use his property for the original purpose. 

More importantly, we conclude that Medinvest is controlling under the facts of this case and allows a landlord to withhold approval for economic reasons.  Specifically,                                                    the Medinvest court concluded that if the proposed sublease would "defeat a specific and primary purpose for a lease, albeit economic, the landlord may withhold consent."  359 N.W.2d at 717.  Here, the district court found that F&W did not approve extending the sublease on the ground that it had plans to develop the parcel, and that its refusal to approve was reasonable.  Like Medinvest, F&W refused to approve based on economic reasons.  On this record, the district court's finding that F&W's refusal to approve was reasonable is not clearly erroneous.

Bank next argues that because F&W would be receiving market rent, it is unreasonable for F&W to require Bank to remove the building it constructed at its own expense.  Bank further argues that F&W's right to decline approval must be related to Burlington Northern's operation of the railroad on the adjoining property.  But the sublease agreement does not restrict landlord's right in that way.  The sublease agreement grants Burlington Northern's successors and assigns the right to not approve the assignment.  Assignability would be meaningless if the successor or assign could only look to Burlington Northern's reasons for denial of approval. 

Finally, Bank argues that F&W's interest in developing the property for sale is too speculative and therefore unreasonable.  But it is undisputed that F&W received approval for subdivision of the property and had been in discussions with a construction firm about developing the property for sale.  Bank argues that F&W's stated intent to develop the property is contradicted by a statement of F&W's attorney that "F&W merely seeks fair market rent for [the] underlying property."  But at the time that statement was made, Bank objected, and the district court ruled that it was not in the record.  Accordingly, we do not consider this statement.  We therefore affirm the district court's conclusion that F&W's reasons for denying an extension were reasonable.

Affirmed.