Options and Related Rights With Respect to Real Estate

 

 

By John C. Murray

© 2010

 

 

Introduction

 

If they are not careful, the parties to legal documents creating or transferring real property interests (including leases and purchase agreements) who wish to incorporate options to purchase, rights of first refusal or similar rights, can create unwanted and unanticipated problems when negotiating and drafting such provisions. Options and related rights should never be taken lightly, and should be clearly and comprehensively negotiated and drafted to reflect the intention and expectations of the parties.

 

Clear Expression of Intention - The Stuart v. D’Ascenz Decision

A Colorado appellate court decision illustrates the dangers of not being careful to ascertain that the option language in a lease expresses the intentions of both of the parties.  In Stuart v. D’Ascenz, 22 P.3d 540 (Colo. Ct. App. 2000), reh’g denied, 2000 Colo. App. LEXIS 1945 (Colo. Ct. App., November 9, 2000), cert. denied, 2001 Colo. LEXIS 384 (Colo., May 14, 2001), the court ruled that a lease provision providing that the tenant had the right of first refusal with respect to a sale of the property, with a specified purchase price, granted only a right of first refusal and not an option to purchase.

The facts in this case were straightforward.  The plaintiff, who owned and operated a bar in Denver, Colorado, agreed to sell the bar to the defendant for $125,000. The parties entered into two agreements in connection with the transaction: (1) a purchase agreement for the sale of the bar, and (2) a lease for the property (executed five weeks after the purchase agreement), whereby the plaintiff would continue to operate the bar.  

The lease contained the following clause (which was certainly not a model of drafting precision or clarity):

Leasee [sic] has the 1st right of refusal on the property for a period of (2) calendar [sic] year term from the start of this lease.  The purchase price shall be $160,000.

* Nothing contained in this Article is to be considered as the rendering of legal advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel. This Article is intended for educational and informational purposes only. The views and opinions expressed in this Article are solely those of the Author, and do not necessarily reflect the views, opinions, or policies of the Author’s employer, First American Title Insurance Company.

Approximately one year after the execution of the lease, the plaintiff offered to purchase the property for $160,000. The defendant refused this offer.  The plaintiff then sued for specific performance, claiming that the lease clause quoted above granted her an option to purchase. The trial court agreed with the plaintiff, holding that the language in the lease clause evidenced the intention of the parties to grant the defendant an option to purchase the property. The trial court stated that even when it considered extrinsic evidence offered by the defendant, it had arrived at the same conclusion.

The appellate court reversed the holding of the trial court, finding that the lease unambiguously provided the defendant with only a right of first refusal.  The appellate court first stated the “distinction in law” between an option and a right of first refusal.  According to the court, “an option to purchase gives the holder the power to compel the owner to sell the property regardless of the owner’s desire to do so; in contrast, a right of first refusal does not give the holder the power to compel the owner to sell but merely requires the owner, when and if he or she decides to sell, to offer the property to first to the holder.” (citations omitted)).  Id. at 542. The appellate court then cited case law in both Colorado and other jurisdictions that held that the mere fact that a purchase price was contained within an otherwise unequivocal right of first refusal did not create an option.  Therefore, the court ruled, the lease clause did not create an option because nothing in the clause indicated that the plaintiff had any right to demand conveyance of the property before the defendant indicated his intention to sell it, and if the defendant subsequently decided to sell the property his only obligation would be to first offer it to the plaintiff for the stipulated purchase price of $160,000.

Finally, the appellate court rejected the plaintiff’s argument that certain provisions in the purchase agreement executed by the parties independently created an option right in the plaintiff. The court stated that because the lease clause was unambiguous, its meaning could not be altered by extrinsic evidence. The court further held that even when extrinsic evidence as to the terms of the purchase agreement was considered, such evidence showed that although the plaintiff had attempted to negotiate a provision providing both an option right and a first right of refusal, the counterproposal submitted by the defendant -- and accepted and signed by the plaintiff -- provided only a right of first refusal to the plaintiff.  Moreover, the court held, because the lease was executed later in time than the purchase agreement, “the purchase agreement provisions merged into the unambiguous clause in the lease dealing with the same subject matter.” Id.

 

Discussion of Stuart v. D’Ascenz Decision

1.         The Colorado appellate court’s decision – finding that the language in the lease created a right of first refusal and not an option – is not surprising. The language clearly referred to a first right of first refusal, and the statement of the “purchase price” – although certainly not a model of clarity (or intelligence) - did not alter this fact. A noted by the court:

The distinction in law between an option and a right of first refusal is this: an option to purchase gives the holder the power to compel the owner to sell the property regardless of the owner's desire to do so; in contrast, a right of first refusal does not give the holder the power to compel the owner to sell but merely requires the owner, when and if he or she decides to sell, to offer the property first to the holder.

Id. at 541-42.

This is, of course, no excuse for the sloppily drafted and worded option provision in the lease. It is always dangerous to combine a right of first refusal and a separate option right in the same agreement (whether deliberately or inadvertently). If such alternative rights must be inserted in the agreement, the parties’ counsel should be careful to clearly and conspicuously spell out in detail the terms of each of such rights and the circumstances under which one or the other will prevail (to avoid an ambiguity that must be decided by a court).

2.         The Colorado court cited law from other jurisdictions in support of its holding, stating that:

Although options are often linked to stipulated prices, and rights of first refusals (or pre-emptive rights) to third party offers, see Kroehnke v. Zimmerman, 171 Colo. 365, 467 P.2d 265 (1970), Peters v. Smuggler-Durant Mining Corp., 910 P.2d 34 (Colo. App. 1995), aff'd, 930 P.2d 575 (Colo. 1997), neither stipulated prices nor third-party considerations determine whether a particular clause is an option or a right of first refusal. See Producers Oil Co. v. Gore, 610 P.2d 772, 774 (Okla. 1980) (recognizing that a right of first refusal can be premised on "a stipulated price, or . . . a price the [owner] is willing to sell to a third party"); Jankowski v. Zafrullah, 155 A.D.2d 793, 548 N.Y.S.2d 70, 71 (App. Div. 1989) ("the contract's recitation of a purchase price was not incompatible with" a right of first refusal); Long v. Wayble, 48 Ore. App. 851, 618 P.2d 22 (1980) (language -- "Lessor agrees to give lessee first right of refusal on purchase of this property at an asking price of $35,000" -- created not an option but a right of first refusal).

Id.

3.         See also Ferrero Constr. Co. v. Dennis Rourke Corp., 311 Md. 560, 584-85 (Md. 1988) (“a right of first refusal is impotent to put property outside the stream of commerce. The holder of a right of first refusal cannot force the owner to sell the property. Nor can the holder prevent a sale once the owner has decided to sell. The holder of the right is limited to either accepting or rejecting the offer when the owner desires to sell. Moreover, because the right of first refusal in this case is not to be exercised at a fixed price, but is instead based on a price the owner is willing to accept from a third party, the right does not discourage the owner from placing improvements on the property, and the owner is assured of getting the fair market value for his land and added improvements”); Bloomer v. Phillips, 164 A.D.2d 52, 54-55 (N.Y. App. Div. 1990) (“Unlike an option, which creates a power to compel a sale, a first refusal right ‘contemplates a willing seller who desires to part with the property.’  Should the seller decide not to sell before the right of first refusal is exercised, ‘the selling party has fully complied with its obligations under the first refusal clause by not selling without first making the required offer.’  Thus, the selling party is not required to do more than was promised by keeping the offer open even after deciding against the sale.  Accordingly, we find that the first refusal offer herein did not become an irrevocable option by operation of law. . . .  Nor, in our view, did the parties intend so under the specific terms of the agreement. We recognize that contracting parties, if they so choose, may specifically provide that a first refusal offer must remain open, ‘making it an option.’  However, that is not the case here. Although the contract provided plaintiffs with an ‘irrevocable’ right of first refusal, the term ‘irrevocable’ specifically applied only to the right of first refusal and not to defendants' offer to sell. In our view, the term is unambiguous and to interpret it otherwise in this instance would transform the right of first refusal into an option, a  result which was not the intention of the parties and cannot be gleaned from the contract itself (citation omitted). Therefore, plaintiffs were not entitled to relief under the circumstances”); Riley v. Campeau Homes (Texas), Inc., 808 S.W.2d 184, 187 (Tex. App. 1991) ("A right of first refusal, as a preemptive right, requires the property owner to first offer the property to the person holding the right of first refusal at the stipulated price and terms in the event the owner decides to sell the property" (emphasis in text); Polemi v. Wells, 759 P.2d 796, 798 (Colo. Ct. App. 1988) ("[A] preemptive right does not give the lessee the power to require an unwilling owner to sell. It merely requires the owner, if he should decide to sell, to offer the property first to the lessee for the price at which the owner is willing to sell to a third party"). Cf. Bramble v. Thomas, 2007 Md. LEXIS 5 (Jan. 8, 2007), at *37-38  (ruling that holder of first right of refusal on real property did not have to literally match all terms of triggering third-party offer tendered to optionor, where terms objected to may have been inserted in bad faith to discourage or frustrate rights of pre-emptive holder of right of first refusal; case was remanded to decide issue of whether there was in fact a reasonable justification for imposing use restriction inserted in contract and objected to by holder of right of first refusal).

4.         But see Tachdjian v. Phillips, 256 Ga. App. 166, 170-171 (2002). In this case, the court ruled that the language in the real-estate purchase agreement executed by the parties was ambiguous as to whether it granted solely a right of first refusal or, in addition, created an enforceable option to purchase certain real property. The court remanded the case for a jury trial as to what the parties actually intended.  The “right of first refusal” in the purchase agreement stated an initial fixed price for a period of years, and thereafter a price “to be negotiated between the parties.” There was testimony by the holder of the right of first refusal that the alleged right to an option to purchase was orally stated and agreed to by the parties and was part of the consideration for the transaction. The court was also concerned that there was no “triggering event” stated in the agreement, i.e., an offer by a third party; the property owner’s decision to sell; or any other triggering event. Furthermore, the court stated that existing Georgia case law “makes clear that if a right of first refusal is to be complete, the parties must supply the triggering term by agreement that informs the parties when such right is operative” (citation omitted). Id. at 170. But the court did not find that the disputed provision constituted an option instead of a right of first refusal; it stated that “the question as to what was intended here is an issue of fact for the jury to resolve” and remanded the case to the trial court for a jury trial on this issue. Id. at 171. The court also stated that, “If the jury finds that the parties intended a right of first refusal (to be triggered by [defendant] offering the party for sale), then [defendant] must prevail.” Id.

 

Difference Between Options and Related Rights

The following briefly summarizes the differences between options, rights of first refusal, right of first negotiation, and rights of first offer:

1.        Option – The clearest and strongest right that can be granted to give a party flexibility in the future; the option grantee (“grantee”) is given the right, but not the obligation, to lease, buy or otherwise control a specified asset in the future.  To be enforceable, the option should set forth exactly what asset is subject to the option, the price and terms on which the optionee can exercise the option, the date or dates on or between which the option is exercisable, and the corresponding dates for closing or delivery of the optioned asset. See black’s law dictionary (7th ed. 1999), at 1121 (defining “option to purchase real property” as “[a] contract by which an owner of realty enters an agreement with another allowing the latter to buy the property at a specified price within a specified time, or within a reasonable time in the future, but without imposing an obligation to purchase upon the person to whom it is given”); Wachovia Bank v. Lifetime Industries, Inc., 145 Cal. App. 4th 1039, 1049 (2006) (“An option to purchase real estate, supported by consideration, is a contract by which the owner of the property (the optionor) gives another (the optionee) the exclusive right to purchase the property in accordance with the terms of the option (citations omitted).  An option may provide that it can be exercised only upon the existence of specified facts or the occurrence of specified events (citation omitted). If the specified facts do not exist or the specified events do not occur, then the option cannot be exercised”).

2.        Right of First Refusal – An alternative to an option.  Unlike an option, a right of first refusal does not entitle the holder of the right to force the other party to sell or lease the asset.  Instead, if and when the other party decides to sell or lease the asset to any third party, the holder of the right of first refusal can require the asset to be sold or leased to him or her for the same price and terms that the owner is willing to accept from the third party. See, e.g., Metropolitan Transp. Authority. v. Bruken Realty Corp., 67 N. Y.2d 156, 163 (1986) (holding that in New York, right of first refusal is a well-accepted term, and is a “preemptive right” that “requires the owner, when and if he decides to sell, to offer the property first to the [rightholder] so that he may meet a third-party offer or buy the property at some other price set by a previously stipulated method”). Obviously, a right of first refusal is much weaker from the standpoint of the holder that an option: it does not set the price for the asset in advance, and it allows the owner of the asset to decide whether and when to sell or lease.  The property owner generally will resist granting a right of first refusal because of its chilling effect on the marketability of the property.  Brokers may be reluctant to list a property that is subject to a right of first refusal unless they are also promised a commission if and when the holder of the right exercises it and purchases the property.  See black’s law dictionary (7th ed. 1999), at 1325 (defining “right of first refusal” as “[a] potential buyer’s contractual right to meet the terms of a third party’s offer if the seller intends to accept that offer”); 1A corbin on contracts § 261 (1963), which defines a right of first refusal as follows:

A "right of first refusal" is not an option contract; it cannot be "accepted" by its holder and it is not required that the price and other terms be specified. A party who grants a right of first refusal promises the purchaser of that right that the promissor will make an offer to sell to the purchaser, or afford the purchaser an option to buy, the property which is the subject of the right, at the price and on the terms stated when the right is granted, or at the same price and upon the same terms as the promissor is willing to accept from a third party. Where no price is stated when the right is granted, the offer of the third party supplies the terms under which the right of first refusal may be exercised.  

