The opinion of the court was delivered by: LINDBERG
This memorandum opinion relates to two separate actions consolidated for trial because of the identity of the parties involved and a similarity of issues. The first action, number 4923, was brought by Earl L. Sands and Rita D. Sands against the United States government and as amended by stipulation and pretrial order the plaintiffs seek damages in the amount of $ 9,999.99 for an alleged unlawful taking without just compensation. In the second action, number 4959, brought by the United States against Earl L. Sands and wife, James E. Comrada and wife, Frederic P. Holbrook, Trustee in Bankruptcy of James E. Comrada, and First Federal Savings and Loan Association of Bremerton, the United States seeks a declaratory judgment as to the rights of the respective parties arising out of a proposal to lease certain property for use as a post office. Frederic P. Holbrook, Trustee in Bankruptcy of James E. Comrada, and Earl L. Sands entered into an agreement whereby Holbrook, in consideration of Sands assigning to him any proceeds in this action up to $ 1,400, assigned to Sands any rights or interest he may have in any additional proceeds of this action, and withdrew as a party. Neither James nor Florence Comrada took part in the trial of this lawsuit.
Inasmuch as the pretrial orders set out in considerable detail the admitted and undisputed facts it will serve no useful purpose to repeat them all at this time. However, a brief resume of the circumstances which gave rise to these actions will help in clarifying the issues involved.
In response to a request for bids to furnish postal facilities on Bainbridge Island, James Comrada submitted a proposal to lease quarters to the Postmaster General in June of 1955. This proposal was amended in December of that year and accepted by the Postmaster General in February of 1956. In January, 1956 Comrada entered into a contract with Sands whereby Sands agreed to construct a post office building on property owned by Comrada for an agreed figure. On May 23, 1956 Comrada conveyed to Sands, by statutory warranty deed, the real estate on which the building was then under construction. On July 25, 1956, Sands executed a mortgage on this property, as security for a loan, to the First Federal Savings and Loan Association of Bremerton. That mortgage has subsequently been foreclosed and the First Federal Savings and Loan Association has become the legal owner of the property subject only to Sands' right of redemption.
The construction of the building did not proceed as rapidly as was desired by the government and in the fall of 1956 they began to urge an early completion. During October the government began to insist that the building be ready for occupancy not later than December 1, and it was at this point that the dispute arose as to the terms of the occupancy. On December 1, 1956, the government secured possession of the building and has continued to operate a postal facility therein to the commencement of this action.
It is clear that the basic issue in this case is the nature and validity of the alleged lease or proposal to lease which is plaintiff's exhibit number 1. At the outset we are confronted with the question of whether this document is to be construed as a lease or as an agreement to lease.
As I announced at the commencement of the trial, federal law and not Washington law should govern this suit. At this point I will briefly state my reasons for so holding. When the United States government sets out to establish postal facilities they are engaged in performing an essential governmental function as specifically empowered by the Constitution. Whenever the government is engaged in such an activity, an activity which by its very nature will be carried on in all cities, towns and communities throughout all states of the Union, it is important that uniformity be achieved. To require that negotiations for securing postal facilities be conducted within the framework of each state's laws, which are admittedly varied and often contradictory, would impose an intolerable burden upon the government. The respect which the federal government normally accords the laws of each individual state must give way in the interest of uniformity when the government is performing a constitutional function. This was the holding of the United States Supreme Court in Clearfield Trust Company v. United States, 1943, 318 U.S. 363, 63 S. Ct. 573, 87 L. Ed. 838, and the same reasoning used there applies to this case. A similar conclusion was also reached in United States v. Allegheny County, 1944, 322 U.S. 174, 64 S. Ct. 908, 88 L. Ed. 1209 and United States v. View Crest Garden Apts., Inc., 9 Cir., 1959, 268 F.2d 380. It should be observed in passing that the statement made in Erie Railroad Co. v. Tompkins, 1938, 304 U.S. 64, 58 S. Ct. 817, 822, 82 L. Ed. 1188 that 'there is no federal general common law' has been limited in its application to those cases in which federal jurisdiction is based on diversity of citizenship. See United States v. Standard Oil, Co., 1947, 332 U.S. 301, 67 S. Ct. 1604, 91 L. Ed. 2067.
Proceeding, therefore, under the mandate of federal law, is the proposal to lease quarters executed by Comrada and the government to be construed as a lease or as an agreement to lease? The government contends that under federal law this proposal should be construed as a lease, not merely an agreement to lease. With this I cannot agree. As is well stated in the American Law of Property, 3.17:
'Whether a given transaction results in a lease or an agreement to give a lease is a matter of intention to be determined from the language and acts of the parties. No precise words are necessary to create a lease, but the use of language of present demise -- demise, lease, to farm let -- indicates that a lease is intended.'
In United States v. 257.654 Acres of Land, etc., D.C.Haw.1947, 72 F.Supp. 903, the court was faced with a problem similar to the present one. That court emphasized that it is a question of intention. Did the parties to the agreement intend that it should be a presently-operative lease or an agreement to later execute a lease? In addition, the district court pointed out that where the instrument in question provides for the later execution of a lease that fact is some evidence that the parties did not intend a present demise of the premises.
A consideration of all the exhibits and testimony leads irresistibly to the conclusion that both Comrada and the government did not intend the proposal they executed to be a lease. Not only does the proposal itself provide that the undersigned 'agrees to lease' but the testimony of the government's own witness was to the effect that a later lease was contemplated and would be entered into. Nowhere was any language used which indicates that a present demise of the premises was intended. Any conclusion that could be drawn from the fact that Comrada signed the sample copy of the lease on the reverse side of the proposal, which action is at the most ambiguous, can have no effect on the result. Unilateral intention is not sufficient, and as I have already indicated, the government did not intend to enter into a lease at that time. Therefore, it is my conclusion that the proposal to lease is in law an agreement to execute a lease in the future.
This conclusion leads then to the next consideration, that is, what is the legal effect of an agreement to lease. What interests did the execution of this agreement and the action of the parties thereunder create?
The prevailing general rule is that an agreement to lease creates a legal relationship similar to that created by an earnest money agreement. That is, it creates an equitable right in the proposed lessee, and this equitable right can be specifically enforced against the proposed lessor or his successor in interest, provided the general requirements for specific performance are met. However, conveyance of the property to a bona fide purchaser or the creation of a subsequent interest by a bona fide encumbrancer will cut off the equitable rights of the proposed lessee. Halsell v. Renfrow, 1906, 202 U.S. 287, 26 S. Ct. 610, 50 L. Ed. 1032. On the other hand, however, if the subsequent purchaser or encumbrancer obtains his interest in the property with notice of the rights of the proposed lessee or vendee, he is bound by those rights and the contract can be specifically enforced against him. See Ebensberger v. Sinclair Refining Co., 5 Cir., 1948, 165 F.2d 803.
Therefore, the key factual question, as I see it, is, did Sands and/or the First Federal Savings and Loan Association have notice of the agreement to lease executed by the government and Comrada?