Daily Development for Monday, November 5, 2007
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri

This has got to be one of the more unfortunate choice of law decisions in recent years.  The contract in question certainly was drafted by lawyers who certainly were not thinking about the application of the Rule Against Perpetuities or the consequences of such Rule in the chosen state Delaware, as opposed to the situs of the real estate, Georgia.  Maybe the litigators who drew up this settlement, in all their arrogance, elected not to consult real estate attornies.  But if they did, someone made a big boo boo.  The case likely will disturb sleep for some others as well. 

RULE AGAINST PERPETUITIES; CHOICE OF LAW: Where two Delaware companies contract with respect to a settlement, and choose Delaware law as the controlling law, Delaware law will apply to invalidate a right of first refusal that is part of the settlement, even though the property is located in Georgia.

CS-Lakeview at Gwinnet, Inc. v. Simon Property Corp, 642 S.E. 2d 383
(Ga. App. 2007)

Simon and CS had undertaken a joint venture in commercial property in Georgia, but had fallen out.  Litigation ensued, and the parties settled in 1985  by Simon taking title to the property in question and CS having a right of first refusal if Simon should ever receive a bona fide offer to sell the property after 1995 (we dont know why they put this date in the arrangement).

Subsequently, in 2000, Simon conducted discussions with a potential buyer and notified CS that it had received an offer to acquire the property for $5.5 million.  CS demanded evidence that a formal offer had been received, but Simon had not yet obtained such an offer.  Nevertheless, Simon offered to CS the option to buy the property for $5.5. million.  CS evaluated the property but tendered an offer to purchase the property for $3.85 million.  Simon refused the offer.  A year later, it sold the property to the original buyer for $5.5 million without giving CS a chance to match the offer at that time. 

CS filed a breach of contract action, apparently on the notion that Simon had never formally complied with the terms of the right of first refusal.  Apparently, also, there was some dispute over the discussions over the option to purchase for $5.5 million and whether Simon had played fair in that exchange. 

We never learn the details of all this litigation in part because the court found that, under Delaware law, the right of first refusal was void because it violated the Delaware version of the Rule Against Perpetuities.  Under the common law Rule, this would not be an unusual result, although there is some authority contra and although many jurisdictions have modified the Rule and dont apply it to commercial transactions.  In fact, one of the jurisdictions that has modified the Rule so as to exempt commercial transactions is Georgia.  CS made a number of creative arguments to escape consequences of the invalidation of its right.

First, of course, CS argued that, since this was real estate, it is appropriate to apply the law of the situs.  Although this may be true, the Georgia court here acknowledged that commercial parties are free to designate the law of another jurisdiction, at least one that has significant contacts to the agreement.  Here, both parties were Delaware corporations and the original litigation between them, from which the settlement arose, was brought in Delaware Chancery court.  The selection of Delaware law was appropriate to the transaction.  There was no sound public policy basis for refusing to apply that law.  Mere dissimilarity of law does not provide such a basis.

CS then argued that the Georgia court should grant reformation of the contract, applying Georgia law, due to the mutual mistake of the parties that Delaware law would permit the right of first refusal to be enforced.  But the court uttered that deathless phrase (in effect) mere ignorance of the law is no excuse.  The mutual mistake doctrine applies to mistakes of fact, not of law.  There was no question here as to the parties agreement on the contract language or what it meant.

CS further argued that for Simon to get the rewards of the settlement agreement and unfettered title to the property was unjust enrichment, and that the court ought to strike down the entire settlement agreement if a critical part - the right of first refusal, is found to be invalid.  The court first pointed to the severability clause, which preserved the contract even if one or another clause was invalidated, and further noted that unjust enrichment does not apply where the parties have arranged their relationship by contract. 

Comment 1: In possibly the only part of the opinion that gives the
editor pause, the court further stated that CS ought to have no
complaint here because it in fact got what it bargained for when Simon
offered it the option to purchase the property for $5.5 million in
2000.  The editor doesnt agree.  Typically these rights are triggered
only by an actual offer - in the words of this agreement - abona
fide offer.  There wasnt such an offer in 2000.  Thus offering CS the
right to buy the property at that time was a nice gesture, but didnt
satisfy the terms of the right of first refusal.  A year later, when
Simon in fact got an actual formal offer to purchase from the same
purchaser, CS should have had the right to match the price at that
time.  Perhaps, due to market conditions, it the property had a greater
value and CS would have had less difficulty finding financing and
matching the offer.  Thats the reason courts typically read in the
requirement for an express offer e
ven if one isn't there.  But here there was language that should have been read to require an express offer.  In the overall context of the litigation, this analysis isn't all that important.  The right was void for other reasons and the unjust enrichment claim failed for other reasons as well.  But it's a sticking point for the editor that the court threw in this comment at the end.

Comment 2:  As to the application of the Rule to rights of first refusal, some jurisdictions differentiate between options and ROFR. The following is excerpted from an earlier posting by DIRTer Jack Murray of the Chicago Office of First American Title: 

See Mitchell, Can A Right of First Refusal Be Assigned? 68 U. Chi. L. Rev. 985, 994 (2001) ("In traditional common law jurisdictions, a right of first refusal of indefinite duration violates the common law Rule Against Perpetuities"); Ferrero Constr. Co. v. Dennis Rourke Corp., 311 Md. 560, 572 (Md. 1988) (rule against perpetuities is implicated by right of first refusal to purchase real estate, as rule was designed not only to facilitate the alienability of property but also to prevent restrictions that render title to land uncertain). The rule against perpetuities is a "peremptory command of law and not a Rule of Construction." Emerson v. Campbell, Del. Ch., 84 A.2d 148, 155 (1951). But see Continental Cablevision, Inc. v. United Broad. Co., 873 F.2d 717, 722 (4th Cir. 1989) ("Of all options, a right of first refusal is one of the least obnoxious to the policy concerns of the rule").

