Case Notes

In 1977, the original lessor assigned all “right, title, and interest in and to” the lease to defendant Margaret P. Fisco, who agreed to assume the obligations imposed by the lease. Fisco, who was represented by counsel in the matter, paid $93,000 for the lease and deed, and also agreed to assume the outstanding mortgage balance of nearly $100,000. For estate planning purposes, Fisco later conveyed the title to the Americo Fisco Revocable Trust.

The United States timely paid all its obligations on the lease, the last term of which ended on Dec. 31, 2014. A year and a week prior to that date, it informed the lessor by written notice that it intended to exercise the option to buy at the completion of the lease term. The defendant lessors responded to this notice by letter, in which they stated that the $300,000 purchase price in the leases represented an “unconscionable ' contract term.” The United States, in turn, responded by letter, stating that it was ready, willing and able to complete the purchase transaction. When the defendants repeated their stance that the price was unconscionable, the United States brought this action seeking declaratory judgment and specific performance of the sale at $300,000. The defendants counterclaimed for a declaration that the purchase option in the lease was unenforceable.

The primary question for the court concerning the cross-motions for summary judgment was whether, as the defendants stated in their pleadings, the purchase option was unenforceable because “[t]he purchase price contained in the lease is unconscionable under Ohio law because it was established fifty years ago and in no way reflects the current fair market value of the property.” The defendants argued that Ohio law shoud apply because a U.S. Court of Appeals for the Seventh Circuit decision, Powers v. U.S. Postal Serv., 671 F.2d 1041 (7th Cir. 1982), “created a tide of case law running strongly against the proposition that there exists federal common law for real property.”

The court relied instead on U.S. Supreme Court precedent, which has consistently held that “obligations to and rights of the United States under its contracts are governed exclusively by federal law.” Boyle v. United Techs. Corp., 487 U.S. 500, 504 (1988). Despite this, the court indulged the defendants by applying Ohio law after noting that the outcome in the case would be the same whether federal or state law were applied.

Under Ohio law, “[u]nconscionability is determined by reference to the relative benefit of the bargain to the parties at the time of its making, the nature of the methods employed in negotiating it, and the relative bargaining power of the parties.” Miller v. Household Realty Corp., No. 81968, 2003 WL 21469782, at *7 (Ohio Ct. App. June 26, 2003). To prove unconscionability, the defendants would have to prove the contract was both procedurally and substantively unconscionable. Taylor Bldg. Corp. of Am. v. Benfield, 884 N.E.2d 12, 20 (Ohio 2008).

Procedurally, nothing was amiss: the parties who first negotiated the lease in the 1960s were sophisticated and were represented by counsel, the court found. In addition, the purchase option language was not concealed but was written in the same font as the rest of the contract and was even set out on a separate piece of paper in the contract. Thus, is was not something that would likely have been overlooked or misunderstood.

Substantively, the contract also was not unconscionable, the court concluded. In Ohio, “Factors courts have considered in evaluating whether a contract is substantively unconscionable include the fairness of the terms, the charge for the service rendered, the standard in the industry, and the ability to accurately predict the extent of future liability.” Hayes v. Oakridge Home, 908 N.E.2d 408, 414 (Ohio 2009). Here, the defendants had signed the contract after getting counsel's advice, had collected more than $25,000 per year in rent from the 1977 purchase date onward, and were receiving from the sale slightly more than $100,000 above the purchase price. “As a matter of law,” concluded the court, “these are not substantively unfair terms.”

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