The scope of the “price and terms” of a third-party offer that the holder of a right of first refusal must meet should be carefully set forth in the right of first refusal and should be carefully reviewed by any prospective third-party purchasers. See, e.g., Hahalyak v. A. Frost, Inc., 444 Pa. Super. 494, 502-503 (1995) (holding that language of right of first refusal was “clear and unambiguous” and that “terms and conditions of any proposed lease” included only economic terms of proposed lease and not agreement of proposed lessee to vacate existing space in the building or agreement of another party to pay “inducement fee” for such vacated space); Cities Service v. Estes, 208 Va. 44, 47 (1967) (holding that an involuntary transfer of leased premises, such as a foreclosure sale, subject to a right of first refusal in the lessee activates the lessee’s right of first refusal, and stating that “[a] right of first refusal is distinguished from an absolute option in that the former does not entitle the [buyer] to compel an unwilling owner to sell. Instead it requires the owner, when and if he decides to sell, to offer the property first to the person entitled to the right of first refusal”); Elec. Reliability Council of Tex., Inc. v. Met Ctr. Partners-4, Ltd., 2005 Tex. App. LEXIS 7787 (Tex. App. 2005), at *31 (“A right of first refusal, also known as a preemptive or preferential right, empowers its holder with a preferential right to purchase the subject property on the same terms offered by or to a bona fide purchaser (citation omitted). Such a right is distinct from a purchase option, which gives the holder the right to purchase at its election within an agreed period at a named price (citation omitted). If the price is to be the market value of the premises at the time the option is exercised, then no price is specified”); Riley v. Campeau Homes (Texas), Inc., 808 S.W.2d 184, 187 (Tex. App. 1991) (“A right of first refusal, as a preemptive right, requires the property owner to first offer the property to the person holding the right of first refusal at the stipulated price and terms in the event the owner decides to sell the property” (emphasis in text)); Beneficial Montana, Inc. v. Stanley, 2003 ML 3208 (4th Judicial Dist. Ct. of Montana 2003), at *12-17 (holding that recorded abstract of settlement agreement entitled "Notice of Right of First Refusal and Conditions Upon Conveyance" provided adequate notice to subsequent parties regarding such right, even though abstract did not mention that settlement agreement granted party with first-refusal right a significant credit against any future bona fide purchase price should it choose to exercise its right of first refusal, and also required that terms and conditions of  settlement agreement be kept confidential -- although abstract contained provision that settlement agreement was available at local law firm's office); 11 s., williston on contracts, § 1441A (3d ed. 1968), which states as follows:

While options and the so-called right of first refusal are sometimes confused, there is a clear and classic distinction: The option compels performance within the time limit specified, or if none is mentioned, then within a reasonable time, whereas the right of first refusal has no binding effect unless the offeror decides to sell.

The right of first refusal, or first right to buy, is not a true option but is a valuable prerogative. It limits the right of the owner to dispose freely of his property by compelling him to offer it first to the party who has the first right to buy.

See also Jewish Center for Aged v. BSPM Trustees, Inc., --- S.W.3d ----, 2009 WL 2151374, at *5 (Mo.App. E.D. 2009):

The person holding the right of first refusal or preemption cannot compel an unwilling seller to sell (citation omitted). Rather, once the seller chooses to sell, the holder of the preemptive right has the option of purchasing the property in accordance with the agreement (citation omitted). The right of first refusal is most frequently given in connection with the sale or lease of real estate (citation omitted). "A right of first refusal that is contained in a lease is regarded as a covenant that runs with the land." Megargel Willbrand & Co., LLC v. FAMPAT Ltd. Partnership, 210 S.W.3d 205, 210 (Mo. App. E.D. 2006).

Perhaps the strangest case in this area is a New York decision involving a "last right of refusal" (“LRR”). See Jeremy's Ale House Also, Inc. v. Jocelyn Luchnick Irrevocable Trust, 798 N.Y.S. 2d 416 (N. Y. App. Div. 1st Dep’t 2005). In this case, the tenant under a lease was granted a "last right of refusal” ("LRR") by the landlord as part of a modification of the parties' commercial lease. The modified lease provided that "in the event of a sale to a third party (not an asset transfer in the family) you [the tenant]  will have the last right of refusal  to beat the terms and price by 3 percent of any bona fide offer" (Emphasis added). The landlord, commencing approximately three months before the expiration of the lease term, advised the tenant of successive oral offers it received to purchase the property beginning at $1 million and increasing to $3 million. The tenant orally exercised its LRR for each offer other than the last offer, proof as to which was requested but not received. The tenant sued for specific performance to purchase the property for $2.7 million, based on the next-to-last offer received by the landlord. The Appellate Division, affirming the Order of the Supreme Court, New York County, granting the tenant's motion to dismiss the complaint, held that the tenant was not entitled to specific performance, as the offer on which the lawsuit was brought was not the last offer. The appellate court stated that,"[the tenant] was not entitled to select the offer it considered the most advantageous." Id. at 418. The court also stated that "The last right of refusal provided [the tenant] with an opportunity it would otherwise not have and that no other bidder enjoyed. It could beat any offer by 3% and the transaction could not close without affording [the tenant] that  opportunity. If nothing else, the last right of refusal would serve as a disincentive to third-party bidding."  Id. at 419. The Court, however, granted the tenant leave to amend its complaint to plead a cause of action for breach of the implied covenant of good faith and fair dealing with respect to the $3 million offer (as to which the tenant would be required to pay $3,090,000), and for specific performance with respect to that offer. In a vigorous dissent, Judge Gonzalez argued that the majority had rendered the landlord's statute-of-frauds argument moot (the majority declined to address this issue) and had rewritten the lease to grant the tenant a "different and novel right," i.e., the right to accept only the "last offer" and sue on a subsequent written offer it had never sought to enforce.

            Attached hereto as Appendix A is a sample form of Right of First Refusal with respect to an adjoining parcel of land.  Attached hereto as Appendix B is a sample form of right-of-first refusal clause for insertion in a lease.

3.         Right of First Negotiation – In order to avoid the chilling effect of a right of first refusal, the parties may instead use a right of first negotiation. This provision provides that the owner must notify the holder of such a right that the owner intends to sell or lease his or her property.  The parties then have a specified period of time in which to negotiate, on an exclusive basis, a mutually acceptable deal.  The obvious advantage of right of first negotiation over a first-refusal right (from the owner’s perspective) is that the right of first negotiation period ends before the owner or any third party or broker invests time and money in negotiating a deal.  There is therefore no “chill” on the marketability of the asset.  A right of first negotiation does not give the holder of the right any assurance that the parties will reach final agreement on the price and terms for the transaction. If the exclusive negotiation period lapses without an agreement on price and terms, the owner generally is free to sell or lease the property to a third party free and clear of the rights of the holder of the first-negotiation right.

4.         Right of First Offer – In some transactions, particularly involving the sale of real estate, the parties will provide for a right of first offer (“RFO”) in favor of the buyer.  The holder of a RFO has the first right to make an offer for the purchase of the property before the owner can sell the property to a third party.  The owner is give a specific period to accept or reject the offer, and if the owner rejects the offer, he or she is free to sell the asset to one or more third parties, with the only restriction being that he or she cannot accept a price that is less (or in some cases less than a percentage of) the price offered by the holder of the RFO.  This puts the holder of the RFO in the position of naming its price without knowing the owner’s estimate of the value and without the opportunity to require the owner to negotiate to an agreed price (unless that right is included in the agreement). The RFO is used, for example, where a purchaser of a parcel wants a right to buy the adjacent parcels when they become available for sale, but the owner is unwilling to give an option or right of first refusal. With respect an RFO (which is preferable to a right of first refusal because it minimizes the “chilling” effect on the marketability of the property), the holder of the right can be afforded additional protection by requiring the owner to make an offer to the holder of the right, containing the terms (including price) that the owner will accept, before the owner can offer the property to a third party.  This “smokes out” the price that the owner will accept.  However, the owner still controls the timing of any potential sale and is not obligated to reduce the price it asks for the property even if it is “unreasonable.”  (However, the owner may be obligated, if negotiated for by the holder of the right, to sell the property for at least that price if the holder elects not to accept the owner’s offer).  Attached hereto as Appendix C is a sample form of Right of Refusal, which contains (as alternative clauses) a right of first refusal and a right of first offer.

5         See generally Paul S. Rutter and Duane M. Montgomery, Options, Rights of First Refusal, Rights of First Negotiation and Rights of First Offer, Corporate Real Estate and the Law (International Association of Attorneys and Executives in Real Estate (AECRE) Newsletter, Vol. 7, No.1, Summer 2000), pp. 5-7; Joseph B. Conn and Karyn E.Corlett, Rights of First Refusal and Rights of First Offer, 2003 ICSC U.S. Shopping Center Law Conference (Palm Desert, CA Oct. 23, 2003), at Tab 26; Gregory G. Gosfield, A Primer on Real Estate Options, 35 real prop. prob. & tr. J. 129 (2000).

 

Carevouts for Packaged Sales and Other Items

The parties who have granted, and who have been granted, any of the foregoing rights should be careful to carve out from any of these rights any transactions intended to be excluded, such as a transfer of property between a parent and a subsidiary corporation or other affiliated entities, foreclosure or deed in lieu of foreclosure, stock transfers, transfers between co-owners or co-tenants, gifts and donations -- and especially portfolio or bulk sales of multiple properties in a single transaction.

1.   See, e.g., Park Station L.P. v. Bosse, 378 Md. 122, 131-32 (2003) (holding that, absent clear language in agreement to contrary, first-refusal rights do not apply to donation of property and do not “run with the land” to bind donees; court stated that “courts have consistently held that a transfer of property by gift does not trigger a right of first refusal based upon a ‘sale’ or decision to ‘sell’”); Mericle v. Wolf and Sacred Heart Hospital, 386 Pa. Super. 82, 88 89 (1989) (holding that all of the elements for a valid inter vivos gift were present and that transfer was not a "sale" because a "sale contemplates a vendor and a buyer and the transfer involves payment or a promise to pay a certain price in money or its equivalent." The appellate court concluded that the term "sold" should "be given its ordinary meaning, and, therefore, the appellees' transfer by way of a gift did not activate the refusal right”); Schroeder v. Duenke, 265 S.W.3d 843, 847-850 (Mo. App. 2008) (holding that although transfer by gift of property from one family member to another generally does not trigger right of first refusal, where transferee paid substantial cash consideration for property and deed stated it was in exchange for valuable consideration, case would be remanded to trial court to determine whether transfer was in fact for “fair market value” of property even if consideration paid was less than price established by appraisal).  See also Rucker Properties, L.L.C. v. Friday, 41 Kan. App. 2d 664, 675-76 (Kan. App. 2009) (“Several . . .  states have addressed the issue of whether a sale or transfer of property between co-owners triggers a right of first refusal, and those states have concluded that  there must be a transfer for value to a third party to trigger such a clause” (citations omitted)); Harris Ominsky, Right of First Refusal – Impairing Family Gift, 38-MAR Real Est. L. Rep. 3, 2009) (discussing Missouri appellate court’s holding in Schroeder v. Duenke, supra); Annotation, Construction and application of "first refusal" option contained in trust instrument and relating to sale of shares of stock, 51 A.L.R.3d 1327.

2.         With respect to portfolio or bulk sales, the majority of courts holds that where an owner sells or attempts to sell property burdened by a right of first refusal as part of a larger package of properties, the right of first refusal is not activated in its traditional sense. See, e.g., Boyd & Mahoney v. Chevron, USA, 419 Pa. Super. 24, 29-30  (1992) (“[A]  right of first refusal as to the conveyance of a property cannot be defeated by including that property in a multi-property or multi-asset transaction . . . The appellant’s argument that the right can be nullified simply by packaging the property for sale with another asset not so encumbered has no merit. Appellants’ logic would deprive the holder of the right the benefit of his or her bargain”); Stuart v. Stammen, 590 N.W.2d 224, 228 (1999) (ruling that holder of right of first refusal could not be forced to purchase property in addition to that which was subject to such right); Landa v. Century 21 Simmons & Co., Inc., 237 Va. 374 (1989) (holding that holder of right of first refusal cannot be compelled to purchase more than is subject to right of first refusal or else forfeit first refusal right); Raymond v. Steen, 882 P.2d 852, 857 (Sup. Ct. Wyo., 1994) (“a right of first refusal is not triggered by an offer on a larger tract which includes the burdened property. Neither is a right of first refusal satisfied by an offer to the holder of the right to sell him a larger tract”); Gyurkey v. Babler, 103 Idaho 663, 668 (1982) (holding that even though vendor separately valued, as a part of total transaction, lot as to which plaintiff had right of first refusal, such lot could not be sold as part of larger parcel as long as lot was subject to such right of first refusal, because “the door would be opened to a myriad of unscrupulous endeavors designed to defeat preemptive rights of purchase by manipulation of lot prices within the terms of a larger sale”); Tarallo v. Norstar Bank, 534 N.Y.S.2d 485, 487 (N.Y. App. Div. 1988) (lessees could not compel conveyance of entire parcel, as right of first refusal did not extend to entire parcel); Whyopen v. Via, 404 So.2d 851, 853 (Fla. Dist. Ct. App. 1981) (landlord could not refuse to honor tenants' first refusal right on theory that tenants had not agreed to purchase entire parcel described in contract for sale); Thomas & Son Transfer Line, Inc. v. Kenyon, Inc., 40 Colo. App. 150, 155 (1977), aff’d 586 P.2d 39 (Colo. 1978) (holding that owner of property cannot defeat right of refusal simply by selling optioned property with other properties which he may own (citations omitted); and stating that “To deny specific performance here would be to defeat the entire purpose of the right of refusal, the protection of the lessee”); Guaclides v. Kruse, 67 N.J. Super. 348, 359 (1961) (“We concur in the generally accepted view as to the optionee's right to an injunction to restrain a vitiating of its option by the inclusion, in the owner's prospective sale, of property in excess of that covered by the option. To allow the owner of the whole to by-pass the optionee merely by attaching additional land to the part under option would render nugatory a substantial right which the optionee had bargained for and obtained”); Brito v. Belvedere Developers, LLC, 2004 WL 877565 (R.I. Super., March 29, 2004) (unpublished opinion) (“Owners should not be permitted to attempt to sell their encumbered parcels to third parties by joining with other landowners, and then be able to deny the rightholder an opportunity to exercise his right by arguing that the encumbered parcel was part of a larger package”); Sawyer v. Firestone, 513 A.2d 36, 40 (R.I. 1986) (“a seller may not defeat a right of first refusal by selling the property subject to the right as part of a larger tract”); Aden v. Estate of Hathaway, 162 Colo. 311, 314 (1967) (ruling that holder of right of first refusal is entitled to injunctive relief, enjoining sale of burdened parcel, when owner decides to sell encumbered parcel as part of larger tract); Chapman v. Mut. Life Ins. Co. of New York, 800 P.2d 1147, 1151-52 (Wyo. 1990) (holding that while package deal did not trigger right of first refusal in its traditional sense, such that rightholder could purchase the property, rightholder was entitled to injunctive relief with respect to sale of burdened property; court stated that most often, courts will “return to the status quo ante and require a bona fide offer on the smaller tract before the right may be exercised or considered waived”); USA Cable v. World Wrestling Fed'n Entertainment, Inc., 2000 Del. Ch. LEXIS 87 (Del. Ch., June 27, 2000), at *44 (“New York courts construing right of first refusal clauses have uniformly held that a property owner cannot compel the holder of a right of first refusal to one property to match the terms of a package deal encompassing extraneous properties”); New Atlantic Garden v. Atlantic Garden Realty Corp., N.Y. App. Div., 194 N.Y.S. 334 (1st Dep’t 1922), aff’d  237 N.Y. 540 (1923) (holding that lessee of movie theater with right of first refusal cannot be forced to match terms of third party's offer to buy from lessor a larger parcel including the theater); Myers v. Lovetinsky, 189 NW2d 571, 575 (Iowa 1971) ("This is a case in which landlords sell the whole farm including the demised premises to purchasers without separately pricing the demised premises and the rest of the farm. The decisions recognize in this kind of case, apparently without exception, that the landlord breaches the tenant's preferential right [of first refusal] by so doing"); Ollie v. Rainbolt, 1983 OK 79, 669 P.2d 275, 280  (1983) (“Because the owner breached the tenant's preferential right by attempting to sell the leased premises as part of the larger tract, the tenant can seek injunctive relief to maintain the status quo until the end of the lease term, when his preferential right will have expired”); Radio Webs, Inc. v. Tele-Media Corp., 249 Ga. 598, 601-02 (1982) (applying rule of law from lease cases holding that sale of parcel larger than the property for which a lessee held a right of first refusal was a breach of contract, and finding that rule applied to sale of a business; court ordered trial court to enter temporary injunction in favor of radio company and take whatever steps were necessary to protect its potential right to relief). Cf. Rottier v. Walsh, 230 Wis.2d 748 (1999) (unpublished opinion) at *3 (holding that unambiguous language of right of first refusal did not permit respondent to require rightholder to either purchase a portion of the parcel or abandon her right of first refusal on that portion, and remanded with instructions to issue declaratory relief and injunction; court stated that “The only reasonable meaning attributable to the document is that Walsh and Rottier intended the ROFR to apply to a sale of the entire property”).

