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FIFTH DIVISION

December 11, 1998

No. 1-98-0747

JUSTICE GREIMAN delivered the opinion of the court:

Plaintiff Edward F. Napleton sought a declaratory judgment establishing his rights regardinganoption to purchase certain real estate that he leased from defendant Ray Buick, Inc. The circuitcourt granted summary judgment in plaintiff's favor, determining that plaintiff properly exercisedthe option and that the lease and any unexercised options to extend the lease must be consideredin applying the formula to establish the purchase price of the real estate. Defendant nowappeals.

For the reasons that follow, we affirm.

On November 26, 1996, plaintiff filed a declaratory judgment action alleging that in July1975defendant owned certain real property commonly known as 6550 West 95th Street in Oak Lawn. Plaintiff alleged that defendant leased the property to LaSalle National Bank, as trustee, and thatthe lease contained an option to purchase at any time after the tenth lease year upon the lesseegiving 90 days' prior written notice of its election to exercise the option. Plaintiff alleged thatunder the lease, if the lessee elected to purchase the property, the purchase price would be theappraised value of the property exclusive of the value of certain improvements as determined byappraisers selected and qualified pursuant to the lease.

The complaint further alleged that plaintiff purchased the leasehold interest in the propertyandon September 25, 1996, plaintiff sent a letter notifying defendant that he exercised the option topurchase. Plaintiff also notified defendant that he had appointed an appraiser for the purposes ofdetermining the purchase price. Plaintiff alleged that defendant failed to appoint an appraiserwithin a reasonable time.

In count I, plaintiff asked the court to declare that defendant waived its right to appoint anappraiser, and in count II, plaintiff asked the court to declare that defendant is estopped fromappointing an appraiser. In count III, plaintiff alleged that defendant agreed to sell the real estateto plaintiff for the "appraised value," which plaintiff alleged was the fair market value of the realestate, "including all encumbrances." Plaintiff asked the court to declare that the fair marketvalue should take into account the ground lease and all other encumbrances.

The ground lease agreement contains the following relevant provisions:

"ARTICLE I

DEMISED PREMISES

***

The Land together with the rights, privileges and easements thereuntobelonging or inanywise thereunto appertaining, is hereinafter collectively referred to as the 'DemisedPremises'.

***

ARTICLE II

PRIMARY TERM AND RENEWAL TERMS

***

Section 3. Lessee shall have three (3) options to extend theprimary term for threesuccessive periods of five (5) years each; each of which said options to extend shall beexercised by Lessee giving to Lessor written notice of Lessee's election so to do not lessthan one hundred eighty (180) calendar days prior to the expiration of the primary term, orthe then current renewal term, as the case may be. All provisions of this lease applicable tothe primary term shall apply to each of the renewal terms.

***

ARTICLE IV

BASIC RENT

Section 1. Lessee covenants and agrees to pay Lessor ***installments of rent (hereinaftercalled 'Basic Rent') as follows:

***

C. During each lease year of each of the following 5-yearperiods, [after the initial tenyears,] *** Lessee shall pay to Lessor annual rent, in an amount equal to Ten percent(10%) of the appraised value of the Demised Premises (exclusive of the value of allImprovements) determined immediately prior to the commencement of each such 5-yearperiod in accordance with the provisions of Section 2 of this Article IV ***.

***

Section 2. The appraised value of the Demised Premises shallbe determined jointly by anappraiser appointed by Lessor and an appraiser appointed by Lessee. Said appraisers shallbe appointed by Lessor and Lessee respectively not less than one hundred twenty (120)days prior to the date upon which the next basic rent adjustment is to become effective.

***

ARTICLE XIII

OPTION TO PURCHASE

Section 1. Lessee shall have, and Lessor hereby gives andgrants to Lessee, the right andoption to purchase the Demised Premises at any time after the tenth lease year, by giving toLessor ninety (90) days prior written notice of Lessee's election so to do. If Lessee shallelect to purchase the Demised Premises as aforesaid, the purchase price of the DemisedPremises (exclusive of the value of the Improvements) shall be determined by the jointappraisal of appraisers selected and qualified as in Section 2 of Article IV provided withrespect to determination of the adjusted Basic Rent, or by a sole appraiser likewise selectedand qualified as in Section 2 of Article IV provided.

