IN THE SUPREME COURT OF IOWA
No. 22–0038
Submitted March 22, 2023—Filed April 21, 2023
WILLIAM LEE PITZ and LYNN S. PITZ,
Appellants,
vs.
UNITED STATES CELLULAR OPERATING COMPANY OF DUBUQUE,
Appellee.
On review from the Iowa Court of Appeals.
Appeal from the Iowa District Court for Dubuque County, Michael J.
Shubatt, Judge.
The lessors of a cell tower site seek further review of a court of appeals
decision affirming a district court ruling that prepayment of rent was not a
condition of the lessee’s exercise of a lease renewal option. DECISION OF THE
COURT OF APPEALS AND DISTRICT COURT JUDGMENT AFFIRMED.
Mansfield, J., delivered the opinion of the court, in which all justices
joined.
Todd J. Locher of Locher & Davis PLC, Farley, and Chad D. Brakhahn and
Joseph J. Porter of Simmons Perrine Moyer Bergman PLC, Cedar Rapids, for
appellants.
Bret A. Dublinske and Brandon R. Underwood of Fredrikson & Byron, P.A.,
Des Moines, for appellee. 2
MANSFIELD, Justice.
I. Introduction.
In 1988, when most cell phones were the size and shape of bricks and were
stored in vehicle consoles, a cell phone service company had the foresight to
enter into a thirty-year lease of property to build a cell tower. Even more
remarkably, the lease included a thirty-year renewal option. To no one’s surprise,
when the lease came up for renewal in 2018, the rent was substantially below
market. The cell phone company gave written notice of renewal to the property
owners as specifically required by the option-exercise clause. However, the cell
phone company did not immediately pay the renewal rent, even though the lease
provided elsewhere that the renewal rent was “payable in a lump sum in advance
at the exercise of the option.” The property owners decided that this was not a
proper exercise of the option and took the cell phone company to court. In the
district court and the court of appeals, the cell phone company prevailed.
On further review, we too conclude that payment of the renewal rent was
not a condition for exercise of the option, and therefore, that the cell tower lease
was properly renewed. Strictness and literalism in the law of offer and
acceptance work both ways. The optionee must comply with all stated conditions
for exercise of the option, but when those conditions have been expressly set
forth in a separate provision, the list should normally be treated as exclusive.
For this reason, we affirm the judgment of the district court and the decision of
the court of appeals. 3
II. Background Facts and Procedural History.
Robert and Dorothy Pitz owned a 320-acre farm property in rural Dubuque
County. In 1988, the Pitzes agreed to lease six acres for a cell tower site; the
lessee was a subsidiary of United States Cellular Corporation.1 U.S. Cellular then
erected an approximately 380-foot cell tower on the leased portion of the
farmland. The official commencement date of the lease was November 14, 1988.
The lease provided that Robert and Dorothy would receive $20,000 in total
rent for the thirty-year term of the lease, all to be paid in advance on or before
January 5, 1989. The lease also contained a renewal option under “ARTICLE
THREE” for a second thirty-year term as follows:
3.2 Option to Renew. Lessee shall have the option to renew this Lease Agreement for one (1) additional term of thirty (30) years, at the rental rate set forth in Article Four and upon all the other terms and conditions hereof. Lessee may exercise such option by giving written notice to Lessor at least sixty (60) days before the expiration of the initial term of this Lease Agreement.
At trial, a U.S. Cellular official described this lease as a “one-off lease,”
meaning that it was not a standardized document. On a different page under
“ARTICLE FOUR,” the lease went on to state that the option term rent would be
as follows:
4.2 Option Term Rent. Lessee shall pay to Lessor as full consideration for use of the Leased Premises during the option term, payable in a lump sum in advance at the exercise of the option, the amount of Twenty Thousand Dollars ($20,000.00), adjusted upward by the percentage of increase in the Consumer Price Index (“CPI”) from the Commencement Date to the first day of the last month of the current lease term. . . . If the amount of the CPI increase is not known at the time the option is exercised, Lessee shall pay Lessor
1We will refer to the lessee hereafter as “U.S. Cellular.” 4
Twenty Thousand Dollars ($20,000.00) at the time of exercise and the balance of the option term rent within thirty (30) days of Lessor’s notice of calculation.
