Before GOODRICH and HASTIE, Circuit Judges and GRIM, District Judge.
This appeal is from a judgment of the District Court for the Western District of Pennsylvania on a petition for a declaratory judgment. The plaintiffs are lessors in two leases of part of a 12 story department store known as Rosenbaum's in Pittsburgh. The leases were executed in 1912 and went into effect on April 1, 1915. By their terms they will expire on March 31, 1950, and the lessee, the defendant herein, at that time will lose its right to occupy the part of the building covered by the leases unless a paragraph, which is in each lease, gives it an enforceable option to enter into a new lease. The paragraph is: "It is further agreed that the Lessee shall have the first refusal to make a new lease from the first of April, 1950, upon the herein described property and the building erected thereon."
The District Court has decided that the first refusal clause is unenforceable, first because it is too vague to be enforced and second because it was superseded by an amendment to the leases dated January 18, 1936. The defendant, lessee, has appealed, contending not only that the District Court erred in deciding that the first refusal clause is unenforceable, but also that the federal courts have no jurisdiction in the case for the reason that certain indispensable parties have been omitted from it, who, when added as parties, will remove the diversity of citizenship from the case which is necessary to give the federal courts jurisdiction.
The first refusal clause conceivably could have three different meanings, which, depending on what the parties meant, could have been expressed in the lease in any one of the following ways:
(1) The lessee shall have the first refusal to make a new lease from the first of April, 1950, that is, the lessee's rights are such that if the lessors should desire to make a new lease from April 1, 1950, they must first negotiate with the lessee in an effort to see whether or not terms of a new lease, which are mutually agreeable to them, can be arrived at.
(2) The lessee shall have the first refusal to make a new lease from the first of April, 1950, that is, the lessee's rights are such that if the lessors should desire to make a new lease beginning April 1, 1950, they must first offer a new lease to the lessee, and the new lease offered to the lessee must contain terms which are as good as the terms which the lessors may be willing to offer to any other person.
(3) The lessee shall have the first refusal to make a new lease from the first of April, 1950, that is, the lessee's rights are such that if the lessors should negotiate a lease with a third person and arrive at agreed terms with the third person, the lessors must offer this same lease under these same terms to the lessee before the lessors can enter into a new lease with the third person.
The defendant contends that the word "refusal" implies that an offer is to be made, which can be refused and, therefore, when the parties used the word "refusal" they meant that something must be offered to the lessee for acceptance or rejection. With this contention we agree. The defendant also contends that the fact that the words "first refusal" were used implies that the refusal was to be made ahead of some other person, who later would have the right to refuse whatever was first offered to the lessee. With this we agree also. But what is the thing which the lessee has the right to refuse and to refuse ahead of any other person? The first meaning we have suggested puts an obligation on the lessors to negotiate in good faith with the lessee ahead of any other person, giving the lessee the first right to accept or reject the lessors' offer to negotiate. The second meaning puts an obligation on the lessors to formulate in their minds the best terms they will put into a new lease and offer this new lease to the lessee ahead of any other person. The lessee then has the first right to accept or reject this definitely formulated lease.*fn1 The third meaning permits the lessors to negotiate with third persons, but after the lessors have come to a meeting of minds with a third person, they cannot immediately execute a lease with the third person, but rather they must take the terms, which have been agreed upon, to the lessee and give the lessee the first right to accept or reject these terms.*fn2
Each one of the meanings is equally fair and reasonable and this court cannot say which meaning was intended by the parties to the leases.
If the first meaning is given to the first refusal clause it is too vague to be enforceable, as it means merely that the parties will try to arrive at mutually agreeable terms. Driebe v. Fort Penn Realty Co., 331 Pa. 314, 200 A. 62, 117 A.L.R. 1091.*fn3 If the second meaning is given to the clause it also is too vague to be enforceable, as it then means merely that the lessors will offer to the lessee the best terms they will give to any other person. Hoffman's Appeal, 319 Pa. 1, 179 A. 38. If the third meaning is used, however, the clause is sufficiently definite to be enforced. Driebe v. Fort Penn Realty Co., supra, Atlantic Refining Company v. Wyoming National Bank, 356 Pa. 226, 51 A.2d 719, 170 A.L.R. 1060.
This court therefore finds itself in a position where it is asked to construe a clause which is so ambiguous that it is impossible to tell what it means and, further, using two out of its three meanings, the clause is unenforceable. Under these circumstances we must declare the clause unenforceable.
Ordinarily a clause in a contract cannot be disregarded if a reasonable meaning can be taken from it. This, however, does not apply to the present case for the reason that the clause under consideration purports to be an option. "* * * When contracts are optional in respect to one party, they are strictly interpreted in favor of the party bound and against the party that is not bound * * *" 3 Williston on Contracts, sec. 620, p. 1788. In an option the optioner is not bound beyond the point where the words of the option clearly and definitely bind him. Where, as in the present case, the words of the option are ambiguous, the optionor is not bound at all because the court cannot say to what obligation he is bound.*fn4
The rule of interpretation that an ambiguous clause in a lease is interpreted in favor of the lessee does not apply to this case for the reason that the clause requiring interpretation is an option to enter into a new lease, and an option in a lease is a contract independent of the lease contract. Signor v. Keystone Consistory, ...