Successive Leases Stand Alone: South Dakota Supreme Court Holds “Then Existing Mortgage” Means the Current (Refinanced) Debt and Rejects Carry-Forward of Prior Reserve Obligations

Introduction

In S.D. Board of Regents v. Madison Housing & Redevelopment Commission, 2025 S.D. 50 (Aug. 20, 2025), the Supreme Court of South Dakota reversed a circuit court judgment that had converted two decades of student-housing leases into a single, continuous contract and that fixed an option-to-purchase price by reference to the original 2000 construction financing. The decision establishes two significant rules of South Dakota contract law:

Serial, separately negotiated leases executed years apart are not treated as a single, continuous contract absent the indicia of a single, integrated transaction. Terms from an earlier lease—here, a reserve account provision—do not silently carry forward unless the later lease integrates or incorporates them.
An option clause fixing the buy-out price at the “then existing mortgage principal and interest balance” means exactly that: the mortgage balance outstanding at the time the option is exercised, even if the property has been refinanced—so long as the calculation is limited to the debt associated with the property being purchased.

The case arose from Dakota State University’s long-term leasing of two eight-plex apartment buildings constructed and financed by the Madison Housing and Redevelopment Commission. After DSU gave notice in 2020 to exercise a purchase option in the 2017 lease, the parties disputed (1) the meaning of “then existing mortgage” given the Commission’s refinance, and (2) whether DSU was entitled to a set-off tied to a “reserve account” described in the initial 2000 lease but omitted from the 2011, 2014, and 2017 leases. The circuit court ruled for DSU on both issues. The Supreme Court reversed and remanded.

Summary of the Opinion

The Supreme Court (Devaney, J.) held:

The later leases (2011, 2014, 2017) do not constitute a single, continuous contract with the 2000 lease. The single-transaction doctrine applies to instruments executed as part of one integrated deal—not to serial leases years apart. Because the 2017 lease contained no reserve-account clause, the Commission had no continuing obligation to maintain such an account or provide a purchase-credit tied to it. Partial summary judgment should have been entered for the Commission on this point.
The option language in the 2017 lease—allowing purchase “for an amount equal to the then existing mortgage principal and interest balance”—is unambiguous and refers to the mortgage balance outstanding when the option is exercised. It is not limited to the original 2000 construction financing. Courts will not add limiting language the parties did not include. Partial summary judgment should have been entered for the Commission on this issue as well.
Because the circuit court’s buy-out calculation rested on these legal errors, the final judgment (including DSU’s refund) was vacated and the matter remanded for recalculation consistent with the Supreme Court’s holdings.

Analysis

Precedents Cited and How They Shaped the Decision

The Court’s analysis builds on South Dakota’s plain-meaning approach to contracts and its careful limits on when multiple writings may be read as a single agreement:

Single-transaction doctrine (integration of multiple writings): The Court distinguished its earlier cases—Talley v. Talley, 1997 S.D. 88, 566 N.W.2d 846; Kramer v. William F. Murphy Self-Declaration of Tr., 2012 S.D. 53, 816 N.W.2d 813; and GMS, Inc. v. Deadwood Social Club, Inc., 333 N.W.2d 442 (S.D. 1983)—all of which involved instruments executed contemporaneously, by the same parties, for the same purpose, and dependent on one another to effect a single transaction. It also cited Baker v. Wilburn, 456 N.W.2d 304 (S.D. 1990), and St. Paul Fire & Marine Ins. Co. v. Tennefos Constr. Co., 396 F.2d 623 (8th Cir. 1968), acknowledging that even where dates differ modestly, internal cross-references and interdependence can still indicate a single-transaction package. By contrast, the DSU leases were executed across 17 years, for discrete terms, with material changes, and without cross-references that carried forward the 2000 terms.
Plain meaning and no judicial re‑drafting: Reaffirming Ziegler Furniture & Funeral Home, Inc. v. Cicmanec, 2006 S.D. 6, 709 N.W.2d 350; Edgar v. Mills, 2017 S.D. 7, 892 N.W.2d 223; Coffey v. Coffey, 2016 S.D. 96, 888 N.W.2d 805; Kernelburner, LLC v. MitchHart Mfg., Inc., 2009 S.D. 33, 765 N.W.2d 740; and Ass Kickin Ranch, LLC v. North Star Mut. Ins. Co., 2012 S.D. 73, 822 N.W.2d 724, the Court applied the plain text, refused extrinsic evidence because the option clause was unambiguous, and declined to add limitations (e.g., “original construction financing only”) that the parties did not write.
Renewal as new contract: Citing Jermar Properties, LLC v. Lamar Advert. Co., 2015 S.D. 26, 864 N.W.2d 1, the Court underscored that a “renewal” recreates a legal relationship and can operate as a new contract rather than a continuation of all prior terms.
Settlement-communications rule: The Court referenced SDCL 19-19-408 (Rule 408) to explain that statements in the 2020/2021 addenda (which were executed to bridge the parties while they negotiated a purchase) could not be used to prove disputed terms. The mere recitals in those addenda did not incorporate the 2000 lease nor revive its terms.

