Daily Development for Wednesday, February 24, 2010
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri

OPTIONS; RIGHTS OF REFUSAL; SCOPE OF RIGHT: Despite rule that an optionee under a right of first refusal may not tender to the optionor an offer to purchase more than the subject property, thereby frustrating optionor’s rights, a Texas Appeals court has held that a party with land subject to a right of refusal may tender to the optionee and offer to acquire all of the personal property on the land and the personal and real propeerty owned by optionor at another location as a condition of exercising its rights, even though the likely value of the property subject to the right is only about 7.6% of the overall price being demanded.

FWT, Inc. Haskin Wallace Mason Property Management, L.L.P. , 2009 WL 4114140 (Tex. App. 11/25/2009) (on rehearing), petition for appeal filed 1/10/10. 

A petition for appeal has been filed in this case and the editor believes, if there is "right and justice" in the Texas legal system, this petition will be granted and the case reversed.  But it is so amazing that a panel of the Texas Court of Appeals would rule as it did that the editor notes the case anyway.

FWT owned a vacant six acre parcel that it sold to HWM.  The transaction included a right of first refusal in FWT, stating:

“In the event Grantee desires to sell, leaese or otherwise convey all or any part of the Property and shall have a bona fide offer from a third party . . . then Grantee shall furnish to Grantor written notice of the name of the prospective purchase and the terms and conditions of such offer. . . . Grantor shall have 20 days after receipt of the notice in which to elect to purchase, lease or otherwise accept such conveyance . . . at the same price and under the same terms and conditions offered by the prospective purchaser.”

HWM owned and operated a galvanizing plant through a corporate subsidiary in another city.  It proceeded to install a galvanizing plant on the subject parcel as well, owned and operated by another subsidiary.  Apparently the galvanizing plant and equipment consisted primarily of removable personal property.

Subsequently, another company submitted an offer to buy HWM’s personal property assets in both cities, acquire title to the land in the other location,  and to lease, with option to buy, the Subject Property that was the subject of the right of first refusal.  The total consideration (other than lease payments) that was to pass in cash to HWM was $16,500,000, with an additional $2.5 million if the lease option were later exercised.

HWM submitted this offer to FWT and argued that the”conditions” that the Buyer had placed upon its offer to lease/option the Subject property were not made for the purpose of frustrating FWT’s right of refusal (HWM argued that it expected FWT to waive that right for other reasons) and that the terms were commercially reasonable (the court doesn’t tell us why a requirement that two plants pass in same transaction is commercially reasonable.   Consequently, the court upheld a grant of summary judgment to HWM that FWT would lose its right of first refusal unless it came up with the total of over $19,000,000 (including the option price) to acquire these facilities.
The court invoked what appears to be a narrow and little used exception to the general rule that an optionor cannot eliminate a right of first refusal by agreeing to sell more than the property occupied by that right.  The exception states that if the conditions imposed on the sale to the third party are not made to frustrate the refusal right, made in good faith, and commercially reasonable, the optionee must meet those conditions.  But the precedent cases cited by the court are nothing like this case.  In one precedent case, the condition was that the FTC approve the transfer of an oil pipeline right.  In another, the conditions were granting a buyer’s commission and including one-year employment rights for certain key employees of an optician’s office. In both cases, of course, the basic substance of the sale tendered to the holder of the refusal right was the same asset that the optionee had bargained over.  But in the instant case, it would appear, the property subject to a r
ight of refusal is only a small portion of a huge and expensive business acquisition. 

Comment 1: All prior postings on DIRT on this subject reiterate the rule that one can’t “oversell” property subject to a right of refusal.  The extensive case law cited in Friedman on Leases (Randolph edition) at Section 15.6 is also consistent with this concept. 

Comment 2: It seems that the Texas court has permitted the exception to swallow the rule.  Although many deals involving property subject to a right of refusal combined with other property might make economic sense, this doesn’t mean that the right should be “sold out” to permit these deals to go ahead.  The mere fact that an outside offer is in good faith and not made to frustrate the refusal rights also are beside the point.  The first question we must ask is whether the optionee has a reasonable opportunity to match the offer on the property that was the subject of the right. 

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