3.       A minority of courts holds that the holder of the right of first refusal is entitled to specific performance on the burdened property alone (as opposed to injunctive relief), and that if the rightholder chooses not to exercise the right then the owner can proceed with the sale of the larger package. These courts generally have granted relief in the form of specific performance at a value set by the court or monetary damages, or where the parties have themselves assigned values to the different properties included in the package. See, e.g., Berry-Iverson Co. of N.D., Inc. v. Johnson, 242 N.W.2d 126, 134 (N.D. 1976) (holding that attempted package sale activates right of first refusal, entitling rightholder to specific performance on burdened property alone); Brenner v. Duncan, 318 Mich. 1, 6 (1947) (ruling that with respect to attempted package sale including burdened property, “it is competent for the court to fix the option price, afford the optionee an opportunity to accept and thereupon specifically enforce the resulting contract”). In Pantry Pride Enter., Inc. v. Stop & Shop Cos., Inc., 806 F.2d 1227, 1231-32, the court concluded that specific performance was the more appropriate remedy where the parties to the sale assigned separate valuations to the personalty and leasehold interests and, therefore, the problems commonly associated with awarding specific performance in such cases were not present. The court stated that:

In the typical case, a landowner leases a portion of his property to a lessee, who secures a right of first refusal. The landowner subsequently agrees to sell the leased portion and some adjacent property to a third party for a single price. When the lessee tries to purchase only the leased portion of the package, the lessor tries to force the lessee into accepting the package deal or allowing the sale. Most courts resolve this conflict by enjoining the sale of any property subject to the lessee's option. [Citations omitted.] Several practical problems arise in granting specific performance in these contiguous property cases. The first problem is one of valuation. If a court allows the lessee to buy only the leasehold portion, the court must allocate the single purchase price between the leased portion and the remainder of the lessor's property. Some courts are reluctant to undertake this process, which may require the court to determine the value of each acre offered for sale. [Citations omitted.] The second problem is that specific performance may be inequitable for three reasons. First, if the lessor sold the leased and nonleased portions together, he would probably receive a greater price than if he sold the properties separately. By forcing the lessor to sell only the leased portion, the court may be depriving the lessor of this premium. Second, the remaining property may be difficult to sell without the attached leased portion. Third, specific performance forces the lessor to separate his contiguous property merely because he leased a portion of it to the lessee. Because of these equitable considerations, most courts do not grant specific performance, but simply protect the lessee's option by enjoining the sale of the leased portion.

Id. at 1229-30.

4.         Only one case appears to take the position that the rightholder’s failure to enter into an agreement addressing the possibility of a package deal leaves the rightholder without a remedy. See Cross-Spieker #23 v. Robert L. Helms Const. & Devel. Co., 731 P.2d 348, 350 (Nev. 1987) (“It is apparent from the terms of the right of first refusal, that the right applied only to offers to purchase Tract B. In this case, there was no such offer. Of course, we would not condone an attempt to evade [the holder of the right of first refusal’s] contractual rights by engineering the sale of a larger parcel (citations omitted), but in this case there was no evidence of any wrongful intent. Rather, the record reflects a good faith decision by [the optionor] to sell the entire tract. Thus, [the holder of the right of first refusal’s] contractual right was totally inapplicable by its own terms”). See generally Annotation, Option to purchase real property as affected by optionor's receipt of offer for, or sale of, larger tract which includes the optioned parcel, 34 A.L.R.4th 1217, Landlord and tenant: What amounts to "sale" of property for purposes of provision giving tenant right of first refusal if landlord desires to sell, 70 A.L.R.3d 203. 

5.       But if the language in the first-right-of-refusal clause or document is vague as to the terms and conditions under which the right may be exercised (including the amount of property covered), or specifically covers more than one parcel, the rightholder may be forced to match an offer for the entire package or else lose its right of first refusal. See West Texas Transmission, L.P. v. Enron Corp., 907 F.2d 1554, 1564 (5th Cir. 1990) (“most courts have insisted that [holders of rights of first refusal] replicate a myriad of nonprice conditions, including . . . the purchase of a larger quantity of land”);  In re New Era Resorts, LLC, 238 B.R. 381, 387 (Bankr. E.D. Tenn. 1999) (stating that “The parties did not define the word ‘terms’ in . . . the Lease Agreement to require the debtor to market the restaurant tract alone”; and ruling that because holder of right of first refusal rejected offer to purchase restaurant parcel together with other property and offered only to purchase restaurant parcel, right of first refusal lapsed and rightholder’s offer constituted rejection and counter-offer, which debtor was free to and did reject). But see USA Cable v. World Wrestling Fed'n Entertainment, Inc., supra, 2000 Del. Ch. LEXIS 87, at *49 (distinguishing West Texas Transmission, supra, and stating that “In re New Era Resorts [supra] does not represent New York law on this subject”). See  also Crestview Builders, Inc. v. The Noggle Family Ltd. P’ship, 352 Ill. App. 3d 1182, 1187-88 (2004) (holding that right of first refusal was not enforceable due to vagueness where it did not contain a price term and did not specifically state that price would be set by competing offer); Uno Restaurants, Inc. v. Boston Kenmore Realty Corp., 441 Mass. 376, 387-89 (2004) (holding that bona fide offer to landlord existed where landlord received legitimate non-collusive offer to purchase property from third party, even if that offer was higher than market value; landlord did not violate covenant of good faith and fair dealing where lease did not require any particular action by landlord to protect tenant’s right of first refusal); Texaco Antilles Ltd. v. Creque, 273 F. Supp. 2d 660, 663-665 (D.V.I. 2003)  (holding that transfer of assets and liabilities by owner of property in connection with a corporate restructuring did not trigger right of first refusal with respect to real property).

6.       At least one court held that with respect to a package deal including the encumbered property, if the holder of the right of first refusal elected to exercise the right the rightholder was entitled to preemptive specific performance on the entire package. See Capalongo v. Giles, 425 N.Y.S.2d 225, 228 (N.Y. Spec. Term 1980) (“where an owner does have an offer from a third party to purchase a piece on which he has given a first refusal option, but on terms which specify inclusion of the piece in a larger parcel . . .  he thereupon has a duty to offer the whole parcel to the option holder on the same terms”).  But this decision was reversed on appeal, sub nom Capalongo v. Desch, 81 A.D.2d 689, 690 (N.Y. App. Div. 1981), appeal dismissed, 54 N.Y.2d 680 (1981), aff’d, 57 N.Y.2d 972 (1982), on the narrow issue of the adequacy of the consideration for the right of first refusal. The appellate court found that failure to give adequate consideration made the option agreement revocable. The owners of the property also contended that the option was in fact revoked by the rightholders, because the owners had advised the rightholders that they would not sell the triangular parcel (which was subject to the right of first refusal) separately from the remaining 123 acres. According to the owners, the rightholders stated that they were not interested in purchasing the larger tract. The owners also claimed that execution of the third-party contract for the entire 123 acres constituted a revocation of the option since such action was patently inconsistent with the terms of the option. The court agreed, finding that the option, which failed to recite either its duration or that it was irrevocable, was effectively revoked by the subsequent actions of the owners, and that the trial court erred in concluding that the option required the owners to give the rightholders a right of first refusal on the entire 123-acre tract. See also Qualtronics Mfg. v. Levinson & Jaffe, 1995 U.S. App. LEXIS 8529, at *3-4 (9th Cir., April 10, 1995) (affirming judgment in favor of lessee that it had not filed a groundless lis pendens notice against lessor’s property where lease was silent as to whether right of first refusal extended to allow lessee to match an offer for entire business park; court found that district court properly concluded that tenant had “some basis” for its contention, and a “rational argument for its interpretation,” that its right of first refusal extended to an offer to purchase other buildings along with its leasehold and, thus, lessee had some basis to record its lis pendens on the other buildings).  

7.       With respect to the issue of whether a foreclosure (or deed in lieu of foreclosure) triggers a right of first refusal, the tighter the language the better. Foreclosures and deeds-in-lieu should be specifically exempted unless the parties expressly agree otherwise.  Otherwise, interpretation of the provision will depend on the specific language in the clause and the particular jurisdiction where the issue may be litigated. The moral is: language matters.  See, e.g., Montara Water and Sanitary Dist. v. County of San Mateo, 598 F.Supp.2d 1070, 1080 fn. 6 (N.D.Cal.,2009), where the court held, based on the language in the document as well as other factors, that a condemnation proceeding triggered the right of first refusal. The court distinguished an earlier California appellate casethat held an involuntary condemnation did not trigger the right of first refusal, stating that:

Campbell v. Alger, 71 Cal.App.4th 200, 83 Cal.Rptr.2d 696 (1999), which held that an involuntary condemnation did not trigger a right of first refusal, is inapposite in that the contract at issue specified that the right "would arise only '[i]n the event ... [the Algers] ... determine[ ] to sell [their] ... interest ... to a third party after having received a bona fide and written offer for such purchase, or make [ ] a bona fide and written offer to sell [their] ... interest to a third party....' " Id. at 207, 83 Cal.Rptr.2d 696 (amendments in original). The instrument itself therefore resolved the issue of whether an involuntary disposition could trigger the right in question.

While acknowledging that reversion clauses generally are disfavored and therefore are interpreted strictly to prevent their exercise, the court also stated, at 1080, that:
In contrast to the "use"--or "sale"--based restrictions at issue in the foregoing cases, the airport deed's use of the word "transfer" does potentially broaden the scope of the grant restriction and weaken the inference that a disposition must be voluntary to constitute a breach.

See also Annotation, Rights of holder of "first refusal" option on real property in event of sale at foreclosure or other involuntary sale, 17 alr 3d 962, which is an excellent source for other pertinent case law on this topic, and is the only source the author is aware of that collects and discusses the cases on this topic (of which there are relatively few). It was originally published in 1968 but is regularly updated. In § 2 (Option as conferring no rights), the Annotation concludes that

Most of the few authorities considering the question take the view that a foreclosure or similar involuntary sale is not within the contemplation of a "first refusal" option and that the holder of the option therefore has no greater rights at such sale than any other buyer.

But the Annotation also points out, in § 3 (Contrary cases), that there are contrary (though mostly older) cases, noting that:

Some courts have taken the view that the rights of the holder of a "first refusal" option are not affected by the fact that the property is eventually sold involuntarily at a foreclosure or other forced sale.

8.         See generally Sara Church Dinkler and Morgan R. Smock, Toss That Form Book: How to Draft an Effective Right of First Refusal, 16 no. 4 acca Docket 50 (July/August 1998), at 59; Harris Ominsky, Real Estate Options: Using Them and Losing Them (Part 1), 15 no. 6 prac. real est. law. 55 (November, 1999), at 65; Bernard Daskal, Rights of First Refusal and the Package Deal, 22 fordham urb. l.j. 461 (Winter 1995).

 

Agreements Containing Both an Option to Purchase and a Right of First Refusal

Tenants (and landlords) can get themselves into trouble when – as occasionally happens and as noted earlier in this paper – the lease provides the tenant with both a fixed-price option and a right of first refusal.

1.         See Markert v. Williams, 874 S.W.2d 353 (Tex.App.-Hous.(1 Dist. 1994), where the issue before the court (which was a matter of first impression) was whether the tenant’s fixed-price option was extinguished by his failure to exercise his right of first refusal, where there had been a subsequent sale of the property to a bona-fide purchaser. (The tenant had attempted to exercise his option right two years after the sale by the landlord).  The court held that under these circumstances, the tenant’s fixed-price option was extinguished because of his failure to exercise the option before the landlord sold the property to the bona-fide purchaser. A way to avoid the issue raised in this case would be to have the provision state specifically that notice by the owner of its intention to market the property would trigger the tenant’s fixed-price option.

