Daily Development for Monday, September 12, 2005
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
OPTIONS; RIGHT OF REFUSAL; ENFORCEABILITY: A right of first refusal is not enforceable due to vagueness where it does not contain a price term and does not specifically state that price will be set by a competing offer.
Crestview Builders, Inc. v. The Noggle Family Limited Partnership, 816 N.E. 2d 1132 (Ill. App. 2004).
Plaintiff Crestview entered into a real estate sales contract with defendants, the Noggle Family Limited Partnership, pursuant to which plaintiff purchased from defendant several tracts of land and defendants agreed to provide plaintiff with “a right of first refusal on the retained homestead.” There was apparently no dispute as to what parcel was intended by the term “retained homestead.”
The parties were unable to negotiate mutually acceptable terms for the right of first refusal, and in the interim defendants conveyed the homestead parcel to two of the partners in their individual capacities. Three years after this conveyance, the parties inserted language at the bottom of a closing statement for the sale of another parcel that stated that defendants would comply with the terms of the original purchase agreement and deliver a signed and recordable right of first refusal by the end of the year. Defendants failed to do so, and plaintiff brought suit for declaratory judgment and specific performance.
The circuit court granted plaintiff's summary judgment motion, and defendants appealed, arguing that the right of first refusal provision was unenforceable due to the lack of a price term. Citing Universal Scrap Metals, Inc. v. J. Sandman & Sons, Inc., 786 N.E.2d 574 (2003), the court observed that a right of first refusal need not provide a price term if it provides a mechanism whereby price may be ascertained. Plaintiff contended that the term itself contained an implicit mechanism for determining price, citing Black's Law Dictionary for the proposition that a right of first refusal is defined as the right to meet the terms of a third party's offer if the seller intends to accept that offer. But the court rejected plaintiff's contention, finding that a right of first refusal need not always involve a third party offer (citing the Universal Scrap Metal case for authority.)
The court noted that other jurisdictions have agreed that a right of first refusal ought to be construed as requiring the holder to match the terms of a competing offer, but indicated that Illinois had reached a different conclusion. It stated that sometimes parties intend that the property be offered first to the holder of the right as a precondition to even offering the property for sale to anyone else. Where the terms of the agreement do not indicate whether the parties intend this type of right of first refusal, as opposed to the “match the offer” type, the court will hold the entire right unenforceable for vagueness.
Comment 1: In the editor’s experience, at least, the term “right of first refusal” has a reasonable well established trade meaning that ought to be enforced when the parties have not indicated otherwise. That meaning is the “match a competing offer” type of right. It bothers the editor that the court does not come up with a “default construction” for the right of first refusal - finding it to be a “match the competing offer” type of arrangement, rather than a “first offer” arrangement and put the burden on the party benefitting from an alternative interpretation to make that idea clear. There is no question in most of these cases, especially when other land is transferred, that the right of refusal is a valuable item for which the parties paid a price. Why should the court read the whole thing out of the contract and give the seller a free ride?
Comment 2: It may be that courts see this as one of those “story” situations - based upon some myth, usually involving a “landed poor” saintly farm family getting snookered by sharpy developers. Courts that suck into these kind of storybook interpretations of legal principles often tend to tilt the law away from a need for clarity and in favor of protecting parties that they perceive to be in need of greater protection, whether or not they make any real investigation as to the accuracy of the assumption or the appropriateness of the remedy.
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