In 2009, Robert and Dorothy transferred ownership of the farm to their
son, William Pitz, and his spouse, Lynn. This transfer included the U.S. Cellular
lease. In reality, William had been farming the property since the early 1980s.
Currently, William grows corn and soybeans and raises livestock on the property.
When William and Lynn acquired the farmland from Robert and Dorothy,
U.S. Cellular was not notified of the change of ownership. The warranty deed to
William and Lynn, however, was recorded. Meanwhile, through the years, U.S.
Cellular continued to operate the cell tower on the leased portion of the farmland.
Anticipating the expiration of the original lease term, U.S. Cellular sent a
certified letter to Robert and Dorothy on September 1, 2017—over one year
before the September 14, 2018 deadline for exercise of the option. This letter
stated that it would “serve as notice that [U.S. Cellular] is exercising its option
to renew the Lease Agreement dated November 14th, 1988 for the first of one
renewal terms (Option 1) of thirty years.” The letter was accompanied by an IRS
Form W-9 (request for taxpayer identification number) and a direct deposit form,
both of which U.S. Cellular asked to be completed and returned. The letter and
enclosures reached William, but he took no action on them.
With the deadline for exercise of the option looming approximately a year
later, U.S. Cellular followed up with an overnight letter to William on September
11, 2018. This letter recited a recent conversation in which William had
apparently informed U.S. Cellular that he and his spouse had purchased the 5
farm property from Robert and Dorothy. The letter set forth U.S. Cellular’s
position that it had already renewed the lease. The letter enclosed fresh copies
of the September 2017 letter, the W-9, and the direct deposit form. It asked again
that the latter two items be completed and returned. The letter concluded, “Once
we have these documents, we will be able to disburse the option rental payment
to you.”
As before, William did not take action. On October 29, U.S. Cellular
forwarded a check for $31,494.02 to William and Lynn. As explained in the body
of the letter, this amount represented the $41,439.50 advance rent due based
on the formula set forth in paragraph 4.2 of the lease, minus required income
tax withholding.
William and Lynn responded through counsel with a letter that returned
the rent check. Counsel’s letter explained, “U.S. Cellular failed to properly
exercise its option to renew due to the fact that it did not timely tender the rent
payment.” Quoting paragraph 4.2 of the lease, counsel advised that U.S. Cellular
had failed to validly exercise the renewal option because it had not tendered
payment “in advance at the exercise of the option.” The letter also expressed
William and Lynn’s willingness to enter into a new lease for the cell tower site at
“fair market value.”
Neither party budged from their position, so on June 19, 2019, William
and Lynn filed a declaratory judgment action in the Dubuque County District
Court. Their petition sought a judicial determination that the option had not
been validly exercised and that the lease had expired on November 13, 2018. 6
William and Lynn’s petition also requested that U.S. Cellular be ordered to
remove all structures from their land and that they be awarded fair rent from the
date of expiration of the original lease term until the structures were removed.
The district court conducted a half-day bench trial, at which William and
Lynn offered expert testimony that a fair market rental for thirty years would be
over $200,000.
The district court ruled for U.S. Cellular, holding that the option had been
validly exercised. The court determined that “[t]he payment of rent was not a
condition precedent to the exercise of the option” but instead was a term and
condition under the renewed lease. Thus, “[a]ny failure to meet obligations under
the term of the renewed lease did not negate the exercise of the option or the
existence of the new lease itself.” The district court also found that U.S. Cellular’s
notice was unqualified and properly identified the legal entity on whose behalf
the option was being exercised. Lastly, the district court denied “[a]ll associated
claims for relief.”
William and Lynn appealed, and U.S. Cellular cross-appealed, arguing
that it should have been awarded attorney fees. We transferred the case to the
court of appeals, which affirmed as to both appeals. Regarding the exercise of
the option, the court of appeals’ reasoning largely echoed that of the district
court. In affirming the denial of attorney fees, the court of appeals noted that the
lease contained only an indemnification clause, which would not support an
attorney fee award in an action between the parties. See NevadaCare, Inc. v. Dep’t 7
of Hum. Servs., 783 N.W.2d 459, 471 (Iowa 2010). William and Lynn sought
further review, and we granted their application.
