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AEP Industries, Inc. v. B.G. Properties, Inc.

Supreme Court of Kentucky

September 28, 2017

AEP INDUSTRIES, INC. APPELLANT
v.
B.G. PROPERTIES, INC. APPELLEE

         ON REVIEW FROM COURT OF APPEALS CASE NO. 2Q13-CA-000132 WARREN CIRCUIT COURT NO. 12-CI-00467

          COUNSEL FOR APPELLANT: Glenn Alan Cohen Seiller Waterman, LLC, Paul Joseph Hershberg Gray White, Jason Conti Foley & Lardner, LLP.

          COUNSEL FOR APPELLEE: David W. Anderson Michael Scott Vitale English, Lucas, Priest & Owsley, LLP.

          OPINION

          VENTERS JUSTICE.

         AEP Industries, Inc. (AEP) appeals from an opinion of the Court of Appeals which vacated a final order of the Warren Circuit Court granting AEP's motion for specific performance of a real estate option contract between AEP and B.G. Properties, Inc. (BG). The Court of Appeals held that the circuit court granted specific performance of the option contract prematurely because disputed issues of fact material to that form of relief had been left unresolved in the circuit court. The Court of Appeals remanded the matter for resolution of those issues. We granted discretionary review, and upon review we vacate the opinion of the Court of Appeals and remand the action to the trial court with direction to dismiss any remaining claims.

         I. FACTUAL AND PROCEDURAL BACKGROUND

         BG and its predecessor in interest owned an industrial building located on a 19.7-acre tract in Bowling Green, Kentucky. The building had been used for manufacturing flexible plastic packing products and contained features uniquely suited to that purpose. AEP leased the property from BG for use in its business of manufacturing flexible plastic packaging. AEP and BG were mutually obligated under several agreements concerning the property. Those agreements provided AEP with an option to purchase the property.[1]

         The specific terms of the purchase option are provided in two documents: the "Consent to Assignment of Lease and Grant of Option to Purchase" made in 2001 and the "Agreement Modifying Sublease and Option" made in 2010. These two documents collectively provide the terms of AEP's option to purchase the property. We refer to those documents together as the "Option Agreement" or "the Agreement."

         The Option Agreement expressly provided the following four-stage process for ascertaining the purchase price if AEP decided to exercise its purchase option. First, the parties would attempt to negotiate a fair purchase price. Second, if the negotiation failed to achieve a mutually agreeable price, then BG would deliver to AEP an appraisal of the property by a qualified professional appraiser[2] with the appraisal subject to special requirements as further described below. Third, if AEP declined to purchase at BG's appraised value, then AEP would obtain its own qualified appraisal and submit it to BG. Fourth, and finally, if BG rejected AEP's appraised value, then AEP's appraiser and BG's appraiser would together select a third appraiser whose independent valuation of the property would become the final purchase price.

         The Option Agreement included two other terms that are significant in our review: 1) every appraisal of the property undertaken to determine the purchase price would ascertain "the fair market value based on its highest and best use, plus the value of all special features and fixtures located therein for AEP's use as an extrusion and flexible packaging manufacturing facility;" and 2) the Agreement granted AEP seven days after the final determination of the purchase price under stage four to withdraw the exercise of its option to purchase the property.

         In August 2011, AEP informed BG that it intended to exercise the option to purchase the property, thereby triggering the four-stage process for determining the price. The initial attempt to negotiate a purchase price was unsuccessful. BG then obtained an appraisal by Brantley Appraisal Company, which valued the property at $7, 500, 000. AEP rejected that price, and as required by the Option Agreement, AEP then obtained its own appraiser, selecting CBRE, which valued the property at $3, 550, 000.

         BG rejected CBRE's valuation. AEP then attempted to initiate the final stage of the process, the selection of the third appraiser, but BG refused to cooperate. BG claimed that AEP did not properly comply with the third stage of the pricing process because the CBRE appraisal tendered by AEP did not meet the special conditions of the Option Agreement for a value based upon "the highest and best use of the property" and for the inclusion of the "special features and fixtures located therein for AEP's use as an extrusion and flexible packaging manufacturing facility." Accordingly, BG insisted that before moving to the fourth stage of the pricing process, AEP was obligated first to submit an appraisal that complied with the special conditions of the Option Agreement.

         Instead of acceding to BG's demand to submit a different appraisal, AEP filed an action in the Warren Circuit Court alleging that BG was in breach of the Option Agreement for failing to proceed with the selection of the third appraiser. AEP sought a court order compelling BG to participate in the appointment of a third appraiser.

         BG responded to the suit with an answer and counterclaim. BG invoked the well-settled equitable principle that specific performance of a contract will only be granted when the party seeking the specific performance has itself complied with all terms of the contract. To be granted specific performance of an agreement for the sale of real property, all conditions precedent to the sale must have been complied with by the party seeking such specific performance.[3] BG asserted that AEP's failure to submit a proper appraisal at the third stage of the pricing process was a breach of the Option Agreement by AEP that barred its claim for specific performance. BG also claimed that in addition to the disagreement about the CBRE appraisal, AEP had also breached the provision of the lease agreement requiring it to keep the roof of the building in good repair. BG contended that the appraisals used to determine the purchase price should not be discounted by the deteriorated condition of the roof that AEP had failed to maintain.

         Eventually, upon motions for summary judgment, the circuit court determined that CBRE's appraisal complied with the conditions of the Option Agreement. The court directed BG to proceed with the fourth stage of the, appraisal process, the selection of the third and final appraiser. The circuit court fixed a deadline for obtaining that appraisal and held the remainder of the action in abeyance pending its completion. In compliance with the circuit court's order, BG and AEP selected G. Herbert Pritchett as the third appraiser. Pritchett valued the property at $3, 834, 000.

         AEP was satisfied with that price, but BG refused to transfer the property, claiming that Pritchett's appraisal suffered the same deficiency as CBRE's appraisal: it failed to account for "the highest and best use of the property" as defined in the Option Agreement and it failed to factor in the special features that made the property uniquely suited to AEP's manufacturing process, as set forth in the Option Agreement. BG also complained that Pritchett's appraisal unfairly diminished the value of the property due to the poor condition of the roof that AEP had failed to maintain.

         AEP then moved the circuit court for an order compelling specific performance of the Option Agreement by directing BG to convey the property at Pritchett's appraised value of $3, 834, 000. In addition, AEP demanded a credit against the purchase price of $407, 987.37 for the additional rent payments it had incurred under the lease due to BG's failure to voluntarily cooperate in the selection of the third appraiser in a timely manner.[4] BG responded by reiterating its position that AEP had initially breached the agreement by failing to tender a qualifying appraisal and for that reason it could not demand specific performance of the very contract it had breached.

         By order dated December 19, 2012, the circuit court rejected BG's arguments. It determined that Pritchett's appraisal of the fair market value of property at $3, 834, 000 properly accounted for the site's "special features and fixtures" and was consistent with the terms of the Option Agreement and that court's previous order. The circuit court also concluded that the Pritchett appraisal properly accounted for the "roof issue" and, therefore, no variance <. from the appraised value was required to accommodate that concern. The circuit court also granted AEP's demand for a credit for the additional rental payments incurred due to BG's delaying the transfer of the property during the dispute. The December 19, 2012 order directed BG to convey the property to AEP for the ...


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