On appeal from and on certification to the Superior Court, Appellate Division.
The opinion of the Court was delivered by Garibaldi, J.
This appeal concerns a dispute between the parties to an option agreement over whether they intended the sum of $10,000, the price of the option, to be credited to the purchase price. The problem arises because after the parties negotiated the contract, the purchaser, Bonnco Petrol, Inc. (Bonnco), and its agent, Marvin Isdaner, the realtor, unilaterally inserted in the option agreement the following clause: "such monies to be applied toward purchase price.'
The realtor took the contract to the home of the seller, Mr. Epstein, but did not bring the additional clause to Mr. Epstein's attention. Mr. Epstein signed the contract as it was presented to him by the realtor.
Bonnco informed Epstein of its desire to exercise the option, but Epstein refused to convey the property. Bonnco commenced this action for specific performance. The trial court held that the option agreement was invalid and dismissed Bonnco's complaint for specific performance. The majority of the Appellate Division held that the contract was rescinded but that the $10,000 option payment should be refunded to Bonnco. The dissent in the Appellate Division argued that the contract should be reformed so that the $10,000 would not be credited toward the purchase price and the property conveyed to Bonnco.
Bonnco filed an appeal as of right pursuant to Rule 2:2-1(b), and a petition for certification, which we granted. 113 N.J. 637 (1988).
The parties met through the efforts of Marvin Isdaner, a real estate salesman. Mr. Epstein had mailed flyers listing the property at issue, together with other properties he owned, to several real estate brokers. At that time Isdaner was actively seeking sites where Bonnco could locate a "Grease Monkey' franchise. Isdaner thought Epstein's property would be a good
location. Initially, Ellen Epstein, Mr. Epstein's daughter, quoted Isdaner a purchase price of $185,000, which Stephen Schmidt, Bonnco's president, rejected as too high. Shortly thereafter, however, Mr. Epstein offered to sell the property for $140,000, a price attractive to Schmidt.
Mr. Epstein, his daughter, Schmidt, and Isdaner had a breakfast meeting on February 16, 1985, to discuss the terms of the transaction. One of the alternatives, presented by Schmidt and rejected by the Epsteins, involved a lengthy and complex agreement of sale drafted by Schmidt's lawyer, which contained numerous contingencies for both financing and governmental approvals and a provision that a $10,000 deposit be credited to the sales price. Mr. Epstein preferred a simple agreement and terms that would allow them to retain title for six more months in order to receive capital gains treatment. The trial court found, notwithstanding Schmidt's profession to the contrary, that such a delay also benefitted Bonnco by allowing it more time to obtain the necessary permits and financing.
Ultimately the parties agreed to an option to purchase the property for $148,500 ($140,000 to be paid to the Epsteins, the remaining sum of $8,500 to be paid to Isdaner as his real estate commission). The option was exercisable after September 1, 1985, but no later than February 28, 1986, for an option price of $10,000. The parties also agreed to enter into a five year lease to commence March 1, 1985. The five-year term, as opposed to a six-month or one-year lease, was chosen to aid Bonnco in obtaining financing. The rent on the lease, $1,590 per month for the first year, was thought to be equivalent to the carrying costs of the property.
Schmidt later testified that he believed the breakfast meeting had included a discussion that the $10,000 would be credited toward the final purchase price, as it would be if it were a down payment on a direct sale. The Epsteins insist that there was no such discussion of a credit. Isdaner does not remember.
At the end of the breakfast meeting, Isdaner offered to draw up the documents. Epstein instructed Isdaner that the option agreement and lease should be drafted like the prior agreements embodied in model option agreements and leases. Epstein gave Isdaner copies of these to follow. These models did not contain provisions crediting the option price to the purchase price. The option and lease drawn up by Isdaner closely followed these models, mentioning no credit. The two documents also contained language referring to each other. The last paragraph of the option agreement reads: "Seller agrees that upon tender of the full $10,000 option price * * * he will enter into a Lease Agreement with the Buyer for the property know as [address]. Said lease agreement is hereby made a part of option agreement attached hereto.' Similarly, in the lease there is the clause, "[t]his lease is subject to an option to purchase attached herewith and dated 2/21/85 and hereunder made a part of this lease.'
Schmidt was the first to examine the documents, in Isdaner's office, on February 21, 1985, although Epstein testified that Isdaner had earlier read the documents to him over the telephone. Schmidt noticed the absence of any credit provision. While Isdaner does not recall whether he participated in changing the option agreement, Schmidt testified that it was at Isdaner's direction that someone in his office typed the clause, "such monies to be applied toward purchase price,' following the terms describing the method of payment of the $10,000. In any event, Schmidt does not deny that he unilaterally changed the contract.
After Schmidt had signed the documents, Isdaner took them to the Epstein's house and waited while Epstein skimmed the documents and signed them for himself and Mrs. Epstein. Isdaner did not mention the change in the option agreement. Schmidt paid the $10,000 plus the first month's rent immediately, in accordance with the agreement, and continued to pay rent as required by the lease over the following year.
On the last day that it was permitted to do so, Bonnco sent a letter to the Epsteins stating it intended to exercise the option. Thereafter, there was a round of negotiations between Schmidt and the Epsteins during which time they discussed the possibility of renegotiating the five year lease instead of settling the purchase. During those discussions Bonnco first withdrew its exercise of the option and later renewed it. It was at a meeting at Epstein's home during those negotiations that Schmidt first mentioned that the option agreement provided that the $10,000 be credited to the purchase price. Mr. Epstein expressed great shock and surprise, and immediately reviewed his copy of the option agreement. As a result of his discovery of the credit clause, the Epsteins refused to sell the property, which led to this litigation.
On June 11, 1986, Bonnco filed a complaint, seeking a temporary restraining order to prevent the Epsteins from selling the property to anyone else, and seeking specific performance of the option agreement as it appeared in the contract. In their ...