III. Standard and Scope of Review.
The parties agree that this action was tried at law. We review a district
court’s interpretation and construction of a contract for correction of errors at
law. Homeland Energy Sols., LLC v. Retterath, 938 N.W.2d 664, 683 (Iowa 2020).
“The district court’s factual findings have the effect of a special verdict and are
binding on us if supported by substantial evidence.” Metro. Prop. & Cas. Ins. v.
Auto-Owners Mut. Ins., 924 N.W.2d 833, 839 (Iowa 2019).
“When we grant further review, we may exercise our discretion to let the
court of appeals decision stand as the final decision on particular issues.”
Farnsworth v. State, 982 N.W.2d 128, 135 (Iowa 2022) (quoting State v. Fogg,
936 N.W.2d 664, 667 n.1 (Iowa 2019)). We do so with respect to all issues except
the question of whether payment of the renewal rent was a condition for exercise
of the renewal option.
IV. Analysis.
The parties disagree over what U.S. Cellular had to do to validly exercise
the option to renew the lease for an additional thirty-year term. Was notice
enough, or did U.S. Cellular also have to pay the rent in advance? If payment
was a condition precedent, then U.S. Cellular’s failure to pay the rent when it
provided the renewal notice could mean that the option was not properly
exercised, and no renewal contract was formed. See SDG Macerich Props., L.P. v.
Stanek Inc., 648 N.W.2d 581, 586 (Iowa 2002) (“Any conditions precedent to the 8
option provision must be fulfilled according to the agreement for the option to
become a contract between the parties.”).
A party exercising an option must strictly comply with conditions
precedent. Id. For example, if a time is prescribed, that time is of the essence. Id.
Substantial performance is not good enough. Id.; see Steele v. Northup, 143
N.W.2d 302, 305 (Iowa 1966) (“The general rule is that the time prescribed for
exercise of an option is of the essence, and if the option is not exercised within
the time limited all rights of the optionee stand forfeited without notice.”);
Restatement (Second) of Contracts § 25 Reporter’s Note cmt. d, at 75 (Am. L.
Inst. 1981) (“Despite equity’s dislike of forfeitures, requirements governing the
time and manner of exercise of a power of acceptance under an option contract
are applied strictly.” (citation omitted)).
Simply stating these general principles does not resolve this case, however.
The lease here has two potentially relevant provisions. Section 3.2 (“Option to
Renew”) expressly requires U.S. Cellular to give written notice to renew the
option, without mentioning payment of option rent. Section 4.2 (“Option Term
Rent”) requires the option term rent to be paid “in advance at the exercise of the
option.” Does section 4.2 amount to an additional condition for the exercise of
the option, or is it a separate covenant? U.S. Cellular argues that the option to
renew stands on its own and does not require prepayment of rent in order to
exercise the option. William and Lynn counter that the contract should be read
as a whole, that section 4.2 should be incorporated into section 3.2, and that it 9
doesn’t make sense to say that U.S. Cellular properly exercised the option if it
went into breach the minute that it exercised it.2
A. Prior Caselaw in Iowa. Our caselaw concerning renewal and purchase
options offers guidance, although it doesn’t necessarily resolve this case, either.
Just after the Civil War, in McFadden v. McCann, we found that notice and
payment were both conditions precedent to the exercise of an option rather than
independent covenants. 25 Iowa 252, 255 (1868). The lease provided that the
tenancy of the lessee shall end “unless he shall have notified [the lessor] of his
election to continue three years longer, . . . and unless he shall, on or before that
day, secure to the parties . . . the rent to accrue.” Id. at 253. We held, “These
conditions are most evidently precedent to the renewal or continuance in force
of the lease, and unless they were performed the instrument ceased to operate
for a future term.” Id. Notably, the lease spelled out that both notice and
payment—connected by the conjunctive “and”—had to be performed if
termination of the lease was to be avoided.
