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
dirt@umkc.edu
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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