2.         Some courts have held that a tenant that when both a right of first refusal and a fixed-price option are contained in the same agreement, the option right becomes ineffective and unenforceable when the tenant fails or refuses to exercise the right of first refusal after being presented with a bona-fide third party offer. For example, in a recent decision, Sheperd v. Davis, 265 Va. 108 (2003), the lessee under a lease agreement had both a fixed-price option to purchase a tract of real estate and a right of first refusal with respect to the property.  The court ruled that the lessee forfeited his right to purchase the property under the fixed-price option after being presented with a third-party offer. The court would not permit the lessee to invoke the fixed-price option after failing to exercise the right of first refusal (due to the fact that the terms of the third-party offer were not acceptable to him, including a higher purchase price). The court noted that there was a split of authority as to whether (1) a lessee my exercise a fixed-price option notwithstanding the grant of a right of first refusal in the same agreement, or (2) a lessee forfeits the right to purchase under a fixed-price option after being presented with a third-party offer. The court reasoned that the result depends on the particular language used in the provision, and found that in this case, “the terms of the dual-option provision [are] clear and unambiguous.” Id. at 118.  The court interpreted the prefatory language to the grant of the right of first refusal, i.e., “notwithstanding anything contained in this Agreement to the contrary” (which did not appear in the portion of the lease provision referring to the option to purchase) as modifying the fixed-price option and giving precedence to the first right of refusal. The court also noted that a sentence in the lease provided that if the landlord did not sell the leased premises in accordance with a third-party offer to purchase, the tenant’s right of first refusal remained in effect, but there was no similar statement that under such circumstances the fixed-price option to purchase also would remain in effect. Cf. Four Howards, Ltd. v. J&F Wenz Rd. Invest., LLC, 179 Ohio App. 3d 399, 409-410 (Ohio App. 6 Dist. 2008) (holding that tenant’s right of first refusal survived subordination of his option to purchase property to option right of third party, because tenant’s option to purchase and right of first refusal were separate contract rights under terms of business lease and first right of refusal became effective upon the expiration of tenant’s option to purchase; court also found that third party had knowledge of lease).

3.         See also Smith v. Bertram, 603 N.W.2d 568, 573 (Iowa Sup.Ct. 1999) (finding that, where contract contained both option to purchase and right of first refusal and intent of parties was unclear, extrinsic evidence would be admitted; such evidence indicated that right-of-first-refusal clause was added in response to landlord’s insistence that she be entitled to accept higher third-party offers, and therefore parties intended that third-party offer would terminate fixed-option right); Elec. Reliability Council of Tex., Inc. v. Met Ctr. Partners-4, Ltd., 2005 Tex. App. LEXIS 7787 (3d Dist., Sept. 22, 2005), at *32 (holding that, by its express terms, lease between the parties prioritized right of first refusal over purchase option, and tenant's right to buy building under purchase option ceased when landlord delivered notice of the third party's offer to landlord);  Shell Oil Co. v. Blumberg, 154 F2d 251, 252-53 (5th Cir. 1946); M & M Oil Co. v. Finch, 7 Kan. App.2d 208, 213 (1982); Tantleff v. Truscelli, 493 N.Y.S.2d 979, 984 (1985), aff’d 698 N.Y.S.2d 769 (1987); Moon v. Haeussler, 545 N.Y.S.2d 623, 624 (1989); Northwest Racing Ass’n v. Hunt, 20 Ill. App. 2d 393, 399-400 (1959); Tarrant v. Self, 180 Ind. App. 215, 222 (Ind. Ct. App. 1979).

4.   But other cases hold that the two provisions, unless otherwise provided in the agreement, are separate and distinct and the tenant can exercise its fixed-price purchase option notwithstanding its failure to exercise its rights under the right of first refusal.  These cases hold that there is no ambiguity or else involve provisions that explicitly state that the tenant’s failure to exercise its first-right-of-refusal right shall not affect its fixed-price option (a good drafting tip).  See Shell Oil Co. v. Prescott, 398 F.2d 592, 593-94 (6th Cir. 1968), McDonald’s Corp. v. Lebow Realty Trust, 710 F.Supp. 385, 388 (D. Mass.), aff’d 888 F.2d 912 (1st Cir. 1989); Texaco, Inc. v. Creel, 57 N.C.App. 611, 617 (1982); Crowley v. Texaco, Inc. 306 N.W.2d 871, 873-75 (S.D. 1981); Gulf Oil Co. v. Chiodo, 804 F.2d 284, 286 (4th Cir. 1986); Amoco Oil Co. v. Snyder, 505 Pa. 214, 220 (Pa. 1984); Butler v. Richardson, 74 R.I. 344, 350-51 (R.I. 1948).  See generally, Annotation, Option to purchase at specified price and to purchase at price offered by third person, included in same instrument, 8 A.L.R.2d 604. 

 

Applicability of the Rule Against Perpetuities

Another issue that must be addressed in connection with options to purchase and rights of first refusal is the rule against perpetuities, i.e., if by any possibility the interest which is subject to the rule cannot vest or fail within the 21-year limit after some life in being at the creation of the interest, it is void for remoteness.

1.         See Jonathon F. 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").

2.         A majority of jurisdictions, finding that options and rights of first refusal are interests in property and not mere contract rights, recognize that such interests are 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 Woods Assoc. v. McHugh, 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); Park Station L.P. v. Bosse, supra, 378 Md. at 134-35 (“the Rule [against perpetuities] applies to an option contract to purchase land . . . and to a right of first refusal to purchase an interest in property”); Atchison v. Englewood, Colo. Supr., 170 Colo. 295, 463 P2d 297, 301 (en banc) (“A provision in an agreement for the sale of a parcel of real property which prohibits the grantee from selling the parcel unless he first offers it to the grantor is valid, unless it violates the common law rule against perpetuities”); Lantis v. Cook, 342 Mich. 347, 358 (1955) (“an option, exercisable upon the happening of a condition precedent, is not regarded as a direct restraint on alienation and is everywhere held valid even though it specifies a fixed price, except in jurisdictions where the rule against perpetuities is in effect as to lands, it would be void if exercisable beyond lives in being and 21 years”); Fallschase Dev. Corp. v. Blakey, 696 So. 2d 833, 836-37 (Fla. Dist. Ct. App. 1997) (“the first refusal right here at issue was void ab initio because it violates the common-law rule against perpetuities”). But see Murphy Exploration & Prod. Co. v. Sun Operating Ltd. P’shp., 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"); First Apostolic Lutheran Church v. Bekkala, 2005 Mich. App. LEXIS 2135 (Aug. 30, 2005), at *7 (Where option did not specify particular time period for exercise, but limited it by reference to grantee’s ceasing to use the property for specific purposes, court held option was not an invalid restraint on alienation and stated that “if the Church here desired to limit the applicability of the option to a particular time period, it should have negotiated such a limitation in the deed”).

3.         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). Thus, in effect, the minority view postulates that an interest 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, § 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 is 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.

4.   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 these 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 for 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)). See also Annotation,  Pre-emptive rights to realty as violation of rule against perpetuities or rule concerning restraints on alienation, 40 A.L.R.3d 920.

 5.        With respect to how and when the interests vest, see Fitzpatrick v. Mer.-Safe, Etc. Co., 220 Md. 534, 541,(1959) (the rule against perpetuities does not invalidate "interests which last too long, but interests which vest too remotely; in other words the Rule is not concerned with the duration of estates, but the time of their vesting").  The purposes of the rule include the facilitation of alienation of property and maintaining certainty of title. See Emerson v. Campbell, supra, 84 A.2d at 155. See also Stuart Kingston v. Robinson, 596 A.2d 1378, 1383-1384 (Del. 1991)(If there are two doubtful constructions of the meaning of an instrument, "one consistent and the other repugnant to the law, the former will be adopted, but if the meaning is clear" the rule must be observed "since it is founded upon a sound principle of public policy and must be rigidly enforced." In projecting the prospect of vesting "it is not enough that the future interests may, or even that it will in all probability, vest within the limits; it must necessarily so vest." If there is any possibility that the interest will vest beyond the period of the rule, then it is void ab initio"); Curtis v. Maryland Baptist Union Ass'n, 176 Md. 430, 438, 439 ("The term 'vested' as used in the law of property, signifies that there has been the fixation of a present right to either the immediate or future enjoyment of property"); Bloomer v. Phillips, 164 A.D.2d 52, 55 (N.Y. App. Div. 1990) ("we note our disagreement with defendants' argument that . . . the rule against perpetuities applies in this case and invalidates the rights of plaintiffs. Assuming, without deciding, that the rule does apply, because the agreement was not made binding on plaintiffs' heirs and assigns the right of first refusal would necessarily terminate upon the deaths of plaintiffs. Therefore, the rule is not violated inasmuch as the right could not be exercised 'later than twenty-one years after one or more lives in being'). The term "vested" has also another meaning, which is so frequently given to it that it cannot be said to be improper. This other meaning is "transmissible." As Professor Gray of Harvard has said, "Such double meaning is, however, very unfortunate, as it has led to much confusion." Gray, Rule Against Perpetuities, 4th Ed., § 118.  Vesting in that secondary sense is not sufficient to escape the rule against perpetuities. The interest must vest in the sense of becoming a vested remainder.

6.         Illinois courts have ruled that an option to purchase real estate is subject to the rule against perpetuities.  See, e.g., Warren v. Albrecht, 213 Ill.App.3d 55, 58-59, 571 N.E.2d 1179, 1180 (5th Dist. 1991) (“[i]nterests subject to the rule are contingent remainders, executory interests (or devises), options to purchase land not incident to a lease for years, and powers of appointment”). In Arclar Co. v. Gates, 17 F.Supp.2d 818, 823 (S.D. Ill. 1998), the court stated that “[i]t is true that a bare option to purchase or sell real estate exercisable outside the period of the rule against perpetuities is generally held to be void as an unreasonable restraint upon alienation” (citations omitted).  The court noted that the only exceptions to the rule were (i) an option to purchase land that is part of a long-term lease of that land, and (ii) an option to purchase an overlying surface estate provided that the option was granted for the purpose of mining the mineral estate. But see In the Matter of Wauka, Inc., 39 B.R. 734, 737 (Bankr. N.D. Ga. 1984) (since right of first refusal included in a sales contract and warranty deed was personal to the individual holder of the right, it did not violate the rule against perpetuities and the holder would be permitted to exercise that right); Park Station L.P. v. Bosse, 378 Md. 122, 138 (2003) (a contract or other instrument, including a right of first refusal, “should be interpreted if feasible to avoid the conclusion that it violates the Rule Against Perpetuities”). Cf. Selig v. State Highway Admin., 383 Md. 655, 676-78 (2004) (rule against perpetuities does not apply to right-of-first-refusal clause in contract and deed where applicable language is mandated by state statute). See also Jonathon F. Mitchell, Comment: Can a First Right of Refusal be Assigned, 68 u. chi. l. rev. 985, 994-96 (2001) (discussing rule against perpetuities in connection with rights of first refusal).

7.         With respect to generally recognized exceptions to the rule against perpetuities regarding options to purchase real estate, see also Ferrero Constr. Co. v. Dennis Rourke Corp., supra, 311 Md. at 567-68 ("In the area of options, courts in the 300 years since the High Court of Chancery decided the Duke of Norfolk's Case (citation omitted), have developed three exceptions to the Rule Against Perpetuities. The Rule does not apply to a lessee's option to renew a lease (citations omitted). It does not apply to a lessee's option to purchase all or part of the leased premises (citations omitted). And it is inapplicable to a usufructuary's option to extend the scope of an easement or profit (citations omitted). All options may violate the Rule Against Perpetuities. Nevertheless, courts have justified these three narrow exceptions because these three types of options yield social benefits that offset the consequences of that violation"); Cambridge Co. v. East Slope Investment Corp., 700 P.2d 537, 542 (Colo. 1985) (holding that the rule against perpetuities did not apply to rights of first refusal contained in condominium declaration, as condominium ownership was a form of property interest unknown to earlier common law; thus, an exception for rights of first refusal to purchase this specialized type of property interest has little bearing on whether rights of first refusal in general should be exempt from the rule against perpetuities).

 

Applicability of the Statute of Frauds

The statute of frauds generally does apply to options and rights of first refusal.  In this connection, see Reeves v. McMickle, 270 Ga. App. 132 (2004). According to the court:

As the trial court recognized, this appeal turns on the option language regarding the purchase price. An option contract for the sale of realty comes within the Statute of Frauds and writings relied on to take the transaction out of the Statute of Frauds must (a) identify the buyer and seller, (b) describe the subject matter of the contract, and (c) name the consideration. . . .Option contracts for the sale of realty require the same degree of definiteness as general contracts. The required definiteness includes such matters as the price, and the terms of payment. The contract must either state the price to be paid for the property or set forth criteria by which it may be calculated. The offer must be complete and definite in all respects, since it becomes a contract on acceptance.

Id. at 133.

The court found that in this case the lack of definite terms caused the contract to be "incomplete, indefinite, and unenforceable." See also Whiteside v. Petersen, 128 N.Y.S. 2d 7 (1953) (holding that tenant is not entitled to specific performance unless it can produce written lease including 'first option to buy' and written contract indicating owner's willingness to sell); Kaplan v. Lippman, 75 N.Y. 2d 320, 324-25 (1986) (involving option to purchase with respect to co-op shares and proprietary lease, which the court assumed to be an interest in land; court emphasized that it is the creation/execution, and not the exercise, of the option that must satisfy the statute of frauds, and stated that “[b]ecause an option to purchase an interest in real property is in effect a conditional contract for a future conveyance of land, a contract that creates such an option is within the Statute of Frauds”).

But see Bero Motors, Inc. v. General Motors Corp., 2006 Mich. App. LEXIS (Oct. 10, 2006) (unpublished opinion). The following is a discussion and analysis of this case by Prof. Pat Randolph, which appeared as the “Daily Development” on the DIRT listserv, http://dirt.umkc.edu/ (created and monitored by Prof. Randolph), for Tuesday, September 5, 2006:

General Motors was interested in realigning its dealerships to combine different lines of cars within single dealerships than had previously been the case.  Bero operated a dealership that included two of the three car lines, and desired to add the third line - GMC trucks - that was part of the new General Motors scheme.

