Daily Development for Friday, December 15, 2000

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

OPTIONS; FIRST REFUSAL; FIXED PRICE: A interest stated as a right of first refusal can still be viewed as such even if it states that the holder of the right may buy at a stated price.

Stuart v. D'Ascenz, 2000 WL 1425100 (9/28/00)

The instrument, which was contained in a lease for a building used as a bar, stated as follows:

"Leasee [sic] has the 2st right of refusal on the property for a period of (2) two calandar [sic] year term from the start of this lease. The purchase price shall be $160,000."

About a year later, the tenant, who had purchased outright the personal property that was part of the bar business, offered to purchase the property for $160,000, and the landlord refused to sell.

Tenant brought an action for specific performance of what Tenant argued was a binding option to purchase for the stipulated price. The trial court concluded that there was reason to believe that the language of the lease in this respect was ambiguous, and admitted extrinsic evidence pertaining to the intent of the parties. It then ruled that, either with or without the extrinsic evidence, it construed the provision as an option to purchase, and ordered the landlord to sell.

On appeal: Held, Reversed. The provision is unambiguously a right of first refusal.

The court noted that the mere existence of a fixed price does not turn a refusal right into an option. The party holding the right can claim that, prior to accepting an offer from anyone else, the party bound by the right has an obligation to sell under the right for the stipulated price. As the court noted in this case, nothing in the clause indicated that the tenant had an absolute right to demand conveyance of the property at any time prior to landlord's decision to sell it.

The extrinsic evidence should not have been considered, because, the appeals court concluded, the clause was unambiguous. In any event, the court noted, the extrinsic evidence consisted of language from the sale agreement for the bar business, which contained an understanding regarding the lease, and as such any language in that agreement contrary to the language of the lease was "merged" into the final expression of the parties' agreement in the lease.

Comment 1: The editor concludes that a fixed price refusal right, although not common, is nevertheless not so unusual as to compel the conclusion that any time such an understanding appears in an agreement it is per se ambiguous. Thus the editor agrees with the case. DIRTer Bert Rush, who wrote up the case for the First American house list Landsakes, disagrees, and would have admitted extrinsic evidence.

Comment 2: Note that there is some danger in the fixed price option or first refusal right in that a court might conclude that such right constitutes an unreasonable restraint on alienation. Particularly where the right will last for a substantial period of time (and two years is verging on substantial), the parties may want to include some protective language indicating why they have fixed upon this price and why they think that it is reasonable and not an undue restriction on the alienability of the property. A far better approach is to base the price on some index. The index still can preserve a good deal for the holder of the right, but prevents the deal from getting outrageously good. Further, rather than extending the option for a substantial period, consider making the option periods shorter with renewals available to the optionee for additional consideration. Even if this additional consideration is applicable to the price, it makes the total deal more reasonable.

Comment 3: Options and refusal rights always make it more difficult to sell property, and anyone giving such an interest ought to take that into account. With a refusal right, the length of time that the holder has to react to an invitation to match the offered price is very significant. Jack Murray has suggested that an alternative approach might prove more acceptable to parties unwilling to tie up their ability to market the property to the highest bidder. This is the "right of first offer," where, if the owner intends to sell, the owner must invite an offer to the holder of the right first, with a specific time period during which the holder can formulate the offer and the bound party must consider it. Once the bound party rejects this offer, the party is unencumbered and can be sold efficiently. Not a bad idea.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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