Legal Reasoning

1) Successive leases are not a single, continuous contract

The Court rejected the circuit court’s integration of the 2000, 2011, 2014, and 2017 leases into a single, continuous agreement. The opinion emphasizes the doctrinal touchstones for integrating multiple writings: contemporaneity, interdependence, common purpose within a single transaction, and internal cross-references that incorporate terms across documents. Those indicia were absent here.

Key facts supporting the Court’s conclusion:

Each lease had its own defined term (10-year in 2000; 3-year in 2011 with automatic 2-year renewals; 2-year in 2014; 3-year in 2017).
Material terms changed across leases: renewal mechanics, rental-rate adjustment language, maintenance and repair responsibilities, and—crucially—elimination of the 2000 reserve-account clause from all later leases.
No later lease incorporated the 2000 lease by reference. The 2020/2021 addenda referenced the existence of the 2000 and 2017 leases only in the course of settlement, and expressly disclaimed that such statements could be used against either party.

On that record, the Court held the 2017 lease controls and, because it contains no reserve-account obligation or reserve-credit on purchase, no such duty existed when DSU exercised the option in 2020. The Court also implicitly checked the misuse of the implied covenant of good faith and fair dealing: that covenant cannot create duties contrary to, or in the absence of, the parties’ written bargain.

2) “Then existing mortgage principal and interest balance” means the balance outstanding at the time of exercise—even if refinanced

The Court applied plain-meaning principles to the option clause in the 2017 lease. The phrase “then existing” points forward to the time of exercise—“at any time” DSU elects to purchase. Nothing in the text limits the price to the original construction financing; nothing forbids refinancing; and nothing pegs the buy-out to a historical amortization schedule. Courts cannot add such limitations.

Two clarifications sharpen the rule:

The buy-out price is tied to the debt associated with the property being purchased. The Court noted the circuit court’s concern about cross-collateralized debt on other properties but explained that the contract term itself is not absurd. The remedy for an “absurd application” (i.e., trying to charge DSU for unrelated properties) lies in enforcing the clause correctly, not in rewriting it.
Because the clause is unambiguous, extrinsic evidence regarding the parties’ purported intent was unnecessary and inadmissible for interpretation.

3) Remedy

The Court vacated the final judgment and directed entry of partial summary judgment for the Commission on the two legal issues (reserve-account obligation and option-price interpretation). It remanded for recalculation of the buy-out: the correct figure is the “then existing” balance of the refinanced mortgage attributable to the two eight‑plexes at the time DSU exercised the option. Any allocation issues arising from a refinance encompassing additional properties are factual matters to resolve on remand, consistent with the Court’s legal rulings.