General Motors had another dealer in the same general area that operated a GMC truck franchise, among other lines.  Bero was interested in acquiring that franchise, including the real estate of the related dealership, which real estate was leased to the dealership by its owners.  General Motors had a right of first offer (characterized by the court as a right of first refusal) for the franchise.  He had negotiated with the owners of that franchise, but had not been successful.

General Motors had a right of first offer on the other franchise.  After failing in his own negotiations to purchase that franchise,  Bero agreed verbally with General Motors that General Motors would assign its right of first offer in the other dealership, and Bero agreed to realign his own sales activities by selling to another dealer the franchises for two lines of cars that the acquired dealership had been selling and by offering any remaining franchise cars through a separate showroom.

Later, Bero learned that General Motors had permitted the owners of the other franchise to sell their dealership, including the real estate, to a third party.  It had not given Bero the right of first offer.  The third party, in fact, paid a price that was lower than that which Bero had been willing to pay.  Bero sued General Motors for damages and won a jury verdict for over $3 million.

On appeal, General Motors argued that its agreement to transfer the right of first offer constituted a contract involving the sale of land and that it was unenforceable because it was not in writing.  The court expressed some doubt that it even had a contract for the sale of land here, but held that in any event the Michigan Statute of Frauds did not apply to option contracts or rights of first refusal, even if the underlying subject was land.

The court's  analysis was virtually non existent.  It cited a precedent case that had refused to apply the Statute of Frauds to options, and held that, perforce, the same reasoning should apply to refusal rights.

The court further held that the promises made by Bero to realign his own sales activities should he be permitted to acquire the dealership in question constituted consideration for General Motor's promise.

Comment 1: It would have been quite easy for the court to characterize Bero's "agreement" to reshuffle his sales activity after acquiring the other dealership as a condition on his acquisition, rather than as a separate promise.  Bero did not promise to do anything before he acquired the other dealership, and everything he promised to do afterwards was a working out of the acquisition and the dealership plan.

But Bero did not offer to change his own dealership as it existed prior to the acquisition.  This distinction was considered by the court, but it upheld the trial court that the promises did constitute consideration.

Comment 2: The reasoning for refusal to apply the Statute of Frauds to option contracts comes, as stated, from a precedent case. That case stated simply that the option contract itself does not create an interest in land, but, apparently, only a contingent right to enter into a contract for the sale of land.

It, in turn, cited a 1937 Michigan Supreme Court decision that held that an option contract to acquire the stock of a corporation, which corporation owned land, did not constitute a contract to acquire the land.  The 1937 opinion did not hold, as the instant court said it held, that an option to purchase land is not within the Statute of

Frauds.  A 1917 case on which the 1937 case relied, however, did appear to make such a holding, again in a very sketchy case with no analysis.

The more recent authority cited by the court, Marina Bay Condominiums, Inc. v. Schlegel, 423 N.W. 2d 284 (Mich. App. 1988) does indeed make a holding as to options that, the editor agrees, ought to apply with equal force to rights of first refusal:

"The court found that the parties had entered into an option agreement that gave defendants the right to purchase property at a fixed price within a specified time. An option is a preliminary contract for the privilege of purchase and not itself a contract of purchase. It is a contract collateral to the offer to sell whereby the offer is irrevocable for a specified period.  It involves the privilege of buying property at a fixed price within a specified period of time. An option contract does not create an interest in land. Id. Therefore, it is not subject to the statute of frauds. (Citations omitted)."

Comment 3: If the court bears hostility to the Statute of Frauds, and therefore is choosing to limit its scope by implication, then perhaps these opinions can be understood.  Further, it is a commonplace that an option does not create an interest in land per se.  This, in fact, was the underlying reasoning to the extent there was any, in Marina Bay. But don't all the policy reasons for requiring a writing for a contract involving a transfer of real estate apply with equal force to an option in real estate?  Isn't it an important undertaking that the public has an interest in being stated with clarity and precision?

The editor has been too lazy to explore whether this holding on the Statute of Frauds is universal, He does note that the general rule is that an option, once exercised, becomes a contract for the sale of land. At that point, the option should be in writing. Why not impose the requirement earlier.  He also notes that options, at least in most jurisdictions, are subject to recording requirements, precisely on the notion that, contracts or conveyances, they clearly affect ownership of land and ought to be made subject of the recording acts.

 

“Relation Back” of Exercise of Option or Similar Right

In an unusual case decided by the California appellate court, Wachovia Bank v. Lifetime Industries, Inc., 145 Cal. App. 4th 1039 (2006), an optionee that held an option to purchase certain real property sued a building contractor that had recorded a mechanic’s lien against the property, seeking specific enforcement of its rights under an option to purchase real estate. The appellate court held that there was insufficient evidence to establish that the optionee obtained title to the property pursuant to the option or that such title extinguished the contractor’s lien.

The facts in this case are somewhat complex. Kmart Corporation sold an estate for years on the property in Perris, California to Shawmut Bank (“Shawmut”) and deeded the remainder interest (“Remainder”) to an entity called FGHK. FGHK then sold to Shawmut Bank options to lease the land after the estate for years expired and the option to purchase the Remainder as provided in a certain “option and estate for years agreement (“Option Agreement”). Shawmut (as owner of the estate for years) leased the property to Kmart. Shawmut paid $12,843 for the options provided for in the Option Agreement, and the option to purchase the Remainder could be exercised upon the occurrence of any of several specified events, including default of FGHK’s duty to “keep the property ‘free and clear of Optionor liens.’” Id. at 1043. In addition, Shawmut Bank executed a deed of trust in favor of Bank of New York by which Shawmut mortgaged its interest in the property, and a trust indenture by which Shawmut assigned its interest in the Kmart lease and the Option Agreement to Bank of New York. Bank of New York subsequently assigned the beneficial interest under the deed of trust to Wachovia, as the Asset Trustee for Property Acquisition Trust 1993-22 (PAT).

The option was to be exercised by the optionee notifying the optionor of its “desire to exercise” the option.  Upon the closing of the purchase of the Remainder, title was to be “conveyed by special warranty deed free and clear of all Liens, except Permitted Liens.” Id. at 1044.  The Option Agreement was recorded on January 3, 1994. Defendant Lifetime Industries, Inc. (“Lifetime”) later recorded a mechanic’s lien against the property in 2002. In May 2003 the deed of trust was sold at a foreclosure sale to PAT, which acquired the estate for years and the rights of the optionee under the Option Agreement. FGHK continued to own the Remainder.

In January 2004, Lifetime obtained a judgment from the County Superior Court against FGHK in the amount of $837,795, including a lien upon the ownership interest of FGHK in the property and an order that the interest of FGHK in the property be sold at public auction (“Lifetime Judgment”).  PAT then served on FGHK a written notice of its intent to exercise the option to purchase the Remainder pursuant to the Option Agreement, due to the fact that FGHK failed to release, vacate, or fully bond the Lifetime Judgment.  FGHK argued in response that the Kmart lease had terminated and that PAT, as the optionee and owner of the estate for years, had the duty to protect the property against Lifetime’s mechanic’s lien. PAT, in turn, argued that this response amounted to a rejection of the Option Agreement.  PAT then filed a complaint in state court against Lifetime and FGHK, including the following counts: declaratory relief against Lifetime; quiet title against all defendants; and specific performance against FGHK. PAT also asked the court to compel FGHK to deliver a special warranty deed of the Remainder upon PAT’s tender of the purchase price, which title to the Remainder PAT alleged would relate back to January 3, 1994, the date the Option was granted, free and clear of any subsequent liens.

FGHK answered the complaint by alleging that PAT had breached the Option Agreement and that FGHK was not obligated to convey title to the Remainder to PAT. PAT sought a declaration that its interest in the Remainder, as represented by the Option Agreement, the exercise notice, and the FGHK deed (when executed), was prior and superior to Lifetime’s purported interest in the Remainder, as represented by the Lifetime Judgment. FGHK further argued that PAT’s title to the Remainder related back to the date the option was granted in 1994 and therefore extinguished Lifetime’s interest in the Remainder under the Lifetime Judgment.

After reviewing the respective parties’ arguments and assertions, the trial court granted PAT’s motion and entered judgment against Lifetime. On appeal to the appellate court, PAT asserted that the quitclaim deed to the Remainder from FGHK to PAT, which was dated two months after the hearing on the summary judgment motion, triggered the relation-back doctrine, but as the appellate court noted, “PAT submitted no evidence showing that its receipt of the quitclaim deed was pursuant to its exercise of the option.” Id. at 1048.

The appellate court noted that under California law, it is the title received by the optionee that relates back to the date the option was given and extinguishes the interest of the intervening party. According to the court, “Until title is transferred, the optionee, after exercising the option, holds only a right to complete the purchase, enforceable by specific performance; intervening interests, while subject to this right, are not yet extinguished.” Id. at 1051. The court noted that “PAT does not state that FGHK ever delivered a deed to the Remainder to PAT or that PAT otherwise has obtained title to the Remainder . . . At most, the evidence submitted to the trial court shows that PAT gave notice that constitutes an exercise of the option to purchase.” Id. at 1052.  The court noted further that “the mere exercise of the option, without the consummation of the purchase and sale transaction, does not provide PAT with title to the Remainder.” Id. at 1053.

            The court, relying on PAT’s own admission that the Remainder continued to be held by FGHK, ruled that Lifetime’s lien against FGHK’s interest in the Remainder had not been extinguished. With regard to the quitclaim deed from FGHK to PAT, the court ruled that this deed, without more, was insufficient to support a finding in favor of PAT. The court noted the title that relates back to the option must bear some relationship to the option, and stated that “while the relation-back rule is well settled, the nature of this rule has not been clearly explained by the California cases that have relied on it.” Id. at 1054.  The court reasoned that “something more than the mere fact that the optionee subsequently acquired title is required before the purchaser has the benefit of the relation-back rule.” Id. at 1054.  The court held that “justification for the relation-back rule does not apply when the optionee obtains title to the property despite the failure of a condition, expiration of the option, or a material breach by the optionee that would preclude specific performance.” Id. at 1055. Here, according to the court, the evidence of the quitclaim deed (if it even decided to take such evidence) did not necessarily comply with the requirements for application of the relation-back rule. This was so because (1) FGHK initially denied PAT’s right to acquire the Remainder because PAT had allegedly breached the Option Agreement and was not entitled to specific performance (although the issues in this action were never determined), and (2) FGHK eventually issued a quitclaim deed to PAT, rather than the special warranty deed required by the option agreement. According to the court, “PAT could not have obtained the deed from FGHK by operation of the terms of the option, but was required to fulfill an additional condition – the resolution of the PAT-Lifetime dispute – as part of a new agreement between the parties.” Id. at 1056.  Based on the record before the court, the court held that there was insufficient evidence that PAT had obtained title pursuant to the option or that the acquisition of such title extinguished Lifetime’s recorded mechanic’s lien.

Finally, the court rejected Lifetime’s argument that a California statute, which protected lenders that granted purchase options in connection with loans secured by real property, applied in the present case. The court held that “there is nothing to indicate that the legal relationship between FGHK and Shawmut Bank was anything more than optionor and optionee under the Option Agreement.” Id. at 1059. The court noted further that the word “collateral” referred to in this statute refers to collateral that secures a debt owed by the debtor-optionor to the secured party-optionee, which was not the case here where no debt between the parties existed.

As noted above, the court ruled that the mere exercise of the option, without consummation of the purchase and sale transaction, did not provide PAT with title to the Remainder, even with the subsequent delivery of a quitclaim deed to the property.  The court, while perhaps reluctant to reach this conclusion, reasoned that a judgment in favor of PAT, based on the facts of this case, could otherwise foster collusion on behalf of the optionor and optionee that should not be encouraged as a matter of public policy. The court gave as an example a situation where PAT exercised its option and thereby extinguished the intervening Lifetime lien, yet subsequently failed to tender the purchase price for the Remainder, or was unable to obtain title to the Remainder because of a failure of a condition to closing or a contractual breach by PAT. Under such circumstances, the court believed that FGHK would unjustly retain title to the Remainder free and clear of the Lifetime lien. The court reasoned that in this case PAT took title to the property “outside the purview of the option,” i.e., when the optionee would not have been entitled to specific performance, and therefore the relation-back rule should not apply and “the optionee should be in the same position as any other purchaser of the property, and the ordinary rules of priority should apply.” Id. at 1055-56.  Also, the court noted that “PAT submitted no evidence showing that its receipt of the quitclaim deed was pursuant to its exercise of the option.” Id. at 1048. 

It was certainly counterproductive of PAT in this case to (1) not resolve the initial issues (the claims were dismissed) regarding FGHK’s original denial that PAT was entitled to acquire the Remainder pursuant to its option right because PAT allegedly breached the Option Agreement and was not entitled to specific performance;  (2) obtain from FGHK a quitclaim deed to the Remainder instead of the special warranty deed required by the Option Agreement; (3) wait to obtain the quitclaim deed until two months after the hearing on the summary judgment motion, and; (4) not specifically state in the deed that it was being granted and delivered pursuant to PAT’s exercise of its option right as set forth in the Option Agreement.

 

Enforceability of Right of First Refusal in Bankruptcy

In bankruptcy proceedings, a question may arise as to whether § 365(f)(1) of the Bankruptcy Code renders a right of first refusal contained in a lease unenforceable. Section 363(f)(1) provides that, “notwithstanding a provision in an executory contract or unexpired lease of the debtor, or in applicable law, that prohibits, restricts, or conditions the assignment of such contract or lease, the trustee may assign such contract or lease” if the trustee assumes the lease and provides adequate assurance of future performance.

1.         In In re E-Z Serve Convenience Stores, Inc., 289 B.R. 45, 51-52 (Bankr. M.D. N. Carolina 2003), the bankruptcy court held that, based on the facts and circumstances of the case, the landlord’s right of first refusal to purchase the buildings and permanent improvements constructed on the leased land by the debtor-tenant was enforceable and would not be excised by the court. The bankruptcy trustee sought to obtain the court’s approval of the assumption, assignment and sale of the debtor-lessee’s interest under the lease to a third party free and clear of the right of first refusal, arguing that it was unenforceable under § 365(f) as an impermissible restraint on assignability of the lease. The court noted that, “courts have applied 365(f) to ‘lease provisions that are so restrictive that they constitute de facto anti-assignment provisions” (citation omitted). The court also acknowledged that “[w]hile a trustee is required to assume a contract as a whole, the court may strike provisions that are contrary to the provisions of the Bankruptcy Code such as those that place restrictions on assignment.” Id. at 49.

