Daily Development for Thursday, November 18, 1999

Daily Development for Friday, November 19, 1999

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

Note two aspects of this case are contained in two separate reports below.

RIGHT OF FIRST REFUSAL; RIGHTS OF THIRD PARTY OFFEROR: A right of first refusal is enforceable against a third party purchaser where the third party knew of the refusal right and made no inquiry as to whether the holder of the right had been given an opportunity to purchase the property on the terms of the third party contract.

Stuart v. Stammen, 590 N.W.2d 224 (N.D. 1999).

The plaintiff was granted a right of first refusal to purchase the seller's real property. Several days after entering into that agreement, the seller informed the plaintiff of a third party offer to purchase the real property, together with personal property, for a price of $140,000. The plaintiff declined to match the third party offer. The seller then agreed to sell the property to the third party for $117,500, allocating $75,000 of the purchase price to the real estate and $42,500 to the personal property. The plaintiff approached the seller upon learning of the agreement and was again given an opportunity to match the terms of the third party contract. The plaintiff again declined, stating that he did not wish to buy the personal property. The plaintiff sued the seller for specific performance of his right of first refusal.

The North Dakota Supreme Court held that the plaintiff had a contractual right to purchase the real property alone for $75,000. The general rule under North Dakota law is that a right of first refusal is unenforceable against a good faith purchaser for value. In this case, however, the record showed that the third party purchaser had been told of the right of first refusal and was therefore on notice that his right to purchase the property was subject to the plaintiff's refusal right. The record also showed that the third party had not inquired as to whether the plaintiff wished to purchase the property on the terms of the third party offer. Thus, the Court held that the third party was not a good faith purchaser and could not claim the protection afforded such purchasers.

Comment: The lesson here is an obvious one. You can't assume that the holder of the right of first refusal has not exercised the right you must demand proof. But how far does one go? Is it enough to have evidence that an accurate notice of opportunity to exercise has been sent? One still doesn't know whether the holder has responded or has an excuse for not responding? It would seem that the only real protection is an estoppel certificate.

If this is the case, then the next consideration is that the grantor of a right of first refusal ought to require as part of the agreement that the holder of the right agree in advance to execute a proper estoppel certificate or other evidence of refusal of the offer in the event the offer is triggered by a later sale.

Comment 2: What about the rights of the third party buyer? If the contract contains no condition excusing performance if the holder of the right exercises that right, does the buyer have a remedy against the seller? Yarnell v. Almy, 703 A.2d 535 (Pa.Super. 1997) held that where a prospective purchaser of real estate was aware of third party's right of first refusal, seller's offer to sell did not amount to an agreement to deliver title even if the holder of the right of first refusal exercised that right.

RIGHT OF FIRST REFUSAL; SALE OF LARGER PORTION: Owner of property subject to right of right of first refusal may not eliminate right of first refusal by selling more than the property subject to the right.

Stuart v. Stammen, 590 N.W.2d 224 (N.D. 1999).

The facts are set forth under the heading: "Right Of First Refusal; Rights Of Third Party Offeror." Stuart had a right of first refusal on some land. Simmons, the owner, received an offer for the land plus some personal property. Simmons tendered the opportunity to buy the land and personal property to Stuart, but Stuart rejected this offer. The North Dakota Supreme Court held that the Stuart's refusal to match the terms of the third party offers for the land and personal property did not constitute a waiver of his right of first refusal for the land alone.

Citing prior rulings, the Court stated that the right to purchase real property is sufficiently important that a waiver of the right must be specific, clear, and unambiguous. Thus, said the Court, the plaintiff's refusal to purchase property at a price of $140,000 did not constitute a waiver of his right to purchase the property at the lower price stated in the purchase agreement. Moreover, and more to the point of this report, the plaintiff could not be forced to purchase property in addition to that which was subject to his right of first refusal. The seller, therefore, could not sell the real property for $75,000 without first giving the plaintiff an opportunity to purchase it at that price.

Comment: For an example of the obverse situation, see the recent unreported decision in Rottier v. Walsh, 1999 Wisc. App. LEXIS 1053 (9/23/99), where the owner of the land subject to a right of first refusal received an offer to buy only one parcel of the land. The owner tendered this opportunity to the holder of the right, but the holder responded with a lawsuit to enjoy the sale of only one parcel. The holder argued that the property could not be sold at all except as an entire parcel. It was not fair to the holder to tender only part of the property on penalty of losing the right to exercise the right on the parcel as a whole. It further would have been unfair to the buyer of the parcel to require it to buy subject to a right of refusal, since the real purpose of the right was to preserve the holder's interest in the entire property, not just one parcel. And to permit the parcel to be sold free of the right would permit the owner ultimately to sell off both parcels and avoid the right entirely. The appeals court agreed (reversing the trial court).

In essence, the court held that an implied provision of a right of first refusal is that the land subject to the right cannot be soled piecemeal. Also see: Raymond v. Steen, 882 P.2d 852 (Wyo. 1994) (semble).

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about 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

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