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June 1, 1983


Review of a decision of the Court of Appeals. Reversing and remanding Day, J. Shirley S. Abrahamson, J. (minority OPINION(S)ing). William G. Callow, J. (minority OPINION(S)ing). Justice Donald W. Steinmetz joins in this Dissenting opinion.

The opinion of the court was delivered by: Day

This is a review of an unpublished decision of the court of appeals which affirmed a judgment of the circuit court for Dane county, Hon. Richard W. Bardwell, Judge. That judgment awarded the plaintiff in this breach of contract action, *fn1 James Harris, damages totaling $42,834.00 *fn2 plus interest at the legal rate from June 3, 1977 to July 28, 1981, the date of the trial court's judgment.

The issues considered in this review are:

1. Should a land contract for the sale of a building and a lease on that building running from the buyer of the building to the sellers thereof which are executed on the same date be construed together?

2. Does an individual who has been injured by the breach of a sale-leaseback contract have the option of seeking the restitution of his investment in the contract as a remedy for the breach?

3. Does a guaranty executed as part of a lease which is made as part of a sale-leaseback arrangement and which obligates the guarantors to "pay to the landlord . . . all damages that may arise in consequence of any default by the tenant under such lease . . ." make the individuals liable as guarantors for restitution sought as the result of the breach of a sale-leaseback contract?

We conclude that the land contract and accompanying lease agreement must be construed together. We also conclude that the injured party may seek restitution of his investment in an action for breach of a sale-leaseback contract. Finally, we conclude that the guaranty executed here obligates the individuals as guarantors to make the restitution of the injured party's investment. We therefore reverse the decision of the Court of Appeals and remand the case to the trial court.

This action involves the sale and leaseback of a shopping center mall building located in Monona, Wisconsin. The building was owned by a partnership, Metropolitan Mall. That partnership consisted of John Borman, Roger Dyson and the James Madison Development Corporation. The sole stockholders of the corporation were Donald Clark and Gordon Carncross. Unless otherwise specified, these individuals and the partnership will be collectively referred to as the Mall Group.

The shopping center project was initiated by the Mall Group in early 1973. Construction of the outer shell of the building was commenced in the spring of that year and the projected completion date of the work was set for November, 1973. However, because of problems in obtaining steel and other work materials, the shell of the building was not entirely completed by June, 1974.

The Mall Group originally intended to construct only the outer shell of the building. Once the shell was completed, the Mall Group would solicit tenants and then arrange the interior to tenants' specifications. It was hoped that the tenants would be putting in their own leasehold improvements (interior walls, plumbing, electricity and sheet metal work) thus saving the Mall Group the expense of these improvements. However, as the project progressed, it became clear that the Mall Group would have to pay for a substantial portion of the interior improvements in order to rent the space to retail tenants.

In the spring of 1974, the Mall Group put the property up for sale in order to raise the funds necessary to complete the project. The property was listed with Munz Investment Real Estate, Inc. (Munz). It was shortly after this listing that Harris became interested in the project.

Harris was the owner of forty-two apartments in Janesville. He had contacted Munz about the possibility of arranging to exchange his apartments as a down payment for other real estate. He wanted to exchange his apartments for other property in order to avoid recognizing any capital gains on the disposal of the property and to get into a real estate venture that did not entail any managerial problems. He also wanted to obtain property which could be used as a "tax shelter" for income he was receiving from a number of hardware stores he owned.

Munz brought the Mall Group and Harris together and an exchange was arranged. The Mall Group sold the building (but not the underlying land) to Harris on a land contract for $1,450,000. As a down payment, Harris exchanged his apartments and added an additional $100,000 in cash ($95,000 of which had been obtained by Harris in a bank loan not at issue in the case). In the land contract, Harris was credited with $324,400 of equity in his apartments. However, $36,300 of that amount was designated to be paid to Munz as a real estate commission on the exchange of the apartments. Thus, the net down payment on the land contract was $388,100 ($288,100 plus $100,000 cash) and the balance financed was $1,061,900. The land contract required Harris to make monthly payments of $9,717.75 to the Mall Group. The Mall Group used Harris' down payment to finish the work on the building. *fn3 The land contract was executed on June 27, 1974. In addition to the provision set out above, the contract included a buy-back agreement which allowed the Mall Group to repurchase the building from Harris at stated times in the future at fair market value but not for less than $1,580,000.