2.         But the court ruled in favor of the lessor based on the following undisputed facts: the landlord had submitted the highest bid for the property; the clause was specifically and heavily negotiated by the parties as consideration for below-market rent; the landlord planned to develop the adjacent land; and the clause was necessary to protect the landlord from violating a non-compete clause in another lease to another party on nearby property. The court stated that “[n]umerous courts have recognized a right of first refusal with no analysis of the application of 365(f)” (citations omitted) . . . A review of these cases reveals that the concern of these courts when presented with a contractual right of first refusal is not whether to enforce such right, but how to incorporate a right of first refusal into the bidding and sale procedures of the bankruptcy auction in a fair and equitable manner that still allows for maximization of the value of the estate.” Id. at 52-53. The court also noted that the majority of courts hold that a right of first refusal is an executory contract, but stated that “[w]hether the right of first refusal is part of a larger executory contract or lease, or stands alone, should not alter the treatment of that right. The Trustee has chosen to assume the lease, which includes [the landlord’s] right of first refusal.” Id. at 53 n.11. See also In re Kellstrom Industries, Inc., 286 B.R. 833, 835 (Bankr. D. Del. 2002) (“we conclude, like the majority of the courts before us, that the right of first refusal . . . is an executory contract which may be rejected by the Debtors under section 365”).

3.         This was a fact-specific decision and the court ruled for the landlord, as the holder of the first right of refusal, based on the following specific factual and evidentiary findings: the landlord presented uncontested evidence of economic harm to him if the provision were not enforced; the right of first refusal was a material and bargained-for provision of the lease, with consideration to the debtor-tenant in the form of below-market rent; there was no “chilling effect” on the sale of the property; the right of first refusal did not restrict or burden the assignment of the lease and therefore did not fall within the framework of § 365(f)(1); absent the right of first refusal, the trustee could not give adequate performance of future performance; the landlord’s offer was equal or better than the terms of competing offers; the court had not yet entered a final order approving the sale; and disregard of the landlord’s interest would be unfair and inequitable where there appeared to be no benefit to the estate and a clear detriment to the holder of the interest. The court also noted that it “retains some discretion in determining whether a lease provision that does not explicitly prohibit assignment qualifies as a de facto anti-assignment clause thereby rendering it unenforceable” (citations omitted). Id. at 50. The court stated further that it “disagrees with the conclusion that the statutory language of § 365(f)(1) renders any right of first refusal unenforceable and finds that [the landlord’s] right of first refusal is not within the scope of § 365(f).” Id. at 51.   The court, in its analysis, referred to the bankruptcy court decisions in In re Auto Trak Corp., 277 B.R. 655 (Bankr. E.D. Va. 2002) and In re Rickel Home Centers, Inc., 240 B.R. 826, 831 (Bankr. D. Del. 1998), with respect to its analysis of whether § 365(f) should be applied to lease provisions that are so restrictive that they should be deemed to be de facto impermissible anti-assignment provisions.

4.         The E-Z Serve case highlights the importance of specifically stating, in the lease provision setting forth an option right or first right of refusal, that the provision was bargained for, was a material part of the lease, and would cause economic detriment to the holder if it were not upheld.

5.         Unlike an option, a right of first refusal does not entitle the holder of the right to force the other party to sell or lease the asset.  Instead, if and when the other party decides to sell or lease the asset to any third party, the holder of the right of first refusal can require the asset to be sold or leased to him or her for the same price and terms that the owner is willing to accept from the third party.

6.     Obviously, a right of first refusal is much weaker from the standpoint of the holder than an option: it does not set the price for the asset in advance, and it allows the owner of the asset to decide whether and when to sell or lease.  A property owner generally will resist granting a right of first refusal because of its chilling effect on the marketability of the property. However, in the E-Z Serve case the court specifically found that “there is no evidence that the existence of a right of first refusal had a chilling effect on the sale procedure.” Id. at 51. This was so because the testimony demonstrated that the party that submitted the bid for the property accepted by the trustee did so without knowledge of the landlord’s first right of refusal, and the landlord was not aware of the amount of any competing bids because it had submitted a bid that was $51,000 more than the bid submitted by the trustee for approval by the bankruptcy court.

 

Title Insurance for Options and Related Rights

            Coverage for rights of the parties under options and related interests in real estate may be available under certain circumstances, subject to the facts of the particular transaction, individual title-insurer underwriting criteria and limitations, and the applicable law and regulations in a particular jurisdiction.

In the case of a recorded option (or related) agreement, where the owner subsequently obtains a mortgage and the mortgagee records its mortgage, the mortgagee generally would take subject to the recorded option (or related) agreement.  If the option was in fact recorded before the mortgage, valid consideration was given for the option in an arms-length transaction, applicable state law provides for "relation back" of recorded options, and the optionee is willing to settle for true indemnity (and not defense or expense) coverage, the title insurer may be persuaded to issue an endorsement indemnifying the insured for actual damages resulting from the mortgage lender's subsequent challenge to the validity, priority and enforceability of the option. (Although any rational lender would not lend on a property with a prior recorded option without requiring subordination.)

An option (or related right) endorsement theoretically could be issued in connection with either an ALTA Loan Policy or an ALTA Owner’s Policy. But an option (or related right) would still likely constitute an “encumbrance” or some other “defect” in the title, at least with respect to the portion of the land that is included in the title policy. Therefore, the title insurer would take a Schedule B exception to the option (or related right) as it affects the specific portion of the “land” described in the policy to which it is attached.

The insured may ask the title insurer to issue a separate endorsement insuring the option right of the optionee to purchase the property. The availability, form and cost of such an endorsement would necessarily depend on the regulatory and statutory provisions and restrictions of the state where the property is located with respect to issuance of such an endorsement, as well as applicable state statutory and case law with respect to the validity, enforceability and priority of such an option, the language contained in the recorded option agreement, and an overall analysis of the transaction and all the other relevant documentation.  Any such endorsement would exclude from coverage any loss occurring as the result of any taxes or assessments levied by any governmental agency or authority subsequent to the recording of the option agreement, and would also contain a creditor’s rights exclusion (excluding from coverage under the endorsement any loss arising or occurring as the result of any federal bankruptcy proceeding or any state or federal insolvency proceeding) because of the risk that such an option could constitute an executory contract under § 365(a) of the Bankruptcy Code that may be rejected by a bankruptcy trustee. Also, title insurance will not provide coverage for any loss occurring as the result of a subsequent bankruptcy filing by or against the optionor or optionee, because of the title-policy exclusions for post-policy matters and matters “created, suffered, assumed, or agreed to” by the insured party.

There also may be other problems associated with "naked" options, which are not part of a lease, mortgage or other existing interest in real estate. These issues involve the confluence of both UCC law and real estate law, and are beyond the scope of this paper. See John C. Murray, Dressing up a Naked Option, 2000, http://www.firstam.com/listReference.cfm?id=5574; John C. Murray, Perfecting and Enforcing a Security Interest in an Option to Purchase Real Estate, 2005, http://www.firstam.com/listReference.cfm?id=5574.

Attached hereto as Appendix D is a sample form of “Right of First Offer” Endorsement (for the protection of the mortgagee), the availability of which is, as noted above, subject to the facts of the particular transaction, individual title-insurer underwriting criteria and limitations, and the applicable law and regulations in a particular jurisdiction. Attached hereto as Appendix E is a sample form of “Borrower’s Certificate Regarding Right of First Offer,” to be executed by the borrower in connection with the form of “Right of First Offer” Endorsement set forth in Appendix D. Attached hereto as Appendix F is a sample form of “Right of First Refusal” Endorsement, the availability of which is, as noted above, subject to the facts of the particular transaction, individual title-insurer underwriting criteria and limitations, and the applicable law and regulations in a particular jurisdiction. Attached hereto as Appendix G, Appendix H, and Appendix I are sample forms of Option Endorsement, to be issued in connection with a purchase option contained in a lease document; the availability of which Endorsements is, as noted above, subject to the facts of the particular transaction, individual title-insurer underwriting criteria and limitations, and the applicable law and regulations in a particular jurisdiction.   Attached hereto as Appendix J, Appendix K, and Appendix L are sample forms of Option Endorsement, to be used where the option is contained in a separate option agreement; the availability of which Endorsements is, as noted above, subject to the facts of the particular transaction, individual title-insurer underwriting criteria and limitations, and the applicable law and regulations in a particular jurisdiction. 

 

 


 

APPENDIX A*

 

 

RIGHT OF FIRST REFUSAL

 

__________________________ and__________________________ (“Grantors”), in consideration of the payment of __________ Thousand Dollars ($__,000.00), the receipt and sufficiency of which are hereby acknowledged, hereby grant to __________________________ and __________________ _________________________ (hereafter “Grantees”), or the survivor of them, a right of first refusal to purchase the premises described in Schedule A attached hereto, upon the terms and conditions herein set forth:

            Grantors grant to Grantees a right of first refusal, for the period set forth below (referred to hereafter as the “Duration”), to purchase the premises described in Schedule A on such terms and conditions as Grantors would be willing to sell said premises to a third party.

            At such time as Grantors, at any time during the Duration, receive a written offer to purchase said premises that they wish to accept (the “Offer”), they shall notify Grantees of such receipt and shall include in such notice a true and accurate copy of the Offer as submitted in writing to Grantors. Grantees shall then have eight (8) days, excluding Saturdays, Sundays and state or federal holidays, from delivery of such notice in the manner set forth below, within which to enter into a written agreement of sale and purchase with Grantors upon the same terms and conditions as are contained in the Offer, including any and all contingencies therein for such matters as, e.g., inspections, obtaining mortgage financing, zoning matters, or the like.

All dates set forth in the Offer shall be adjusted to account for the delay between the Grantors’ delivery of notice of the Offer and Grantees’ entering into a written agreement of sale and purchase with Grantors upon the same terms and conditions as are contained in the Offer. (For example: If the Offer is dated March 1st and sets forth a closing date of May 15th, and notice of the Offer is delivered to Grantees on March 6th and Grantees exercise their right of first refusal on March 12th, Grantees’ agreement with Grantors shall be considered to be “upon the same terms and conditions as are contained in the Offer” if it sets forth a closing date of May 27th. Dates such as dates for earnest money deposits, inspection contingencies, and the like shall be similarly adjusted.) Grantees shall be deemed to have “entered into a written agreement of sale and purchase with Grantors” upon Grantees’ timely delivery to Grantors of a writing signed by Grantees upon the same terms and conditions as are contained in the Offer; the failure, neglect or refusal of Grantors or either of them to sign such timely delivered “written agreement of sale and purchase with Grantors” shall not defeat Grantees’ exercise of the right of first refusal hereunder.

If Grantees do not so enter into such agreement, then this right of first refusal shall be null and void.  Grantees agree to execute any and all documents that Grantors may request to waive or release the right of first refusal not so exercised.  Grantees shall be liable to Grantors for all costs incurred by Grantors, including attorney’s fees, in the event of Grantees’ wrongful failure to so waive or release this right of first refusal.

            Any notices required hereunder may be sent by the U.S. mails, first class, postage prepaid, certified, return receipt requested, addressed as follows:

 

            TO GRANTORS:

            _____________________________

 

            TO GRANTEES:

 

            _____________________________

 

            _____________________________

             

or to such other address as may be designated in a writing sent by one party to the other at the foregoing address.  Delivery by overnight courier and service by state marshal are also acceptable methods of delivery of notices hereunder. Notice(s) shall be deemed received or delivered when physically delivered to the address(es) as set forth herein (as may be changed by written notice aforesaid). Notice to one of the Grantees or to one of the Grantors shall not be deemed notice to both Grantees or both Grantors. Nothing in this paragraph regarding notices shall be deemed to prohibit there being different addresses to which notices must be sent for each of the Grantees or for each of the Grantors.

 

            This right of first refusal shall be and remain in effect from the date the same is executed by the Grantors until the date that is twenty (20) years after the date of death of the survivor of the Grantors.

This right of first refusal:  (1) is not assignable by Grantees, except that each may assign it to the other; (2) shall not survive the deaths of both of the Grantees, or, if assigned by one Grantee to the other, the death of the assignee; (3) shall terminate upon the filing of a petition in bankruptcy by or against Grantees or either of them; and (4) is not exercisable by only one of the Grantees if such one Grantee has not had the right of first refusal assigned to him or her by the other Grantee.

Any assignment as permitted by the terms hereof shall not be effective unless and until notice thereof has been delivered to Grantors in the manner specified herein for the delivery of notices.

            This right of first refusal is binding upon the heirs, successors and assigns of Grantors.

 

            Executed this ____ day of ______________, 200_.

 

Witnesses:

 

_______________________________                     

 

                       

STATE OF _________________ )

                                                      )   ss.

COUNTY OF _______________      )

 

            On this the _______ day of _____________________, 200_, personally appeared, before me, the undersigned officer, __________________________ and ________________________, signers and sealers of the foregoing instrument, who acknowledged that they executed the same for the purposes therein contained as their free act and deed.

