Long-Term Lease Allowed on Exercised Real Estate Option

November 21, 2023 | Jennifer Harrington

On October 25, 2023, the Iowa Court of Appeals upheld the district court’s summary judgment ruling in a family transaction involving a long-term farm lease and purchase option. Thomas, the son, sued his parents arguing that they breached the purchase option when they entered into a twenty-year lease after executing the purchase option but before the purchase option was exercised. The court found there was no breach. The purchase option merged with the deed upon acceptance of the deed which expressly noted the existence of the lease.


In 2007, Plaintiff Thomas and his parents entered into a real estate option contract under which Thomas could purchase from his parents 70 acres of farmland any time prior to Thomas’s parents’ death or within six months after their death. In 2014, Thomas’s parents entered into a twenty-year farm lease on the same 70 acres with Thomas’s brother. The lease was recorded. The rent in the lease was $150.00 per acre for all row crop acres and $40.00 per acre for those acres in grassed hay or pasture. This was significantly below market rate.

In 2016, Thomas was court-ordered to exercise the option as part of a divorce proceeding. In September 2017, Thomas’s parents conveyed the land by special warranty deed. The deed included a provision that stated the real estate was subject to the twenty-year lease.

In 2018, Thomas sued his parents arguing breach of the option contract and unjust enrichment. He argued that the purchase option had an implied term disallowing encumbrances on the land due to the implied covenant of good faith and fair dealing. The long-term lease was a violation of the implied covenant. He also argued that the farm lease unjustly enriched his parents. He argued the lease diminished the land value so much that he was unable to sell the land at market value.

After his father died, Thomas’s mother moved for summary judgment. The district court dismissed the lawsuit, finding that the purchase option merged with the deed and that there was no provision within the purchase option that promised the land would be unencumbered. Therefore, the court found that there was no breach. It also found that the existence of the written contract precluded Thomas’s claim of unjust enrichment. Thomas appealed. 


The court of appeals affirmed the district court, explaining that merger of a contract into a deed is presumed, but that certain exceptions exist. Although Thomas argued that the implied term requiring clear title was a collateral agreement to the purchase option, the court was not convinced. The specific reference to the lease in the deed proved that the implied term was not a collateral agreement. The court thus found that Thomas waived any right to clear title when he accepted and recorded the deed.

The court emphasized that although Thomas was ordered to exercise the option as part of the divorce proceeding, he was not ordered to accept any deed that was presented. He should have sought specific performance of the purchase option if the deed did not conform to the terms found in the purchase agreement.

Finally, the court ruled that Thomas could not claim unjust enrichment since the deed, which expressly acknowledged the lease, was made to fulfill a written contract. There was no inequity in holding Thomas “to the terms of the deed he agreed to accept.”