Some years later, in Lockman v. Anderson, we again held that payment
was a condition precedent where the plaintiff had an option to buy a building
“for the consideration of $5,500; this being upon the condition that the [plaintiff]
desires to buy the same by the first of March, 1900.” 89 N.W. 1072, 1072 (Iowa
1902). The plaintiff notified the defendant on February 28 that he intended to
“avail[] himself of the option to take the property,” but he did not tender the price
2William and Lynn also point out that U.S. Cellular drafted the lease, so any ambiguities should be resolved against it. See Shelby Cnty. Cookers, L.L.C. v. Util. Consultants Int’l, Inc., 857 N.W.2d 186, 195 n.8 (Iowa 2014). 10
until March 3. Id. at 1073. We held the option had not been properly exercised
because the plaintiff had to make payment by the March 1 deadline:
[I]t is contended on behalf of plaintiff that the option was exercised on the 28th of February, by the notice to defendant that plaintiff would take the property, and that thereupon the contract became one simply for the purchase of the property at an agreed price, and that the failure of plaintiff to pay on the exact day named in the contract would not defeat plaintiff’s right to a specific performance. In answer to this argument it is enough to say that the contract does not so provide. It is true, nothing is said, in connection with the exercise of the option of purchase, as to when payment is to be made; but, in the absence of any express provision, it must certainly be implied that the option to be exercised was not simply the making of an election to take the property, but the payment of the purchase price. If this is not so, then there is no provision as to the time when the purchase price is to be paid; and, rather than presume that the parties intended that the time of payment should be left wholly indefinite and undetermined after plaintiff had notified defendant of his election to take the property, we think that we are bound to hold that the intention was that the purchase price was to be paid by the day named.
Id. In effect, silence in the manner of exercise, with only a naming of price,
required the price to be paid in order to validly exercise the option.
On the other hand, in Breen v. Mayne, we concluded that a differently
worded agreement did not require payment as a condition of exercising the
option. 118 N.W. 441, 442–43 (Iowa 1908). The agreement provided that the
defendants “agree to sell to [plaintiff], at his option, at any time on or before
October 17th, 1906, the following described premises” with the agreed price
payable “on delivery of deed.” Id. at 442. We held that “payment of the purchase
price was not essential to the completion of the contract” and that “Plaintiff might
make his election in any lawful method before the expiration of the time limit.”
Id. at 443. We added, “The only fixed rule regarding the manner of the exercise 11
of an option under a contract granting it is to discover from the language of the
instrument, construed in the light of competent parol testimony, the intent of
the parties with reference thereto.” Id. We also observed, “It is important in such
cases to distinguish that which pertains to the performance of a contract from
that which pertains to its making.” Id. In Breen, it appeared to be important that
the agreement by its terms did not require payment until the deed had been
delivered. See id.
Also of note is our decision in Steele v. Northup, 143 N.W.2d 302. There,
the agreement stated that the plaintiffs would have “until the date of March 1st,
1962 to execute this option by tender of the total sum due the party of the first
part as hereinafter set out.” 143 N.W.2d at 304. A month before the deadline,
the plaintiffs notified the defendant of their intent to exercise the option and
asked the defendant to provide the amount due. Id. After the defendant
procrastinated instead of responding with the amount due, the plaintiffs filed
suit. Id. We held that the plaintiffs had given an unqualified notice of their intent
to exercise the option and that payment was a condition subsequent, not a
condition precedent, to exercising the option. Id. at 306. Yet the significance of
Steele’s holding is diminished by the fact that we also held any obligation to
make a tender before the option expiration date had been foiled by the
defendant’s conduct and was therefore excused. Id. As we put it, “[The plaintiffs]
could hardly have done more.” Id. at 307.
Figge v. Clark, like Lockman, involved an option that was silent as to the
manner of exercise. 174 N.W.2d 432, 433 (Iowa 1970) (“The agreement is silent 12
as to how this option was to be exercised, and no particular form of notice was
provided therein.”). But this time, unlike in Lockman, we decided that “anything
amounting to an unqualified manifestation of an optionee’s determination to
accept [was] sufficient.” Id. at 435. Payment was not a condition of exercise but
“a condition subsequent.” Id. at 437. Still, it is worth noting that the Figge
defendants had in any event failed to cooperate and that “reasonable efforts to
make that tender proved futile.” Id.
Finally, in Lyon v. Willie, we considered another notice-plus-payment
option-exercise provision that stated as follows:
The party desiring to exercise this first right to buy referred to above shall notify the negotiating party in writing within sixty (60) days from the date of Notice and by making full payment in cash of the above purchase price within one hundred twenty (120) days from the date the written Notice of the negotiated sale is mailed to or delivered in person to the party or parties not negotiating the sale . . . .