Impact

The opinion carries significant implications for South Dakota real estate and public‑private partnership (P3) projects, particularly university and municipal housing arrangements:

Integration doctrine constrained: Parties cannot assume that favorable terms in an early lease (e.g., reserve accounts, credit-on-purchase) linger through later, separately negotiated leases. If a term matters, it must be re‑inserted or incorporated by reference in each subsequent lease.
Option pricing certainty—refinancing counts: Option prices pegged to the “then existing mortgage” will generally include the current, refinanced balance. Option holders should negotiate:
- Explicit caps (e.g., “not to exceed the balance that would have remained on the original amortization schedule”),
- Consent rights or prohibitions on refinancing or cross‑collateralization, and
- Clear allocation methods if a refinance secures multiple properties.
Limits on implied duties: The implied covenant of good faith and fair dealing cannot revive an obligation (like a reserve account) that the parties omitted from later contracts.
Settlement bridging documents are not backdoor amendments: Addenda used to extend a relationship while pursuing settlement—especially those that contain Rule 408 disclaimers—will not be read to incorporate old terms wholesale.
Drafting discipline rewarded: The Court’s insistence on plain meaning and non-rewriting of deals incentivizes precise drafting, consistent integration by reference when desired, and thoughtful option-pricing clauses that address refinancing, amortization assumptions, and allocation of debt.

Complex Concepts Simplified

Single-transaction doctrine: Courts sometimes treat multiple documents as one contract, but only when they were executed as part of a single, integrated deal—typically at or near the same time, for the same purpose, with interdependent obligations and cross-references. Separate leases negotiated over the years for new terms almost never qualify.
“Then existing mortgage” in options: This phrase normally means the mortgage balance due when the option is exercised. If the owner has refinanced, the “then existing” balance is the refinanced balance—limited to the debt associated with the property being purchased.
Reserve account: A contractual fund sometimes built from rent “excess” or savings, used for maintenance or credited on purchase. If later leases omit the clause, the obligation to maintain or credit the reserve disappears unless expressly carried forward.
Implied covenant of good faith: A background duty to perform existing contractual promises honestly. It cannot create new obligations the parties did not write, nor override the plain text of a later contract.
Parol/extrinsic evidence and ambiguity: If a contract term is clear, courts interpret it based on the text alone and do not consider outside evidence of intent. A disagreement about meaning does not make a term ambiguous.
Rule 408 (SDCL 19-19-408): Statements made during settlement negotiations are generally inadmissible to prove the validity or meaning of a disputed claim. Settlement-bridging addenda with express disclaimers are especially unlikely to alter contract terms.
Renewal vs. new contract: In South Dakota, a “renewal” often functions as entering into a new contract for a new term. If a term is not restated or incorporated in the renewal, it may be lost.

Practice Pointers

To preserve reserve or credit terms: Repeat them in every lease, or explicitly incorporate the prior lease by reference and identify the sections being carried forward.
To manage option pricing risk: Define the option price precisely. Consider formulas based on:
- The balance that would have existed under the original amortization schedule (as if no refinance),
- A fixed price or appraisal collar,
- Excluding non-property debt and setting an allocation methodology if the mortgage secures multiple properties.
If refinancing is contemplated: Include provisions requiring the option holder’s consent, prohibiting cross-collateralization, or specifying allocation rules.
When using stop-gap addenda during negotiations: Avoid language that could be construed as incorporating prior agreements wholesale; include Rule 408-style disclaimers where appropriate.
Litigation posture: On unambiguous clauses, resist extrinsic evidence. Frame cross-motions for summary judgment around plain meaning to secure de novo review.

Conclusion

S.D. Board of Regents v. Madison Housing marks a clear, two-pronged clarification of South Dakota contract law in the leasing and option context. First, it narrows the circumstances in which multiple documents will be read as a single contract: absent contemporaneity, interdependence, and integration, successive leases stand on their own, and omitted terms (like a reserve account) do not carry forward. Second, it gives option-pricing clauses real bite according to their words: “then existing mortgage” means the current, outstanding mortgage balance at the time of exercise, even if refinanced, limited to the debt associated with the subject property.

For public institutions, housing authorities, and private partners structuring student housing and other P3 transactions, the opinion underscores a simple but consequential drafting imperative: say what you mean every time you sign. If a term matters, carry it forward expressly. If refinancing risk matters, regulate it in the text. South Dakota courts will enforce what you wrote—not what you wished you had written later.