Section 2. The purchase and sale of the Demised Premisesshall be consummated withinthe sixty (60) days next following the date of determination of the purchase price, by thedelivery of Lessor's deed and the payment by Lessee of the purchase price. Title to theDemised Premises shall be conveyed to Lessee (or the nominee designated by Lessee inwritten notice to Lessor) by a good and sufficient general warranty deed, subject to nomatters other than those to which the Demised Premises was subject at the time ofcommencement of the term of the Lease, then current general real estate taxes, andinstallments of special assessments levied or assessed after the date of commencement ofthe term of this Lease and to matters done or suffered to be done by Lessee or thoseclaiming by, through or under Lessee.

***

ARTICLE XXVI

MISCELLANEOUS

***

Section 4. If the Lessee shall acquire and become the ownerof the fee simple title andestate in and to the Land and the premises leased and let to Lessee pursuant to theprovisions of this Lease, there shall be no merger of the leasehold estate in and with the feesimple title and this Lease and the leasehold created hereby shall continue in full force andeffect until Lessee shall have filed for record in the Office of the Recorder of Deeds awritten instrument duly executed by Lessee, reciting that Lessee has acquired the feesimple title in and to the Land and the premises leased and let pursuant to this Lease, anddeclaring that Lessee has elected that the leasehold estate created by this Lease be and thesame is, effective upon the filing of such written instrument, merged in the fee simple titleto the Land and that this Lease is thereupon null and void of no further force or effect."

The September 25 letter to defendant stated: "This letter shall constitute notice, pursuant toArticle 13, Section 1 of the Lease, that [plaintiff] is hereby exercising his option to purchase theDemised Premises." The letter further identified an individual plaintiff appointed as an appraiserfor the purpose of determining the purchase price.

Defendant moved to dismiss the complaint pursuant to section 2--619 of the Code of CivilProcedure (735 ILCS 5/2--619 (West 1996)). Defendant alleged that the claim was barredbecause plaintiff failed to properly exercise the option to purchase the property. An affidavitattached to the motion by Ray L. Gieselmann, president of Ray Buick, Inc., stated that defendantfirst received notice regarding the option to purchase the leased property dated September 25,1996. However, defendant received no other written communication regarding the option topurchase prior to the date plaintiff filed this suit.

On April 23, 1997, the court entered an order finding that plaintiff properly exercised theoptionto purchase the property. The court dismissed counts I and II, finding that there was no actualcontroversy alleged in those counts.

Defendant then filed its answer as to count III and both parties moved for summaryjudgment. Defendant attached several affidavits suggesting that the contracting parties actually intendedthatthe lease not be included in the consideration of the purchase price. The circuit court grantedsummary judgment in favor of plaintiff, declaring that the purchase price must take into accountthe ground lease and all other encumbrances on the property. Defendant moved to vacate ormodify the judgment order. The court denied defendant's requests, but made a slightmodification to the order.

Defendant appealed from the orders ruling on its motion to dismiss "insofar as [they] heldthatPlaintiff *** properly exercised the option to purchase the premises *** and denied Defendant'sMotion to Dismiss Count III of Plaintiff's Complaint." Defendant also appealed from the ordergranting summary judgment to plaintiff and the orders denying defendant's motions to vacate ormodify. Defendant asks this court to reverse the denial of his motion to dismiss count III or, inthe alternative, reverse the order granting summary judgment to plaintiff and rule that the groundlease and options to renew not be included when determining the purchase price.

Defendant first argues that the circuit court erred in failing to dismiss all three of the countsof thecomplaint pursuant to a section 2--619 motion (735 ILCS 5/2--619 (West 1996)) becauseplaintifffailed to properly exercise the option to purchase the real estate. Plaintiff contends that this courtlacks jurisdiction to consider this question because the orders that defendant contests wereactually entered in its favor. The circuit court found that plaintiff properly exercised the optionand granted the motion to dismiss counts I and II. The court denied defendant's motion todismiss count III. Defendant contends this court may review this issue because it appealed fromthe orders insofar as they held that plaintiff properly exercised the option to purchase thepremises and denied defendant's motion to dismiss count III. We need not resolve this dispute,however, because we hold that even if we review this issue, there is no basis for reversal.

