Fair Market Value Is Determined at Time Testamentary Purchase Option Is Exercised
On January 10, 2024, the Iowa Court of Appeals affirmed the district court’s determination of when to value farmland that was subject to a testamentary purchase option. The doctrine of equitable conversion applies to testamentary purchase options, and equitable title passes when the buyer notifies the sellers they will exercise their option. Further, rent payments made by buyer were credited towards the purchase price when the parties could not agree upon a sales price for over two years.
Facts
Eugene and Mildred Binneboese had six children. One of those children, James, was a farmer. In their wills, Eugene and Mildred devised approximately 400 acres of farmland to their six children as tenants-in-common. They also gave James a purchase option that expired five years after the death of the last surviving parent. The option required James to pay “fair market value” for any farm real estate he chose to purchase. The purchase option also allowed James to make payments pursuant to a five-year real estate contract . Eugene died in 1998 and Mildred died in 2016.
In July 2020, James sent a letter to each of his siblings informing them that he was exercising his purchase option. The letter acknowledged that all parties involved need to decide how fair market value would be determined. In December 2020, the five siblings obtained an appraisal that valued the land at $11,486.48 per acre. James offered to pay $9,200 per acre. There were more negotiations, but no agreement. In April 2021, the five siblings obtained another appraisal which valued the land at that time at $12,435 per acre. James rejected that valuation, stating that he was obligated to pay fair market value as of July 2020, not April 2021. During this time James rented the farm ground and paid rent to the siblings.
In August 2021, the five siblings petitioned the district court for a declaratory judgment. They wanted the court to do three things: (1) establish James had exercised his option, (2) determine the purchase option terms and fair market value for the farm land, and (3) require James to perform. Five weeks before trial the five siblings moved to amend their petition. In the amended petition, they wanted the court to void the option under two different legal theories. The district court denied the motion because there would be significant prejudice to James if the court allowed the amendment.
After disallowing the amendment, both James and the siblings moved for summary judgment. In its ruling, the district court determined that equitable title passed in July 2020 when James notified his siblings that he was exercising the option. Therefore, fair market value needed to be determined at that time. The court then set the fair market value at $10,383.50 per acre. The court also found that rent payments should be credited against the purchase price. Finally, the court ordered a warranty deed should be executed by the siblings and their spouses.
The five siblings appealed. They argued the district court should have let them amend their petition five weeks before trial. They also argued the court erred when it determined that equitable title passed when the option was invoked. Finally, the argued the court erred when it credited rent payments paid by James towards the purchase price and ordered spouses to sign the deed.
Opinion
The Court of Appeals affirmed the district court’s decision to deny the siblings’ request to amend the petition. The court found that the initial petition sought specific performance of the option, but the desired amendment argued the purchase option was unenforceable. Allowing the amendment would have “substantially transformed” the issues and put James at a severe disadvantage since the trial date was five weeks away. Therefore, the court’s denial of the siblings’ request was reasonable.
The court then addressed whether the district court properly applied the doctrine of equitable conversion. The doctrine of equitable conversion was not discussed in detail. Equitable conversion is a legal principle in property law that establishes “when a contract is made, the buyer acquires equitable title to the property, and the seller retains legal title.”[i] The siblings argued equitable title would pass on the execution date of the real estate contract, not when James informed them he wished to exercise his option. The Court of Appeals cited to a 1917 case establishing that equitable conversion occurs when a buyer formally exercises their purchase option. In this instance, that occurred in July 2020 when James informed his siblings that he would purchase the farm ground. Therefore, the correct valuation date for the farm land is July 2020 and not the execution date of the real estate contract.
The Court of Appeals affirmed the district court’s decision to credit the 2021 and 2022 rent payments towards the purchase price. James was forced to make rent payment in order to not be evicted. The court stated that the siblings “should have predicted the payments would be part of the court’s calculus in granting equitable relief[,]” and “[i]t would make no sense for a court . . . to deny James credit for rent he paid after the court decided James was the equitable owner as of July 2020.”
Finally, the court remanded the case back to district court to address the issue of marketable title. The siblings argued that their spouses could not be ordered to sign a warranty deed because they were not named in the lawsuit or served notice, and therefore the district court lacked jurisdiction. The court of appeals agreed and remanded the case back to district court.
[i] CONVERSION, Black's Law Dictionary (11th ed. 2019).