 

 

                                                                                    ________________________

                                                                                    Notary Public

 

                                                                                    My commission expires:

                                                                                   

           

* This document was drafted by and supplied to the author of the above article by John D. Thomas, Vice President and Branch Counsel, Fidelity National Title Insurance Company, East Hartford, CT. The author expresses his appreciation for Mr. Thomas’ contribution. 
SCHEDULE A

 

Legal Description


 

APPENDIX B

 

TENANT’S RIGHT OF FIRST REFUSAL

 

  1. Right of First Refusal.  Provided that Tenant:
    1. Is not in default under this Lease,
    2. Has not assigned this lease or sublet all or part of the Premises, or   
    3. Is not holding over in the Premises,
  2. if Landlord enters into a contract to sell its entire fee interest in the Premises (and only the Premises) (a “Sale”), Tenant shall have a one-time right of first refusal to purchase of the entire Premises (“Refusal Right”). In the event of a Sale, Landlord shall notify Tenant in writing of the prospective Sale of the Premises (“Landlord’s Notice”). Landlord’s Notice shall include the elements of the business deal of such prospective Sale (the “Elements”), and a contract of sale executed by Landlord containing the material terms of the Sale (the “Contract of Sale”) for Tenant’s signature.
  3. Tenant’s Exercise of Right.  In order to exercise the Refusal Right, Tenant shall:
    1. Accept the terms of the Sale as set out in the Contract of Sale by notifying Landlord, in writing, sent by registered or certified mail, return receipt requested, of its intent to so accept, postmarked within five (5) business days after receipt of Landlord’s Notice; and
    2. Execute and return to Landlord the Contract of Sale within fifteen (15) days after receipt of same from Landlord.
  4. Proof of Financing.  If Tenant shall timely exercise the Refusal Right, Tenant shall, within five (5) days following its execution of the Contract of Sale, provide Landlord with evidence of a non-contingent financing commitment or other evidence acceptable to Landlord, in Landlord’s sole and absolute discretion, of Tenant’s ability to close on or before the closing date set forth in the Contract of Sale.  If Tenant has not shown Landlord such evidence within the five (5) day period, Landlord shall have no obligation to sell the Premises to Tenant and Tenant’s rights under this Clause shall forever be null and void.
  5. Closing.  Following Landlord’s receipt of satisfactory evidence from Tenant of Tenant’s ability to close pursuant to the terms of the Contract of Sale, Landlord and Tenant shall proceed to close the sale of the Premises no later than the closing date set forth in the Contract of Sale.
  6. Lapse of Refusal Right.  If Tenant shall fail to timely perform any of its obligations as set forth herein, or if Tenant shall opt not to exercise the Refusal Right, the Refusal Right shall lapse and Landlord shall be free to sell the Premises pursuant to the Elements or any subsequent agreement for the transfer of the Premises.
  7. No Assignment of Right.  The Refusal Right is personal to Tenant and may not be assigned by Tenant in connection with and assignment of this Lease or otherwise. The Refusal Right may not be exercised by anyone other than Tenant. Any attempted assignment of the Refusal Right shall be of no effect and the Refusal Right shall become forever null and void as of the date of the purported assignment.
  8. Events Not Triggering Refusal Right.  Anything contained herein to the contrary notwithstanding, in the event of any of the following, the Refusal Right shall be deemed not to have arisen and of no force and effect:

(i)         The sale of the Premises to an Affiliate (as defined in Clause _____ hereof)            of Landlord or to a government entity;

(ii)        The sale of the Premises in connection with a sale of all or substantially all of Landlord’s assets or shares (or interests);

(iii)       Landlord’s shares becoming or continuing to be traded on the New York, or Over-the-Counter stock exchange or market or any similar exchange or market;

(iv)       The entering into of any management agreement or any similar agreement which transfers control of the Premises by Landlord;

(v)        The entering into by Landlord of any ground lease, mortgage, or trust deed upon all or any portion of the Premises, any advances made thereunder and all renewals, modifications, consolidations, replacements, extensions, and re-financings thereof; or

(vi)       The entering into a contract by Landlord for the sale of more than one property wherein the Premises is one of such properties.

h.         Subordination.  The Refusal Right shall be subject and subordinate to any mortgage now or hereafter placed upon the Premises or any portion of the [Building/Center], and to any renewals, modifications, consolidations, replacements, extensions, and re-financings thereof.  Tenant agrees to execute and deliver whatever instruments may be requested by any Lender for such purposes. If Tenant fails to do so within ten (10) days after demand in writing, Tenant does hereby make, constitute, and irrevocably appoint Landlord as its attorney-in-fact (which shall be deemed to be coupled with an interest) and in its name and place to execute and deliver such instruments.


 

APPENDIX C

 

 

RIGHT OF REFUSAL AGREEMENT

 

THIS AGREEMENT (the “Agreement”) is made effective the _____ day of __________ 200_, by LAND HOLDER and HAND HOLDER, husband and wife, having a notice address at                     (the “Owners”) in favor of HOMESTEAD DEVELOPMENT, INC., a              corporation (the “Developer”), having a notice address at   ­­­­­                                                         .       

 

 

RECITALS:

 

 

A.           The Owners own approximately                (     ) acres of real property in

                       County,             (the “Land”), more particularly described as follows:

 

 

 

B.           The Developer is interested in determining whether the Land can be subdivided and developed;

C.           The Developer’s interest is contingent on the Developer gaining access to the Land to conduct feasibility studies, inspections and tests;

D.           If the Developer determines that it is feasible to subdivide and develop the Land, the Developer intends to enter into negotiations with the Owners to purchase the Land on terms that are mutually satisfactory to the Owners and the Developer; and

E.           The Owners are willing to grant such access to the Developer on the terms hereinafter provided, but not otherwise.

 

AGREEMENTS:

 

In consideration of the payment to the Owners of One Hundred Dollars ($100.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Owners and the Developer agree as follows:

[1.           Right of Refusal. If during the term of this Agreement the Owners receive a bona-fide third-party offer (the “Offer”) to purchase trail or any part of the Land on terms that are acceptable to the Owners in the Owners’ sole discretion, within five (5) business days after the Owners’ receipt of the Offer the Owners agree to notify the Developer in writing (the “Notice”) by certified mail of the terms of the Offer. The Developer will have thirty (30) days after the date of receipt of the Notice within which to notify the Owners that the Developer elects to purchase the Land (or the portion thereof which is the subject of the Offer) on the terms of the Offer as described in the Notice, If the Developer so elects, the closing of such sale will take place at the offices of               Title Company,              ,            , pursuant to the terms of the Offer. If the Developer does not elect to purchase the Land (or the portion thereof that is the subject of the Offer) within thirty (30) days after the date of the Developer’s receipt of the Notice, the Owners may sell or transfer the Land (or the portion there of which is the subject of the Offer) to another purchaser at the price and on substantially the terms stated in the Offer. As used herein, the word “purchase” will be deemed to include any transaction whereby the Owners contribute all or any portion of the Land, or the Owners’ beneficial interest therein, to a partnership, corporation, limited liability company, trust or other entity, in exchange for an interest in such entity.

[1.        Right to Offer. Before the Owners may sell or transfer the Land to any third party, the Owners agree to first offer the Land to the Developer by giving written notice (the “Owners’ Offer ‘9 of the terms and conditions on which the Owners are willing to sell the Land. The Developer will have thirty (30) days after the date of receipt of the Owners’ Offer within which to notify the Owners that the Developer accepts the Owners’ Offer on the terms and conditions therein contained. If the Developer accepts the Owner’s Offer, the closing of such sale to the Developer will take place at the offices of Southwest Title Company, Oklahoma City, Oklahoma, pursuant to the terms of the Owners’ Offer. If the Developer does not accept the Owners’ Offer in writing within thirty (30) days after the date of the Developer’s receipt thereof the Owners may sell the Land to any other person at the price and on the terms and conditions stated in the Owners’ Offer within one hundred twenty (120) days after the date of the Owners’ Offer. At the end of such one hundred twenty (120) days, the right of the Owners to sell the Land free from the right of refusal hereby granted will terminate, and the provisions of this Agreement will apply to any subsequent proposed sale or transfer of the land by the Owners. The right of refusal hereby granted will expire on the date that is twenty-one (21) years after the death of the last surviving child of                         ,   unless sooner terminated by the exercise of or failure to exercise the option set forth herein. As used herein, the word “sell” will be deemed to include any transaction whereby the Owners contribute all or any portion of the Land, or the Owners’ beneficial interest therein, to a partnership, corporation, limited liability company, trust or other entity, in exchange for an interest in such entity.] 

  1. Term. This Agreement and the rights herein granted will expire at midnight on the one hundred eightieth (180th) day after the date of execution of this Agreement by all parties.

3.         Right of Entry. During the term of this Agreement, the Developer, the Developer’s agents, employees, independent contractors and engineers will have the right from time to time to enter on the Land at the Developer’s sole risk for the purpose of inspecting the same and conducting surveys, engineering studies, borings, soils tests, environmental studies, investigations, feasibility studies and such other studies, tests and inspections as the Developer deems appropriate. All such entries will be made in such a manner as to minimize any material interference with the Owners’ use of the Land. The Developer, to the Owners’ reasonable satisfaction, will restore the Land as nearly as possible to the condition immediately preceding any exercise by the Developer of the right of entry and inspection granted to Developer pursuant to this Agreement. The Developer agrees to indemnify, defend and hold the Owners harmless from all liability or claims of liability directly or indirectly arising out of any such entry; which indemnification obligation will survive the termination of this Agreement.

4.         Application for Approvals. During the term of this Agreement, the Developer will have the right, but not the Obligation, to apply to appropriate authorities for and to prosecute the obtaining of: (a) agreements for all improvements required by governmental authorities as a condition to the development of the Land; (b) any variances, special exceptions, uses or other approvals required under zoning or other laws, regulations or requirements pertaining to the intended use, occupancy or development of the Land; and (c) all other permits and approvals which, in the exercise of Developer’s reasonable judgment, are required as a prerequisite to the development of the Land.

5.         Owners’ Participation. During the term of this Agreement, the Owners, at the Developer’s expense, agree to join in the execution of such applications and other documents and participate, to the extent not overly burdensome to the Owners, in such proceedings, as are, in the exercise of the Developer’s reasonable judgment, required to determine the feasibility of the Land for the use intended by the Developer; provided, however, the Owners will not be required to join or participate in any of the foregoing if to do so would result in any liability or financial obligation being imposed on the Owners or the Land unless the Developer agrees to bear the same. The Developer agrees to indemnify, defend and hold the Owners harmless from any such obligation or liability, which indemnification obligation will survive the termination of this Agreement.

6.         Binding Effect. This Agreement will inure to the benefit of and bind the respective heirs, personal representatives, successors and assigns of the parties.

7.         Entire Agreement. This instrument constitutes the entire agreement between the parties relating to the subject matter of this Agreement and there are no agreements, understandings, warranties or representations between the parties except as set forth herein.

8.        Attorneys’ Fees. If either party institutes an action against the other party relating to the provisions of this Agreement or any default hereunder, the unsuccessful party to such action will reimburse the successful party for the reasonable attorneys’ fees, disbursements and other litigation expenses incurred by the successful party.

9.         Irrevocable. The rights granted to the Developer will be irrevocable during the term of this Agreement.

 

IN WITNESS WHEREOF, the undersigned have executed this instrument this _____ day of    , 200_, effective the date first above written.

 

                                                                                        _________________________

                                                                                        LAND HOLDER

 

 

                                                                                        ______________________

                                                                                        HAND HOLDER

                                                                                        (the “Owners”)

 

______________________,a __________ corporation

 

By: ___________________

                                                                      President

ATTEST:                                                         (the “Developer”)

 

______________________

(SEAL)                     

                                                               Secretary

 

ACKNOWLEDGMENTS

 

[INSERT APPROPRIATE ACKNOWLEDGMENTS]


 

APPENDIX D

 

RIGHT-OF-FIRSRT-OFFER ENDORSEMENT

 

ATTACHED TO POLICY NO.

 

ISSUED BY

 

_______________ Title insurance Company

 

            The Company hereby insures the insured against toss or damage sustained or incurred by the insured by reason of (1) any impairment of the validity, enforceability or priority of the lien of the insured mortgage resulting from the Right of First Offer (defined below), and (2) the rights of the Tenant pursuant to the Right of First Offer being triggered solely by a future foreclosure of the lien of the insured mortgage or a deed-in-lieu of foreclosure of the lien of the insured mortgage.

The term “Right of First Offer” as used in this endorsement shall mean that certain Tenant’s Right of First Offer set forth at Section __­ of the Ground Lease dated __________ ___, 200_ by and between ____________________Inc., a __________ corporation, as “Landlord”, and __________________ Inc., a __________ corporation, as “Tenant” (the “Ground Lease”), [the Landlord’s interest in the Ground Lease having been assigned to _______________, a _______________ general partnership, and which Ground Lease and certain amendments and supplements thereto and Memorandums thereof are identified in paragraph ___ of Schedule B, Part I.

This endorsement is made a part of said policy and is subject to all of the terms and provisions thereof and of any prior endorsements thereto. Expect to the extent expressly stated, it neither modifies any of the terms and provisions of the policy and any prior endorsements, nor does it extend the effective date of the policy and any prior endorsements, nor does it increase the face amount thereof.

 

_______________ Title Insurance Company

 

 

BY _________________________________________

 

 

AUTHORIZED SIGNATORY

 

Right of First Offer” Endorsement

ALTA Loan Policy


 

APPENDIX E

 

Loan No.  ________

 

BORROWER’S CERTIFICATE REGARDING RIGHT OF FIRST OFFER

 

THIS CERTIFICATE is made by _______________, a ____________ general partnership (“Borrower”), to and for the benefit of the _______________ Title Insurance Company (“Title Company”).

 

 

RECITALS

 

This Certificate is entered into on the basis of the following facts, understandings and intentions of the parties:

 

A.        Borrower desires to obtain a first mortgage loan (the ‘Loan”) from _______________Insurance (“Lender”), to be insured by a policy of title insurance insuring Lender under Title Company’s policy number _______ (the “Title Policy”).

B.        Lender has requested that Title Company issue an endorsement to the Title Policy relating to a right of first offer (the “ROFO”) to purchase a portion of the property that is the subject of the Title Policy (“Property”) by _______________, , Inc. (“Tenant”), pursuant to the provisions of a lease of such property from Borrower to  Tenant dated __________ ___, as amended.

C.        In order to issue such endorsement, Title Company has requested that Borrower execute a certificate to affirm certain matters regarding the ROFO as of the date of the closing of the Loan.

 

CERTIFICATE

NOW, THEREFORE, with knowledge that Title Company will rely in part upon this Certificate to issuing the Title Policy, Borrower warrants and represents to Title Company as follows

1.         At no time prior to the date hereof has Borrower or any agent, employee, broker or representative of Borrower taken any action that would trigger the ROFO (including, but not limited to, offering or listing the Property for sale) or offered the Property to Tenant in connection with any intention or desire on the part of Borrower to sell the Property.