The lease agreement provided that the lessee had an option to purchase "the DemisedPremises atany time after the tenth lease year, by giving to Lessor ninety (90) days prior written notice ofLessee's election so to do." On September 25, 1996, plaintiff's attorney sent a letter to defendantadvising that plaintiff was the lessee and stating that the letter "shall constitute notice, pursuant toArticle 13, Section 1 of the Lease, that [plaintiff] is hereby exercising his option to purchase theDemised Premises."

Defendant admits receiving the letter, but contends plaintiff did not properly exercise theoptionby sending this letter because defendant did not receive any further written communication fromplaintiff until the lawsuit was filed, which was before 90 days had passed. Defendant remindsthecourt that an option to purchase "must be exercised in strict accordance with its terms." Chapman v. Brokaw, 225 Ill. App. 3d 662, 666 (1992), citing Department ofPublic Works &Buildings v. Halls, 35 Ill. 2d 283 (1966).

We agree with the circuit court that plaintiff properly exercised the option. The leaseagreementonly required that plaintiff give 90 days' notice. Plaintiff sent a letter indicating such notice andappointing an appraiser. Plaintiff then proceeded as if the purchase would be completed within90 days. When defendant did not appoint its appraiser, plaintiff filed suit for a declaratoryjudgment. Defendant never received a letter revoking or otherwise striking the expression ofintent to purchase the real estate and when 90 days arrived on December 24, 1996, plaintiffcontinued to proceed with the intent to purchase the property. We see no violation of the option'sterms.

Defendant next argues that the circuit court erred in granting summary judgment in favor ofplaintiff on the issues regarding the calculation of the purchase price of the real estate. Defendantmaintains that neither the ground lease nor the extensions to that lease should be consideredwhenthe appraisers calculate the purchase price. Plaintiff contends, however, that these items areencumbrances on the property that must be considered.

In reviewing a motion for summary judgment, the court determines whether the movant isentitled to judgment as a matter of law. Outboard Marine Corp. v. Liberty MutualInsuranceCo., 154 Ill. 2d 90, 102 (1992). This court reviews such matters de novo. Outboard Marine, 154Ill. 2d at 102.

Defendant maintains that under Illinois law the lease was extinguished when plaintiffexercisedthe option to purchase and therefore it cannot be an encumbrance on the property and should notbe considered in calculating the purchase price.

In Cities Service Oil Co. v. Viering, 404 Ill. 538, 540 (1949), the plaintiffalleged that thedefendant leased property to the plaintiff with an option of purchasing the property at any timeduring the term of the lease. The plaintiff exercised the option, but the defendant refused toconvey the property. Cities, 404 Ill. at 540-41. The trial court entered a decree forthe plaintiff. Cities, 404 Ill. at 543. The defendant objected in part because the decree did notrequire paymentof rent from the plaintiff until the date of delivery of the deed and payment of the purchase price. This court stated:

"Where the relation of landlord and tenant exists under the terms of awritten lease,containing an option to purchase which the lessee exercises, he is no longer in possessionas a tenant, but his possession is that of a vendee. [Citations.] The lessor is not entitled torent after the option to purchase is exercised unless there is in the lease an expressstipulation therefor. [Citation.] The exercise of the option extinguishes the lease andterminates the relation of landlord and tenant. The lease and all its incidents, express andimplied, are blotted out of existence, and the relation of vendor and vendeecreated."(Emphasis added.) Cities, 404 Ill. at 554.

The Cities court determined that when the plaintiff exercised its option topurchase by noticeserved on the defendant, a complete and absolute contract was created binding upon the plaintiffto buy and the defendant to sell, thereby vesting the equitable ownership of the property in theplaintiff. The relation of landlord and tenant then ceased to exist. Cities, 404 Ill. at555.

In Artful Dodger Pub, Inc. v. Koch, 230 Ill. App. 3d 806 (1992), a tenantexercised an option topurchase leased property. On cross-appeal, plaintiff argued that the trial court erred in denyingits motion for replevin of all rents which defendant collected since the time it exercised theoption. Artful Dodger, 230 Ill. App. 3d at 811. The court stated:

"Upon exercise of the option, the former relationship of lessor and lesseeterminates and theparties occupy the relationship of vendor and vendee. [Citation.] Thereafter, the land isregarded, in equity, as the property of the vendee subject to the rights of the vendor underthe contract, and the lessor is not entitled to rent thereafter unless the lease expressly soprovides." Artful Dodger, 230 Ill. App. 3d at 811.

