Iowa Court Appeals Interprets a Family Settlement Agreement

Overview

The Iowa Court of Appeals recently had the opportunity to interpret a family settlement agreement. Determining that the agreement was unambiguous, the court affirmed the district court’s interpretation.

Facts

The parents of the parties transferred their farmland by warranty deed to their three daughters as tenants in common. They retained a life estate for themselves.  At the time they executed the deed in 1992, the parents and their daughters and the daughters’ husbands executed a family settlement agreement under which the parties agreed that one daughter would have the first option to purchase the farm at the death of her parents if they died simultaneously, or upon the death of the surviving parent.  Indeed, the settlement agreement specifically stated,  “It is the desire of all parties that [the daughter] shall have the first option to purchase said real estate in the event of the death of her parents or upon the death of the survivor of them.”

The agreement specified that if the option was exercised, the purchase price was to be the fair market value and that the sisters were to each be paid one-third of that fair market value price.  The agreement also provided, “It is agreed that [the daughter] shall have the right to purchase the same on a real estate contract, calling for an initial down payment of 10 percent of the purchase price, with installments equal to five percent of the purchase price to be paid each year for a period of seven years, plus interest.” The contract went on to state that a balloon payment would be due at the end of the seven-year period. It also stated that if there was a substantial increase in the fair market value of the property (which was defined as the land being valued in excess of  $1,400 per acre), the daughter would have the same option to purchase the property at 75 percent of market value.

The last parent died in 2012 when the fair market value of the property far exceeded $1,400. The daughter sent a letter to her siblings stating that she wanted to exercise her option to purchase the farmland. The letter stated that the daughter intended to purchase the property with a lump sum payment, rather than under an installment contract. She obtained an appraisal valuing the property at $1.7 million.

One of the other two sisters objected, arguing that the family settlement agreement required the daughter to purchase the property through a contract payable over seven years. The sister also offered an appraisal valuing the property at $1.95 million.

The daughter exercising her option filed a petition for a declaratory judgment asking the court to determine whether she could purchase the property with a lump sum payment. She also asked the court to determine the fair market value of the property.

The district court found that the terms of the family settlement agreement were clear and unambiguous.  Although the agreement gave the daughter the right to buy the farm under an installment agreement, it did not require her to do so. The court found that the daughter had properly executed her right to purchase under the agreement and that the fair market value of the property was $1.83 million (the average of the two appraisals).

Iowa Court of Appeals

The other sister appealed, and the Iowa Court of Appeals affirmed. The court agreed that the language of the family settlement agreement was “very clear and unambiguous.” The court found that the district court properly ruled that the agreement gave the daughter the right to purchase the farm on a contract for deed but that it “certainly” did not require her to do so. The daughter’s letter had been a proper exercise of her option to purchase.

Conclusion

This case demonstrates the necessity to thoroughly discuss the consequences of property transfers at the time documents are drafted. Many interpersonal consequences, however, cannot be predicted. When one child is favored over others, there is often the possibility of bad feelings by the unfavored child or children. Here, the sister protesting the option could have been frustrated that she would not be able to spread out her income stream over a period of seven years or she could have been frustrated that her sister was receiving a favorable land deal at her expense. Hindsight is 20/20, but in this case simply rephrasing the settlement agreement language to state, “It is agreed that she shall have the right, but is not required, to purchase the same on real estate contract…” would have gone a long way to avoiding litigation.