Daily Development for
Friday, February 22, 1999

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

RIGHT OF FIRST REFUSAL; ELECTION OF REMEDIES: Seller who offers property to buyer pursuant to right of first refusal cannot withdraw the offer even though there was no consideration for the original grant of the right.

Gaugert v. Duve, 579 N.W.2d 746 (Wis. Ct.App. 1998), review denied by 584 N.W.2d 123 (Wis. 1998).

Seller agreed to sell certain farmland to Buyer. When it turned out that the land did not total the 36 acres necessary to permit Buyer to build a house on the land, Seller offered to transfer an additional 28 acres, on the condition that Seller have the right to gather hay on twelve of those acres. Seller retained his own adjacent farmstead.

At closing, Buyer put on the table a right of first refusal document that Seller had never seen before. Seller executed it, knowing that he was executing a document that gave Buyer new rights. But some evidence suggested that at the time Seller believed, due to Seller's own misunderstanding, that the document simply gave Buyer a right to offer on the property at some later time. No separate consideration was exchanged for the right of first refusal.

Six years later, after previously warm relations between Buyer and Seller had cooled, Buyer learned that Seller was attempting to sell his farm. Buyer demanded the right to exercise the right of first refusal. Seller responded by delivering a Notice of Right to Exercise Option of First Refusal signed by Seller. The Notice apparently was mailed from Seller's attorney's office. This Notice included a copy of the contract offer Seller had received from a third party.

Buyer exercised the option and mailed Seller an earnest money check. Three weeks later, Seller's attorneys rescinded the option and returned Buyer's earnest money, stating that the option was invalid for lack of consideration. Buyer then filed suit to enforce the option. The trial court refused to enforce the option because of lack of consideration and because the agreement did not reflect a "meeting of the minds." Further the trial court concluded that Seller did not elect to follow through on the contract when it sent the Notice of Right to Exercise, and therefore had not elected to forego the defense of failure of consideration.

On appeal: Held: Reversed. The mailing of the Notice of Right was an election, and Seller is bound by it. Seller had a choice to refuse to follow through on the right of first refusal or to treat it as a binding agreement and accept its benefits. It chose, through the sending of the Notice of Right, to accept and affirm the contract. This was an election. Although Seller may not have understood at the time that Seller had the option to refuse to proceed due to lack of consideration, this was due to the fact that Seller did not adequately review his options with his attorneys before sending the Notice. Misunderstanding based upon failure to inform oneself adequately of the legal circumstances is no defense to an election claim.

The court distinguished between election and waiver. Unlike in waiver cases, a party can be held to have made an election in moving ahead on one of two inconsistent alternatives even when the party has no intention to relinquish completely the option not chosen.

The trial court, incidentally, had found no fraud on the part of the Buyers.

Comment: A remarkable feature of this case is that the court includes gratuitous information about how generous the Seller had been originally, and comments that the Seller was a more credible witness than the Buyer, but nevertheless permits the Buyer to follow through on what was originally an unenforceable contract based upon what appears to be a technicality. The editor likes "bright line law," and this clearly is a good example of such a case. Seller had counsel, and either the counsel or Seller made a serious error in electing to follow through on the contract before fully evaluating available defenses to 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

Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. The same is true of all commentary provided by contributors to the DIRT list. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.