The court concluded that the plaintiff was entitled to an accounting and replevin. Artful Dodger,230 Ill. App. 3d at 811.

There are two essential distinctions between this line of cases and the case at hand. First, thecases allow for an exception to the rule that the lease terminates when a tenant exercises anoption to purchase if the contract provides otherwise. See Cities, 404 Ill. at 554(lessor notentitled to rent after exercise of option "unless there is in the lease an express stipulationtherefor"); Artful Dodger, 230 Ill. App. 3d at 811 (lessor not entitled to rent afterexercise ofoption "unless the lease expressly so provides").

In the instant case, the contract specifically states that the lease shall continue after thepurchase. Article XXVI, section 4 of the lease agreement provides that, if the lessee acquires and becomesthe owner of the fee simple title to the land:

"[T]here shall be no merger of the leasehold estate in and with the feesimple title and thisLease and the leasehold created hereby shall continue in full force and effect until Lesseeshall have filed for record in the Office of the Recorder of Deeds a written instrument dulyexecuted by Lessee, reciting that Lessee has acquired the fee simple title in and to the Landand the premises leased and let pursuant to this Lease, and declaring that Lessee has electedthat the leasehold estate created by this Lease be and the same is, effective upon the filingof such written instrument, merged in the fee simple title to the Land and that this Lease isthereupon null and void of no further force or effect." (Emphasis added.)

Secondly, the cases cited are recognizing a change in the relationship of the parties based onequitable principles for the purposes of determining the obligation to pay rent. This case doesnotinvolve a question of rent obligations and plaintiff does not argue that his lessor/lesseerelationship with defendant is continuing. We do not find these cases controlling as to thequestion of whether the lease and its options to renew are considered in the appraised value of theproperty when a tenant exercises an option to purchase.

Defendant also contends that the doctrine of merger applies to merge the leasehold with thefeeestate when plaintiff exercised the option to purchase. In Hooper v. Goldstein, 336Ill. 125(1929), the supreme court stated:

"A merger takes place when a greater estate and a lesser meet in one and thesame person,in one and the same right, without any intermediate estate. The lesser estate therebymerges in the greater. But a merger is not a necessary result of the union of the two estatesin the same person. The intention and interest of the party who unites the two estates inhimself will determine whether or not a merger takes place." Hooper, 336 Ill. at132.

Defendant contends that this flexible application of the doctrine of merger was supersededby theruling in Cities in which the court stated that the lease is extinguished when thelessee exercisesan option to purchase. We note that Cities did not address the application of themerger doctrine. That case addressed the obligation to pay rent after the option to purchase had been exercised. Further, case law decided after Cities indicates that the intent of the parties is stillrelevant to theapplication of merger. See Miller v. McDonough, 13 Ill. App. 2d 290, 294 (1957),quotingHooper, 336 Ill. at 132.

In Daniels v. Anderson, 162 Ill. 2d 47 (1994), a party argued that the doctrineof merger by deedbarred a claim to a contractual easement because that easement merged with the deed when thelandowner accepted the deed to the property. The court stated:

"Under the doctrine of merger by deed, if the terms of a real estate contractare fulfilled bydelivery of the deed, the two instruments merge. Unless the deed contains a reservation,the deed supersedes all contract provisions and becomes the only binding instrumentbetween the parties. However, where there are contract provisions which delivery of thedeed does not fulfill, the contract remains in force until it has been fully performed. ***

Whether and to what extent the contract merges into the deed is a matter ofthe parties'intent that the deed constitutes a full performance of the contract. This intent is evidencedby the language of the instruments and the surrounding circumstances." Daniels,162 Ill.2d at 63-64.

The court held that, because the deed did not mention the prior contractual easement, thedoctrineof merger did not apply and the easement remained in force despite acceptance of the deed.

Although it was applying the doctrine of merger in the context of a real estate contract andconveyance of a deed, the supreme court's decision in Daniels indicates that thedoctrine ofmerger is not as automatic and inflexible as defendant contends. The contract in this casespecifically stated that merger would not apply and we reject defendant's assertion that thedoctrine must apply whenever a tenant exercises an option to purchase.