On the same date the land contract was executed, the parties executed a lease. *fn4 The lease provided that the Mall Group would lease the building from Harris for $10,467.45 per month. This payment was $750 per month more than Harris' land contract payment. As part of the lease agreement, each of the individual defendants (Carncross, Dyson, Clark and Borman) executed a guaranty in which they obligated themselves to pay to Harris, upon default by the Mall Group, "the rent or any arrears thereof, and all damages that may arise in consequence of any default by the Tenant under such lease . . ."

From July, 1974, to October, 1975, both parties made their payments. However, no payments were made by either party after October, 1975. Although the parties were in regular communication with each other, the first formal written notification of the Mall Group's desire to terminate the lease was not sent until April 23, 1976. The letter included a demand that Harris make efforts to mitigate his damages. On April 29, 1976, Harris refused to accept the termination of the lease but made assurances that he would try to mitigate his damages. Harris then took over responsibility for the mall. He collected the rents from the retail tenants and paid the bills. During this period, he incurred out-of-pocket expenses totaling $19,585.73. On April 26, 1977, the building was damaged by a fire. On June 3, 1977, the building and the underlying land were sold for $700,000 subject to the fire damage. Harris received $50,000 of the amount received from the sale of the property and $100,000 of the fire insurance proceeds.

Harris brought suit to recoup the damages he had suffered because of the breach of the lease. *fn5 In his Amended Answer and Counterclaim dated March 29, 1979, Harris sought restitution of his investment in the project. That amount, after deductions for the sale and fire insurance proceeds, totaled $238,100.

The case went to trial. At trial, the Mall Group argued that Harris lost money on this project not because of the breach of the lease but rather because he paid too much for his investment. The Mall Group produced Timothy M. Warner, an expert in the appraisal of real estate investments, who testified as to the value of Harris' investment in the project based upon the assumption that Harris had purchased the property solely as a tax shelter. Warner testified that Harris could have purchased a tax shelter similar to that which this project offered for $159,285 rather than the $388,100 which Harris had actually invested. Judge Bardwell admitted Warner's testimony over the objection of Harris as to its relevancy.

Following trial, Judge Bardwell issued a decision in which he awarded Harris a joint and several judgment against the Mall Group and the individual defendants in the amount of $42,834. *fn6 In addition to amounts awarded for a lost rental income of $750 per month and for Harris' out-of-pocket expenses, the trial court awarded damages for loss of Harris' investment in the project. However, rather than valuing Harris' investment at the value of the property and cash Harris contributed as a down payment on the land contract, the trial court determined the value of the investment as $159,000 -- the amount of money which Timothy Warner testified that it would have cost Harris to purchase an equivalent tax shelter investment. Because Harris had already received $150,000 in sale and fire insurance proceeds, the trial court awarded Harris $9,000 for the diminution in the value of his investment.

Harris appealed the judgment. The court of appeals affirmed. In its opinion, the court concluded that Harris was seeking recovery of expenditures made in reliance upon the performance of the lease and thus, under 5 Corbin, Contracts sec. 1033 (1964), it was proper to consider whether Harris' expenditures were prudent. The court of appeals determined that the trial court could have appropriately found that only an expenditure of $159,000 would have been prudent.

The first issue on review is whether land contract and lease should be construed as one document.

The trial court concluded that the documents should be construed together. This decision is in accord with well-settled principles of law. As this court wrote in Wipfli v. Bever, 37 Wis. 2d 324, 326, 155 N.W.2d 71 (1967), "The general rule is that instruments executed at the same time between the same contracting parties in the course of the same transaction will be construed together."

Here, there is no reason to deviate from the application of the general rule. Although neither agreement referred to the other, from the record it is clear that neither agreement would have been executed without the other being executed. This was one transaction and ...

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