288 N.W.2d 884, 887 (Iowa 1980). As in McFadden over a hundred years earlier,
we held that the defendant “was required to take two steps to exercise his
option”: (1) give notice and (2) tender the purchase price. Id. at 894. Despite a
“grammatical defect” in the agreement, we found that the use of the conjunction
“and” was dispositive and meant that there were two conditions precedent to
exercise the option to renew. Id. at 888–89.
Our present case doesn’t fit neatly into any of these paradigms. It doesn’t
involve a conjunctive, notice-and-payment provision the way McFadden and
Lyon did. Nor is the agreement silent as to how the option would be exercised, 13
as in Lockman and Figge. Additionally, the agreement doesn’t allow payment to
be deferred until a later date, as in Breen.
So perhaps the most we can distill from prior cases are the two points we
made long ago in Breen: (1) there are no fixed rules about manner of exercise of
an option, and (2) acceptance and performance are two different things. 118 N.W.
at 443; see also Lyon, 288 N.W.2d at 888 (quoting Breen for both points); Figge,
174 N.W.2d at 435 (same); Steele, 143 N.W.2d at 305 (same).
Here, both the district court and the court of appeals emphasized that the
option-to-renew provision—viewed in isolation—only required delivery of a
written notice for acceptance. This is an important point, but it doesn’t quite
suffice to explain why section 3.2 should not be read in conjunction with section
4.2. It also doesn’t quite answer William and Lynn’s point that U.S. Cellular’s
reading of the option would allow it to both form a renewal contract and be in
breach of that contract at the same time—seemingly an odd result. Nonetheless,
we believe there are several answers to William and Lynn’s arguments.
B. Acceptance vs. Performance. First, acceptance and performance
really are two different things. Courts typically take a strict, compartmentalized
view of acceptance and a broader, more holistic view of performance. That’s why
offer and acceptance are often taught at the beginning of first-year contracts; the
legal principles are more straightforward and therefore easier to learn. So the
principle that we read contracts as a whole has less relevance when the issue is
whether an option was properly exercised. 14
We follow the rule that “acceptance must conform strictly to the offer in all
its conditions,” Shell Oil Co. v. Kelinson, 158 N.W.2d 724, 728 (Iowa 1968), but
the corollary to that rule is that the conditions for acceptance should be spelled
out. Someone deciding how to exercise an option thirty years after the original
contract was executed normally ought to be able to rely on the clause specifically
devoted to that subject. This means that it is appropriate for us to focus on what
the clause entitled “Option to Renew” itself said rather than scanning the
agreement for other implied terms of acceptance. More importantly, we can take
at face value a sentence that began, “Lessee may exercise such option by giving
written notice”—and didn’t disclose that anything other than the giving of notice
had to be done.
Moreover, section 3.2 said that exercise of the option occurred “by” the
giving of written notice. Elsewhere, section 4.2 described something else that
must occur “at” the exercise of the option. A distinction was seemingly being
drawn between that which was necessary for the “making” of the renewal
agreement and that which was necessary for its “performance.” See Breen, 118
N.W. at 443. “By” sounds like a condition, “at” like a term of performance.
A good out-of-state case illustrating what we have been saying is Northern
Plains Alliance, L.L.C. v. Mitzel, 663 N.W.2d 169 (N.D. 2003). The case involved a
right of first refusal (RFR) in a divorce decree. 663 N.W.2d at 170–71. The
provision concerning exercise of the RFR stated, “Lee Roy will have seven days
from receipt of the original purchase agreement to either sign a waiver of his 15
right of first refusal or give written notification to Barbara that he will purchase
the property at the same price.” Id. at 174. A separate provision stated,
If Lee Roy decides to purchase the property with his written notification of purchase he will pay an identical amount of earnest money as provided in the purchase agreement and will have the same amount of time as provided the purchaser in the purchase agreement to pay the remaining purchase price.
Id. The North Dakota Supreme Court held, “We do not construe the latter
provision governing payment terms to engraft an additional requirement for
exercise of the right of first refusal.” Id. Instead, the court found “that provision
merely clarifies that Lee Roy must pay earnest money and will have the same
amount of time as the other purchaser to perform under the contract.” Id.