Plaintiff cites case law from Florida and Arizona involving similar situations to the case athand. In TCC Enterprises v. Estate of Erney, 149 Ariz. 257, 257, 717 P.2d 936, 936(App. 1986), alessee attempted to exercise an option to purchase that called for payment of "current marketvalue." The lessee argued that the value of the property should reflect the value of the leaseencumbrance; the lessor was not in a position to sell unencumbered fee simple because the feewas encumbered by the lease. TCC, 149 Ariz. at 257-58, 717 P.2d at 936-37. Thecourtrecognized that the estate the lessor owned was a "leased-fee estate" and ruled that the currentmarket value should consider the lease. TCC, 149 Ariz. at 258, 717 P.2d at937.

In Contos v. Lipsky, 433 So. 2d 1242 (Fla. App. 1983), lessors brought suit toobtain a judgmentdeclaring that the true market value of the property subject to an option to purchase was its valueunencumbered by the years remaining on the lease. The court addressed the question of merger,stating "the once inflexible common law rule--that is, that whenever a greater estate and a lesserestate coincide in the same person without any intermediate estate, the lesser estate merges intothe greater--has given way to the rule that equity will prevent or permit a merger as will bestserve the purpose of justice and the actual and just intent of the parties, whether express orimplied." Contos, 433 So. 2d at 1244. The court affirmed the lower court's rulingdeclaring thatthe true market value of the property was its value encumbered by the years remaining on thelease because it found no evidence of intent for the leasehold estate to merge into the fee whenthe lessee exercised her option.

A dissenting judge in Contos disagreed with the conclusion, stating that thecourt should look tothe language of the parties' agreement, which the judge believed suggested that the value of theproperty should not include the lease at the time of purchase. Contos, 433 So. 2d at1247-48(Schwartz, C.J., dissenting). Other Florida cases since Contos have followed thereasoning of thedissent and found that a lease should not be included in the purchase price when the language ofthe agreement suggested that the property should be valued unencumbered. See Lassiterv.Kaufman, 581 So. 2d 147 (Fla. 1991); Palm Pavilion v. Thompson, 458 So.2d 893 (Fla. App.1984); see also Taylor v. Fusco Management Co., 593 So. 2d 1045, 1047 (Fla.1992) (absentspecific language to the contrary, the market value of leased property at the time a lesseeexercises an option to purchase should be computed as if the property were unencumbered by thelease; any intent to value the property otherwise should be clearly stated in the lease).

In the instant case, the lease agreement clearly indicates that the parties did not intend for theleasehold to merge with the fee when the lessee exercised the option to purchase. The contractspecifically precludes that. We therefore reject defendant's arguments that the lease and theoptions to renew are extinguished as a matter of law.

Even if the lease in this case did not contain the provision specifically addressing the issue ofmerger, we believe that a court must look to the terms of the parties' agreement to determinewhether a lease is included in the calculation of the appraised value of the property when a tenantexercises an option to purchase. This leads us to the essential question in this case as to whetherthe lease and the options to renew must be considered by the appraisers in calculating thepurchase price of the property under the terms of the parties' agreement.

A lease agreement is a type of contract governed generally by the rules of contract law. MidlandManagement Co. v. Helgason, 158 Ill. 2d 98, 103 (1994). A court's function inconstruing a leaseis to give effect to the intentions of the parties as expressed in the language of the documentwhenread as a whole. Midland, 158 Ill. 2d at 104. If the language of a contract isunambiguous, theintention of the parties must be ascertained by the language used, not by constructions urged bythe parties. MXL Industries, Inc. v. Mulder, 252 Ill. App. 3d 18, 29 (1993). Acourt cannotconstrue the contract contrary to the plain and obvious meaning of the language and it ispresumed that the terms and conditions are purposefully inserted. MXL, 252 Ill.App. 3d at 29.

The lease agreement provides that if the lessee elects to purchase the property "the purchasepriceof the Demised Premises (exclusive of the value of the Improvements)" shall be determined byappraisers. While this section clearly exempts the value of improvements from consideration,theagreement does not expressly state what the appraisers should consider in determining thepurchase price of the "Demised Premises." While the lease does not provide a direct statement asto what should be included, we believed the plain language of the contract as a wholeunambiguously states that the lease and the options to purchase should be included in thecalculation of the purchase price.