2.         The foregoing warranty and representation does not contain any misstatement of fact or omit any statement of fact that would make any such warranty or representation misleading.

3.         This Certificate maybe relied upon by Title Company in its decision to issue the Title Policy in the form requested by Lender.

4.         This Certificate may be executed in any number of counterparts, each of which counterpart shall be deemed to be an original and all of which together shall constitute but one and the same Certificate

                       

                        DATED this _____ day of                          , 200_.

 

 

 

BORROWER

                                                                        ________________________,

a __________ general partnership

                                                                       

By:  ____________________, a general partner

 

By:  _____________________, a       general partner

                                                                       

           By:  _____________________, a       general partner


 

APPENDIX F

 

RIGHT-OF-FIRST-REFUSAL ENDORSEMENT

 

ATTACHED TO POLICY NO.

 

ISSUED BY

 

 

_______________ Title Insurance Company

The Company hereby insures the insured against loss or damage sustained or incurred by the insured by reason of the rights of the [Tenant] pursuant to the Right of First Refusal (defined below) being triggered solely by [a future foreclosure of the lien of the insured mortgage or a deed-in-lieu of foreclosure of the lien of the insured mortgage].

The term “Right of First Refusal” as used in this endorsement shall mean that certain Tenant’s Right of First Refusal set forth at [Section ___ of the Ground Lease] dated_________ ___, 200_ by and between _______________, Inc., a __________ corporation, as “Landlord”, and _______________, Inc., a __________ corporation, as “Tenant” (the “Ground Lease”), [the Landlord’s interest in the Ground Lease having been assigned to_______________, a __________ general partnership], and which Ground Lease and certain amendments and supplements thereto and Memorandums thereof are identified in paragraph _________,   Schedule B1.

This endorsement is made a part of said policy and is subject to all of the terms and provisions thereof and of any prior endorsements thereto. Expect to the extent expressly stated, it neither modifies any of the terms and provisions of the policy and any prior endorsements, nor does it extend the effective date of the policy and any prior endorsements, nor does it increase the face amount thereof.

 

_______________ Title Insurance Company

 

 

BY _________________________________________

 

 

AUTHORIZED SIGNATORY


 

APPENDIX G

 

OPTION ENDORSEMENT (LEASE)

 

Attached to Policy No.

 

The policy is hereby amended in the following manner:

The Company insures against loss or damage which the insured may sustain resulting from a final adverse determination of a court of competent jurisdiction based upon the invalidity, unenforceability or failure of priority of the Purchase Option described in the Lease, a Memorandum of which is set forth on Schedule A hereof, as against any lienholder, encumbrancer or party having an interest or estate in the land (‘Lienholder”) created or arising between the Date of Policy and date of acquisition of the estate to which the Purchase Option relates provided that:

1.      The Purchase Option is properly exercised in accordance with its terms; and

2.         The superiority of the Purchase Option is asserted by the insured at its own expense, in a timely manner and by appropriate action or proceeding against any such Lienholder, including, without limitation, any action or proceeding brought by any such Lienholder, encumbrancer or party, or any proceeding necessary to have any such lien, encumbrance, interest or estate removed from its effect upon the land and relegated to the fund produced as a result of the exercise of the Purchase Option; and

3.        The coverage afforded by this Endorsement shall not be applicable to:

(a)       any loss arising from a bankruptcy or insolvency proceeding or the exercise of the rights of any trustee, receiver or creditor in connection therewith; or

(b)       any loss based upon taxes or assessments levied by any governmental agency or authority subsequent to the Date of Policy.

This endorsement is made a part of the policy and is subject to all of the terms and provisions thereof and of any prior endorsements thereto. Except to the extent expressly stated, it neither modifies any of the terms and provisions of the policy and any prior endorsements, nor does it extend the effective date of the policy and any other prior endorsements, nor does it increase the face amount thereof

 

_________________TITLE INSURANCE COMPANY

 

By: _________________________

Authorized Signatory

 

 

 


 

APPENDIX H

 

OPTION ENDORSEMENT (LEASE; ALTERNATIVE)

Attached to and forming a part of Policy No. __________

 

Issued by

_______________ TITLE INSURANCE COMPANY

 

OPTION ENDORSEMENT

 

With respect to the option to purchase contained in the lease described in Schedule A, the option to purchase is hereby incorporated into Sched­ule A of the policy as an interest insured thereby, and the Company further insures the insured against loss or damage sustained or incurred by the insured by reason of:

(1)     The unenforceability of the right to exercise the option to purchase except to the extent that such unenforceability or claim thereof is based on the failure of the insured to have fulfilled the terms and conditions of the option.

(2)     The priority over the option to purchase of any conveyance made of the fee simple estate in the land or any liens or encumbrances created thereon after the Date of Policy, excepting any such liens and encumbrances that would affect the insured had the insured been the owner of the fee simple title instead of an option as of Date of Policy, including without limitation, real estate taxes, special assessments, demolition liens, drainage liens and water tax liens, or any right, title or interest in the land derived thereunder.

(3)       The entry of any court order or judgment which constitutes a final determination and requires the insured, as a condition to receiving specific performance of the option, to pay a sum in excess of the option price, other than attorney’s fees, and all costs of litigation.                                                                                                   

Nothing contained in this endorsement shall be construed as insuring the insured against loss or damage sustained or incurred by reason of:

(a)     Disaffirmance of the option under the provisions of the Bankruptcy Code.

(b)     The failure of the optionee to receive all or part of an award entered in a condemnation proceeding unless failure to share in said award stems solely from a court order or judgment that constitutes a final determination and adjudges the option invalid or incapable of specific performance.

(c)     The failure of the insured, at the time of payment of the option price, either to have obtained proper conveyances and releases from all persons then having an interest in said land or a lien or encumbrance thereon (the determination as to the identity of such persons and the nature of the interest, lien or encumbrance owned or claimed, to be at the expense of the insured) or to have obtained a court order or judgment that constitutes a final determination and determines those persons and interests, entitled to receive the option price.

(d)    Attorney’s fees and costs in connection with the proceedings men­tioned in subparagraph (c) immediately above, or in connection with an action to enforce the option, excluding attorneys’ fees incurred to defend an attack on the validity or enforceability of said Option.

(e)   Any lien, or right to a lien, for services, labor or material heretofore or hereafter furnished, imposed by law.

This endorsement is made a part of the commitment or policy. It is subject to all the terms of the commitment or policy and prior endorsements. Except as expressly stated in this endorsement, the terms, dates and amount of the commitment or policy and prior endorsements are not changed.

 

 

Dated:

 

______________TITLE INSURANCE COMPANY

                                                                                   

                                                                                    By: ___________________

 

 

Authorized Signatory:                                                  ATTEST: _____________________


 

APPENDIX I

 

OPTION TO PURCHASE (LEASE; ALTERNATIVE)

 

ISSUED BY

_______________ TITLE INSURANCE COMPANY

 

Attached to Policy No. ____________

File No. ____________

 

This policy is hereby amended in the following manner:

 

The Company insures against loss or damage which the insured shall sustain resulting from a final adverse determination of a court of competent jurisdiction based upon the invalidity, unenforceability or failure of priority of the Purchase Option described in the Lease, a Memorandum of which is set forth on Schedule A hereof, as against any lienholder, encumbrancer or party having an interest or estate in the land (“Lienholder”) created or arising between the Date of Policy and date of acquisition of the estate to which the Purchase Option relates provided that:

1.         The Purchase Option is properly exercised in accordance with its terms; and

2.         The superiority of the Purchase Option is asserted by the insured at its own expense, in a timely manner and by appropriate action or proceeding against and such Lienholder, including, without limitation, any action or proceeding brought by any such Lienholder, encumbrancer or party, or any proceeding necessary to have such lien, encumbrance, interest or estate removed from its effect upon the land and relegated to the fund produced as a result of the exercise of the Purchase Option; and

3.         The coverage afforded by this Endorsement shall not be applicable to:

a.   any loss arising from a bankruptcy or insolvency proceeding or the exercise of the rights of any trustee, receiver or creditor in connection therewith; or

b. any loss based upon taxes or assessments levied by any governmental agency or authority subsequent to the Date of Policy.

This endorsement is made a part of the policy and is subject to all of the terms and provisions thereof and of any prior endorsements thereto. Except to the extent expressly stated, it neither modifies any of the terms and provisions of the policy and any prior endorsements, nor does it extend the effective date of the policy and any prior endorsements, nor does it increase the face amount thereof.

 

 

_______________ Title Insurance Company

 

Dated: _______________

By: ________________________

               


 

APPENDIX J

 

OPTION ENDORSEMENT

 

This policy is hereby amended in the following manner:

The Company insures against loss or damage which the insured shall sustain resulting from a final adverse determination of a court of competent jurisdiction based upon the invalidity, unenforceability or failure of priority of the Purchase Option described in the Lease, a Memorandum of which is set forth on Schedule A hereof, as against any lienholder, encumbrancer or party having an interest or estate in the land (“Lienholder”) created or arising between the Date of Policy and date of acquisition of the estate to which the Purchase Option relates provided that:

1.       The Purchase Option is properly exercised in accordance with its terms; and

2.      The superiority of the Purchase Option is asserted by the insured at its own expense, in a timely manner and by appropriate action or proceeding against and such Lienholder, including, without limitation, any action or proceeding brought by any such Lienholder, encumbrancer or party, or any proceeding necessary to have such lien, encumbrance, interest or estate removed from its effect upon the land and relegated to the fund produced as a result of the exercise of the Purchase Option; and

3.      The coverage afforded by this Endorsement shall not applicable to:

a.      any loss arising from a bankruptcy or insolvency proceeding or the exercise of the rights of any trustee, receiver or creditor in connection therewith; or

b.      any loss based upon taxes or assessments levied by any governmental agency or authority subsequent to the Date of Policy.

This endorsement is made a part of the policy and is subject to all of the terms and provisions thereof and of any prior endorsements thereto. Except to the extent expressly stated, it neither modifies any of the terms and provisions of the policy and any prior endorsements, nor does it extend the effective date of the policy and any prior endorsements, nor does it increase the face amount thereof.

 

First American Title Insurance Company

 

 

Dated:      

By: __________________________________


 

APPENDIX K

 

OPTION ENDORSEMENT (ALTERNATIVE)

 

With respect to the option to purchase contained in the lease described in Schedule A, the option to purchase is hereby incorporated into Sched­ule A of the policy as an interest insured thereby, and the Company further insures the insured against loss or damage sustained or incurred by the insured by reason of:

(1)     The unenforceability of the right to exercise the option to purchase except to the extent that such unenforceability or claim thereof is based on the failure of the insured to have fulfilled the terms and conditions of the option.               

(2)     The priority over the option to purchase of any conveyance made of the fee simple estate in the land or any liens or encumbrances created thereon after the Date of Policy, excepting any such liens and encumbrances that would affect the insured had the insured been the owner of the fee simple title instead of an option as of Date of Policy, including without limitation, real estate taxes, special assessments, demolition liens, drainage liens and water tax liens, or any right, title or interest in the land derived thereunder.

(3)  The entry of any court order or judgment which constitutes a final determination and requires the insured, as a condition to receiving specific performance of this option, to pay a sum in excess of the option price, other than attorneys’ fees and all costs of litigation.    

Nothing contained in this endorsement shall be construed as insuring the insured against loss or damage sustained or incurred by reason of:

(a)     Disaffirmance of the option under the provisions of the Bankruptcy Code.

(b)     The failure of the optionee to receive all or part of an award entered in a condemnation proceeding unless failure to share in said award stems solely from a court order or judgment which constitutes a final determination and adjudges the option invalid or incapable of specific performance.

(c)     The failure of the insured, at the time of payment of the option price, either to have obtained proper conveyances and releases from all persons then having an interest in said land or a lien or encumbrance thereon (the determination as to the identity of such persons and the nature of the interest, lien or encumbrance owned or claimed, to be at the expense of the insured) or to have obtained a court order or judgment which constitutes a final determination and determines those persons and interests, entitled to receive the option price.

(d)   Attorneys fees and costs in connection with the proceedings mentioned in subparagraph (c) immediately above, or in connection with an action to enforce the option, excluding attorneys’ fees incurred an attack on the validity or enforceability of said option.

(e)     Any lien, or right to a lien, for services, labor or material or heretofore or hereafter furnished, imposed by law.

This endorsement is made a part of the commitment or policy. It is subject to all the terms of the commitment or policy and prior endorsements. Except as expressly stated in this endorsement, the terms, dates and amount of the commitment or policy and prior endorsements are not changed

 

Dated:

 

                                                                                                                                                                                                                        ___Title Insurance Company                                                  ___________                                

                                                                                           By: ______________

 

 

 

 

 

__________________

Authorized Signatory                                                         ATTEST:

 


 

APPENDIX L

 

OPTION ENDORSEMENT (ALTERNATIVE)

 

Attached to Policy No.

 

Issued By

 

_______________ Title Insurance Company

 

The Company hereby insures the Insured against loss or damage sustained or incurred by the Insured by reason of the option to purchase referred to in paragraph _____ of Schedule B being at the date hereof invalid or the failure of the rights of the optionee under the option to be vested in the Insured. The option is shown in Schedule B Part II in its order of priority of record.

Notwithstanding the provisions contained in the conditions and stipulations of the policy of which this endorsement is a part, the coverage afforded by the policy and this endorsement shall cease and terminate upon the exercise of the option or on the date the option expires by its own terms, whichever occurs first.

Part I of Schedule B of the policy is hereby amended by the addition of the following paragraph as the last numbered paragraph thereof:

Terms, provisions and conditions, and any failure to comply with same, as contained in the Option Agreement       dated   __________   by and between ______________________________________________
            as optionor and ____________________________________________ as optionee, as evidenced by that certain instrument recorded on ______________________ in book __________, page, Official Records            _______________ County.

 

This endorsement is made a part of the policy and is subject to all of the terms and provisions thereof and of any prior endorsements thereto. Except to the extent expressly stated, it neither modifies any of the terms and provisions of the policy and any prior endorsements, nor does it extend the effective date of the policy and any prior endorsements, nor does it increase the face amount thereof.

 

Date:

 

 

_______________ Title Insurance Company

 

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