In our case the district court cited a similar decision, Welsh v. Jakstas, 82
N.E.2d 53 (Ill. 1948), in its thorough and well-researched opinion. In Welsh, the
underlying contract said that the lessees could exercise a purchase option “upon
thirty (30) days’ notice in writing given to Lessor by Lessees,” while also stating
that “[u]pon the exercise of the option to purchase by Lessees, Lessees shall
immediately pay to Lessor” a specific sum. 82 N.E.2d at 55–56. The court rejected
the argument that payment was a condition precedent to exercise of the option:
There is nothing in the option which requires the payment of any money to be made or tendered when the option right is exercised in order to constitute an acceptance. The parties to an option may or may not make payment an essential condition to the exercise and acceptance of the option. Acceptance in writing was the only thing necessary. The initial installment of the purchase price was then to be made immediately, but such payment was a matter pertaining to the performance of the contract and not to its creation.
Id. at 59. 16
C. No Absurdity. Second, there is less absurdity than might appear at
first blush to the notion that U.S. Cellular could accept an offer to renew a
contract and potentially breach that renewal contract through nonpayment at
the same time. Sometimes payment requires the payee’s cooperation. This case
illustrates that point, as did Steele and Figge.
Before U.S. Cellular could pay the rent for the renewal term to William and
Lynn, the company had to obtain a completed Form W-9 to make sure the couple
was not subject to backup withholding. William did not respond, despite
receiving the form long before the deadline for exercise of the option. As a result,
even though U.S. Cellular knew that it wanted to renew the lease, it remained
uncertain whether to pay the full amount of the rent or that amount minus 24%
backup withholding. See 26 U.S.C. § 3406(a)(1)(A) (requiring payor to do backup
withholding if the payee fails to furnish their tax identification number). In short,
there was a legitimate reason for the parties to treat written notice as the means
of acceptance and payment as a matter of performance.
D. William and Lynn’s Authorities Are Not Persuasive. William and
Lynn cite a number of authorities; most if not all are distinguishable. In Ingram
v. Kasey’s Associates, the South Carolina Supreme Court determined that the
lessee had to make payment as well as give notice in order to exercise a purchase
option. 531 S.E.2d 287, 293 (S.C. 2000). But the agreement said only that the
“Lessee shall have the right to purchase the premises at any time during the
term hereof.” Id. at 289. It was silent as to how the option was to be exercised;
therefore, the court was filling a gap in the agreement. See id. 17
Similarly, in Hofmann v. Sullivan, the Supreme Court of Utah stated that
a first right of refusal in a lease that was silent as to manner of exercise, “[i]n
general, . . . calls for a payment of cash at the time of the exercise of the option.”
599 P.2d 505, 508 (Utah 1979). Those are not the facts here.
In Peebler v. Seawell, the option-to-purchase paragraph itself required the
lessee to pay “at least one-third of the purchase price down.” 265 P.2d 109, 110
(Cal. Ct. App. 1954). The court found that this was “a condition to the exercise
of the option.” Id. at 112.
In Burns v. Reves, the lessees’ notice of exercise failed because it was
qualified—i.e., it was “conditioned on obtaining necessary financing.” 457 S.E.2d
178, 180 (Ga. Ct. App. 1995).
Shellhart v. Axford, 485 P.2d 1031 (Wyo. 1971), is William and Lynn’s best
case, but even it appears to be distinguishable. There the relevant lease provision
stated,
This extension shall also incorporate an option on the part of the LESSEE to purchase the above described property at any time during the term of this lease or its extension for the sum of $12,000.00. This option may be exercised at any time prior to December 1, 1969 by giving the LESSORS at least 30 days notice in writing of LESSEE’S intention to so exercise said option.
485 P.2d at 1032. The Wyoming Supreme Court rejected the lessee’s contention
that it had duly exercised the option and concluded that “it is to be impliedly
understood that an option such as the one considered cannot be exercised
without the requisite notice and without payment of the purchase price.” Id. at
1034. Yet it is noteworthy that the lessee’s attorney was “making a counter offer
for his client and attempting to set up a different deal, with a down payment and 18
the rest payable later.” Id. at 1033. That is not the situation here; U.S. Cellular
was not trying to renegotiate the terms of the lease renewal.
V. Conclusion.
For the foregoing reasons, we affirm the decision of the court of appeals
and the judgment of the district court.
DECISION OF THE COURT OF APPEALS AND DISTRICT COURT
JUDGMENT AFFIRMED.