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Headstart Building, LLC v. National Centers for Learning Excellence, Inc.

Court of Appeals of Wisconsin, District II

November 8, 2017

Headstart Building, LLC, Plaintiff-Respondent-Cross-Appellant,
v.
National Centers for Learning Excellence, Inc. f/k/a Waukesha County Project Headstart Inc., Defendant-Appellant-Cross-Respondent.

         APPEAL from an order of the circuit court No. 2013CV1221 for Waukesha County: PATRICK C. HAUGHNEY, Judge. Reversed and cause remanded with directions.

          Before Neubauer, C.J., Reilly, P.J., and Hagedorn, J.

          HAGEDORN, J.

         ¶1 This dispute arises out of an option-to-purchase provision in a lease between Headstart Building, LLC (Headstart), the lessor, and National Centers for Learning Excellence, Inc. (National), the lessee. In the event the option was exercised, the purchase price was to be based on the fair market value reflected in appraisals of the property. Specifically, the agreement required each party to commission an appraisal, and the purchase price would be determined by a formula based on the average of the two appraisals so long as they were within five percent of one another. If the difference was greater than five percent, the agreement called for the two appraisers to collectively choose a third individual to conduct an independent appraisal. That "Appraised Value, " according to the agreement, became the contractually binding purchase price on which the formula was based.

         ¶2 This case comes before our court because National attempted to exercise its option, and the two appraisers were nowhere close to each other-in large part because they appraised different interests. Headstart's appraiser considered the terms of National's lease and estimated the value of the leased fee interest in the property. National's appraiser considered the value of the property without the current lease-a fee simple interest. No third appraisal was conducted as specified in the agreement. Instead, Headstart filed suit seeking to compel National to purchase the property at the price determined by Headstart's appraiser. National responded with a counterclaim seeking a declaratory judgment to resolve whether the appraisals should be based on the leased fee interest or fee simple interest.

         ¶3 Following a trial, the circuit court dismissed Headstart's claims-its ruling partially resting on the conclusion that there was no meeting of the minds regarding the proper appraisal methodology. Following supplemental briefing, the court reaffirmed its conclusion that there was no meeting of the minds and declared the option itself void. Therefore, the court determined that a declaratory judgment ruling regarding the proper appraisal methodology was unnecessary, and it dismissed National's counterclaim. National appeals from the circuit court's order declaring the option void.

         ¶4 The sole issue on appeal is whether the option is enforceable. Because the option specified a method to determine the purchase price with reasonable certainty, we conclude that the circuit court erred by declaring the option void and remand for consideration of National's now resurrected and unaddressed counterclaim for declaratory judgment on the proper interpretation of the option agreement. BACKGROUND

         ¶5 Headstart owns real property in Waukesha; it leased that property to National in an agreement signed by the parties on April 20, 2002.[1] Section 19(a) of the lease provides that National "shall have the option to purchase ... the Premises at any time during" the lease. Exhibit B of the lease agreement provides the means to determine the purchase price should the option be exercised.

         ¶6 According to Exhibit B, the purchase price will be the "Appraised Value" multiplied by a percentage depending on the year of the lease. If the option were exercised in the first five years of the lease, the price would be higher than the "Appraised Value."[2] Thereafter, the purchase price would be simply the "Appraised Value." The exhibit defines "Appraised Value" as follows:

In the event Tenant shall elect to exercise Tenant's option to purchase the Premises, Landlord and Tenant shall each choose an appraiser to appraise the Premises which appraisals must be completed within forty five (45) days of the date Tenant notifies Landlord that it intends to exercise its option to purchase. In the event the fair market value of the Premises in the two appraisals differs by no more than five percent (5%), the Appraised Value shall be the average of the two appraisals. In the event the appraised value of the Premises in the two appraisals differs by more than five (5%) percent, the two appraisers shall agree upon a third appraiser and the result of such third appraisal shall be the Appraised Value.

         In December 2012, National sent a letter to Headstart indicating its intent to exercise the option.

         ¶7 Pursuant to the terms of the option, the parties commissioned their respective appraisals. Headstart's appraisal assessed the value of the leased fee interest, meaning that the appraisal included the value of the specific terms of National's lease on the property. This appraisal valued the property at $6, 880, 000. National offered its own commissioned appraisal-one which considered the fair market rental value of the property rather than the value of National's existing lease. National's appraiser determined the value of the fee simple interest was $4, 075, 000. The predominant reason for this significant difference was the divergent valuation methods used.[3]

         ¶8 After receiving National's appraisal, Headstart responded with a letter on March 7, 2013, asserting that the appraisal was "hopelessly defective" and purported to give National an ultimatum: obtain a new appraisal assessing the leased fee interest or National must purchase the property at Headstart's chosen price of $6.88 million. National responded with a letter on March 18 "withdrawing" its offer to purchase the property. The parties agree that the two appraisers never chose a third appraiser to resolve the conflict.

         ¶9 Following this, Headstart filed a complaint requesting specific performance of the option (at its appraised price of $6.88 million) and damages based on National's alleged breach of the option and bad faith. National filed a counterclaim for a declaratory judgment, averring that "because the Lease and Option do not state the method of appraisal, the Court needs to declare the method of appraisal so that the parties know their rights and responsibilities going forward."

         ¶10 During a two-day bench trial, the circuit court received the testimony of multiple witnesses, including the appraisers. The trial and associated briefing centered on two questions: whether National breached the option agreement and whether the appraisers should take the existing lease into account or not. Following trial, the court dismissed all of Headstart's claims, concluding that National did not breach the option. The court first rejected Headstart's bad faith claim because it found that National did not attempt to rig the appraisal or do anything "underhanded." The court also rejected Headstart's claim for specific performance because the prescribed process in the option-a third appraisal-was not followed. The court further suggested it was rejecting Headstart's claim on the grounds that there was no meeting of the minds regarding the proper appraisal methodology.

         ¶11 At the conclusion of the court's oral ruling from the bench, the parties pressed the court for the implications of the decision on National's declaratory judgment claim, which had not yet been addressed. Following a brief debate between the parties, the court delayed ruling on the declaratory judgment and asked the parties to submit supplemental briefing. Following the briefing, the court reiterated its conclusion that there was no meeting of the minds regarding the option agreement, and thus the option itself was stricken from the lease. Hence, the court found that any decision regarding the proper appraisal methodology was "unnecessary" because the option was no longer enforceable. The court therefore declined to issue declaratory relief regarding the meaning of the option and entered an order declaring that the ...


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