"Demised Premises" is defined in the agreement as "[t]he Land together with the rights,privileges and easements thereunto belonging or in anywise thereunto appertaining." Thislanguage suggests that any encumbrance to the property would be considered a part of the"Demised Premises." The fact that the agreement specifically excludes improvements alsosuggests that every other interest or covenant should be included.

Article IV of the lease agreement provides a process for determining the amount of rentowedduring the years after the tenth lease year. Section 1(C) provides that "Lessee shall pay to Lessorannual rent, in an amount equal to Ten percent (10%) of the appraised value of the DemisedPremises (exclusive of the value of all Improvements)." This language is essentially the same asthe language used when determining the amount of the purchase price. Defendant argues thatbecause the lease would not be included in the consideration of the value of the property for thepurposes of paying rent, this court should not construe the contract to include that value wheninterpreting the language regarding the purchase price. There is no evidence in the record toestablish that the parties did in fact exclude the lease when determining the appraised value forthe purposes of setting the rent obligation. Nevertheless, we do not find this language toestablish that the lease should not be included at the time the lessee exercised the option topurchase. Valuing the property at the time of exercising the option would be a different situationthan valuing the property for the purposes of rent.

Moreover, we find other language in the agreement to provide strong evidence of intent toinclude the lease in the valuation. As discussed above, the lease clearly states that "there shall beno merger of the leasehold estate in and with the fee simple title" when the lessee purchases theproperty. The lease and the leasehold created "shall continue in full force and effect." If thelessee desires to terminate the lease, he must file a written instrument with the office of therecorder of deeds. These provisions lend strong support to the conclusion that the lease is anencumbrance on the property that the appraisers must consider in calculating the value of theproperty.

Section 2 of article XIII also suggests that the lease encumbrance be considered. In thatsectionthe lease provides that when the lessee exercises the option, "[t]itle to the Demised Premisesshallbe conveyed to Lessee *** by good and sufficient general warranty deed, subject to no mattersother than those to which the Demised Premises was subject at the time of commencement of theterm of the Lease, then current general real estate taxes, and installments of special assessmentslevied or assessed after the date of commencement of the term of this Lease and to matters doneor suffered to be done by Lessee or those claiming by, through or under Lessee." This languageindicates that the contracting parties understood that if the option to purchase was exercised, thelessee would be purchasing the property subject to the lease agreement, but no otherencumbrances.

Defendant argues that the lease contains a latent ambiguity which must be resolved by thecourt. "A latent ambiguity exists where a contract's terms are clear on their face, but extrinsic evidencecreates uncertainty as to the meaning of the terms." De Kalb Bank v. Purdy, 166Ill. App. 3d 709,719 (1988). Defendant attempts to establish a latent ambiguity by relying on affidavits of thepersons involved in the original lease negotiation. While the affidavits may establish that theparties intended something other than what the language in the contract suggests, the statementsof these individuals do not establish a latent ambiguity allowing the court to rely on suchstatements to interpret the contract. The affidavits do not explain any term in the contract thatmay have had a specialized meaning or a meaning that is confusing or unknown to the court. Theaffidavits merely assert the parties' actual intent when signing the lease. Defendant has failed todemonstrate a latent ambiguity.

Finally, defendant argues that the options to extend the ground lease should not beconsidered inthe valuation of the property. The definition of "Demised Premises" in the lease includes theland with all "the rights, privileges and easements thereunto belonging or in anywise thereuntoappertaining." As already determined, the language of the agreementestablishes that the lease isto be included in the calculation of the purchase price. The agreement's language also indicatesthat the terms of the lease that provided for extensions to the lease should also be considered. Ifthe lease survives the exercise of the option, there is no reason to conclude that the options toextend, which are terms of that lease, would not survive.

While defendant claims the result in this case is unjust, we note that the previous increases inrentshould inure to the benefit of defendant since the increased rental allowing a 10% return willcorrespondingly increase the purchase price. The impact of potential future rent increases willalso be a favorable factor for defendant.

For the aforementioned reasons, we affirm the orders of the circuit court.

Affirmed.

THEIS, J., and GALLAGHER, J.*, concur.

* Justice Hourihane originally heard oral argument in this case. Upon his recusal, JusticeGallagher was substituted and has reviewed the record, briefs and audio recording of the oralargument.