Nebraska Supreme Court: Decedent’s Real Property Remained In Estate And Was Not Validly Purchased Under Option Contract

Sometimes inherited real property passes automatically by operation of Nebraska law.  Other times, persons purporting to transact on a decedent’s property are unaware that they do not actually have the authority to do so.  In the June 2020 case of Arnold v. Walz, the Nebraska Supreme Court determined that decedent’s real property remained in the estate, and had not been validly purchased because the purported seller did not own the property.

The Facts of Arnold v. Walz

Beverly Freiden died on December 8, 2012.  The Nebraska probate court appointed Arnold and Jon Freiden as co-personal representatives of decedent’s estate.  Decedent’s will stated that her real property located in Omaha, Nebraska:

may either be sold or retained by my personal representatives as they shall determine, and upon sale, whenever it occurs, my son, Jon Freiden, shall receive the first $25,000 from the sale and the remainder of the net sale  proceeds shall be paid over to my grandson, Bart Arnold for his care…

The co-personal representatives did not sell the property.  Instead, they filed an informal closing by verified statement which stated that Arnold and Jon Freiden's appointments as copersonal representatives "shall terminate one year after the filing hereof." The schedule of distribution regarding Beverly Freiden's assets provided that "[c]ash and real estate" would be distributed to Jon Freiden.

Option To Purchase The Real Property

Walz had leased the property from decedent and was interested in buying the real property – an option to purchase provision was included in the February 2, 2012 lease between decedent and Walz.  The terms of the option to purchase provision included that:

• Walz could exercise his option at any time before July 31, 2014
• The option must be exercised in writing during the term of the lease (between February 1, 2012 and July 31, 2014)
• Upon exercise of the option, Walz was required to close on the purchase no later than August 15, 2014.

Walz did not exercise the option during the original tenancy. In August 2014 (after the expiration of the option), Walz and Freiden purported to modify the lease/purchase agreement to extend the option to purchase to July 31, 2015.  Walz did not exercise the option to purchase the real property by that date.  Walz and John Freiden entered into another agreement in August 2015 which set forth the “balance owed for the purchase of the property” and contemplated that the balance would be paid off at the end of one year or the agreement would automatically renew. As a result of the 2015 agreement, Walz claimed that he had purchased the property from Jon Freiden.

The Estate Files A Quiet Title Action

In January 2017, decedent’s estate was reopened and Arnold Freiden was reappointed as personal representative. Arnold filed a complaint to quiet title to the property.  Arnold alleged that Walz had not timely exercised his option to purchase, and that there was no enforceable modification to the lease/purchase agreement. The Nebraska district court quieted title in favor of decedent’s estate.  The court found that:

Walz had not exercised the 2012 Option, because he had not attempted to exercise it before July 31, 2014, and had not "'close[d] on the purchase not later than August 15, 2014,'" as required by the contract. The district court also found that the subsequent 2014 Agreement and 2015 Agreement were unenforceable with respect to the option to purchase, because the option had ended on its own terms and there was no longer a valid option to exercise by Walz as a holdover tenant.

Under Nebraska Law An Option To Purchase Real Property Does Not Extend To A Holdover Tenant

Under Nebraska law, options to purchase are strictly construed and not extended beyond their express provisions. Here, Walz was permitted to exercise the option at any time before July 31, 2014.  Walz did not, and the option expired under the terms of the original lease agreement.  The Nebraska Supreme Court stated:

With respect to the effect of the 2014 Agreement and 2015 Agreement, which purportedly modified the 2012 lease/purchase agreement to empower Walz to treat his rent payments as installment payments to buy the real property, these contracts, if analyzed on their face, do not provide continuity with the original lease/purchase agreement and did not revive the original but extinguished option to buy the property. Although they are framed as a contract modification, they cannot modify a terminated contract. The district court did not err when it found that the effect of the 2014 Agreement and 2015 Agreement was "moot" with regard to the 2012 Option, because there was no longer a valid option to exercise or modify.

Can A Decedent’s Real Property Pass Without A Deed Under Nebraska Law?

Yes, a decedent’s real property can pass without a deed as is generally required to transfer title to real estate.  Real property may distributed in kind in accordance with the decedent’s will under Nebraska law, and the absence of a recorded deed does not invalidate the instruments in the probate proceedings between the parties.  Section 30-24, 104(a), of the Nebraska Probate Code states:

(a) Unless a contrary intention is indicated by the will, the distributable assets of a decedent's estate shall be distributed in kind to the extent possible…

In this case, if decedent’s will had devised the real property to Jon Freiden without caveat, the real property would have devolved upon death with a deed.  But the decedent’s will did not do so. The will directed that the real property:

may either be sold or retained by my personal representatives as they shall determine, and upon sale, whenever it occurs, my son, Jon Freiden, shall receive the first $25,000.00 from the sale and the remainder of the net sale proceeds shall be paid over to my grandson, Bart Arnold for his care.

The real property remained in the Nebraska estate, and Jon Freiden was entitled to only the first $25,000 of the proceeds upon a sale of the real property. The will did not direct that the real property was to be distributed in kind to Jon Freiden.  The real property was also meant to support Bart upon sale.

Can A Probate Distribution Sheet Operate As A Conveyance of Real Property?

No, estate real property that is not distributed in kind pursuant to decedent’s will, is transferred by deed pursuant to Nebraska law.  Here, although the distribution sheet indicated that Jon Freiden was to receive the real property from the estate, there was no evidence, such as a personal representative’s deed, demonstrating that any conveyance from the estate to Jon Freiden took place.  Because the will indicated that Jon Freiden was not to receive the real property in kind, Freiden did not own the real property and did not have the authority to unilaterally convey the real property to Walz. Here, Jon Freiden, as personal representative, could not breathe life into an expired option contract to purchase the estate real property under Nebraska law.  He also did not have the authority to convey the real property, because it was not his under the terms of Decedent’s will.  The real property remained in the estate, to be distributed pursuant to the terms of decedent’s Nebraska will.