A majority of jurisdictions recognizes that a right of first refusal is
subject to the rule against perpetuities (though there is contrary
authority). See, e.g., Stuart Kingston v. Robinson, 596 A.2d 1378,
1383-1384 (Del. 1991) ("Although the rule is most often applied in the
construction of testamentary devices, it applies equally to rights of
first refusal, also known as preemptive rights, to acquire interests in
land. Despite the view of some courts that preemptive rights are merely
contract rights and not direct interests in property, a vast majority
of courts and commentators view such rights as equitable claims
sufficient to support an action for specific performance if the
property owner attempts to sell to someone other than the owner of the
right of first refusal. Because the holder of the right of first
refusal acquires merely an equitable interest, it remains inchoate
until the owner decides to sell thus triggering the right of first
refusal"). See also Lake of the Woo
ds Assoc., 380 S.E.2d 872, 874 (Va. 1989) (rejecting a request to treat first-refusal provision as procedural right that could be saved by application of "wait and see" doctrine). But see Murphy Exploration & Prod. Co. v. Sun Operating Ltd. Pshp., 747 So. 2d 260, 265 (Miss. 1999)("Mississippi, like many jurisdictions, has modified the draconian effect of this rule with the wait and see doctrine").

Courts adopting the minority view generally reach their conclusion by
assuming that the sole policy underlying the rule against perpetuities
is the elimination of restraints on alienation. Based on this
distinction, the minority view contends that, unlike ordinary options,
at least some rights of first refusal do not restrain alienation;
consequently, the minority view concludes that such rights of first
refusal should not be subject to the rule against perpetuities. See,
e.g., Forderhause v. Cherokee Water Co., 623 S.W.2d 435, 438-439 (Tex.
App. 1981); Robroy Land Co. v. Prather, 95 Wash.2d 66, 71 (1980);
Hartnett v. Jones, 629 P.2d 1357, 1361 (Wyo.1981); Weber v. Texas Co.,
83 F.2d 807,808 (5th Cir. 1936). [The editor also has seen cited for
the minority position a New York case, Metropolitan Transp. Auth. v.
Bruken Realty Corp., 67 N.Y.2d 156, 153 (1986); also see.  Bortolotti
v. Hayden, 866 N.E. 2d 882 (Mass. 2007).]  Thus, in effect, the
minority view postulates that an inte
rest should not be subject to the Rule unless the interest constitutes a restraint on alienation. The minority view then distinguishes rights of first refusal from ordinary options. As stated in VI American Law of Property,C2=A7 26.64, at 507:

"An option creates in the optionee a power to compel the owner of property to sell it at a stipulated price whether or not he be willing to part with ownership. A pre-emption does not give to the pre-emptioner the power to compel an unwilling owner to sell; it merely requires the owner, when and if he decides to sell, to offer the property first to the person entitled to the pre-emption, at the stipulated price. Upon receiving such an offer, the pre-emptioner may elect whether he will buy. If he decides not to buy, then the owner of the property may sell to anyone."

But this position has been harshly criticized. See Ferrero Constr. Co.
v. Dennis Rourke Corp., supra, 311 Md. at 572-73 ("Even assuming the
validity of the distinction between rights of first refusal and other
options, the minority view errs in assuming that an interest should not
be subject to the Rule unless the interest constitutes a restraint on
alienation. In making this assumption, courts adopting the minority
view confuse the Rule Against Perpetuities with the rule against
unreasonable restraints on alienation. Admittedly, both rules belong to
'a family of related rules that regulate the devolution of wealth from
generation to generation' (citation omitted). These two rules are
nonetheless distinct. The Rule Against Perpetuities prevents property
interests from vesting remotely (citations omitted). The rule against
restraints on alienation, on grantors from unreasonably depriving
grantees of the power to alienate their estates (citations omitted).
The policies underlying t
hese two rules are likewise not identical. Obviously, the rule against restraints on alienation serves to facilitate the alienability of property. Similarly, one of the purposes of the Rule Against Perpetuities is to facilitate the alienability of property (citation omitted). Contrary to the minority view, however, the Rule Against Perpetuities is not simply a rule against restraints on alienation (citation omitted). Instead, the Rule Against Perpetuities is concerned with restrictions that render title uncertain (citation omitted). Without the Rule Against Perpetuities, it would be possible at some distant point for a remotely vesting future interest to divest the current owner's estate. Because of this threat of divestment, the owner might be deterred from making the most effective use of the property, even if he never has any desire to alienate his estate. Thus, by voiding certain remotely vesting future interests, the Rule Against Perpetuities eliminates this deterrent both fo r owners who wish to alienate their estates and for owners who have no intention of ever doing so (citation omitted). Consequently, from the standpoint of the Rule Against Perpetuities, it is irrelevant whether a particular future interest imposes a light burden, a heavy burden, or no burden at all upon the alienability of property" (citations omitted)).

TITLE INSURANCE; TORTIOUS INTERFERENCE: When title insurer agrees to insure over a third party option right in order to permit a closing of property, it will not be liable to such third party for tortious interference with the option when the seller, prior to seeking the title insurance,  has already resolved to sell the property notwithstanding the third party's right. 

CS-Lakeview at Gwinnet, Inc. v. Simon Property Corp, 642 S.E. 2d 383 (Ga. App. 2007) , discussed under the heading:Rule Against Perpetuities; Choice of Law.

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