Options and Rights
2 Prop. L. J. 86 (2015) 86
Options and Rights in Real Property…. Oh My!! The
Scary Truth About Future Interests
Alisa M. Levin
2 Prop. L. J. 86 (2015)
∗
I.
ABSTRACT
The law is a many splendored thing, but one thing is
clear: certain kinds of contracts and rights embodied within
contracts can be confusing, even for attorneys. Lawyers
practicing in a particular area of law can find a topic difficult
to deal with, find that the law itself is unclear, or that the law
has many interpretations the same thing; therefore, clarity is a
welcomed thing. The bodies of law in relation to real estate
law and more specifically the law of options and rights
embodied within real estate contracts, including
purchase/sale documents and leases leave much to be desired.
Due to the difficulty in deciphering what is actually occurring
in live transactions, which often spawn years of litigation, the
author proposes black-letter clarity on the law of options and
rights in real estate contracts. This clarity makes laws
affecting the sale or rental of real estate easier to digest,
common in understanding and application, and uniform
across jurisdictions.
This Article reviews the many different kinds of
rights, options, and terms commonly used in the United
States. Part I explores popular issues that arise out of the use
of options and rights, and their impact on other legal concepts
in Property Law. Part II provides an introduction to the
overall context of the Article and provides insight into the
problems attendant to rights and options in general. Part III
*
Alisa Levin is a Chicago attorney, principal of the firm Levin Law, Ltd.,
and an adjunct professor at DePaul University College of Law, where she
has most recently taught a real estate drafting course. Her practice
involves complex commercial and real estate litigation as well as
appellate matters.
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 87
opens up the proverbial Pandora’s Box. Subpart A identifies
and explains the different rights and options that are used in
U.S. real estate transactions. Subpart B identifies concerns
about priority in rights and options when two options or
rights are simultaneously either announced or exercised by
one or more parties involving real estate. Subpart C discusses
the assignability of rights and options, and explores the
complications that arise when original parties to a real estate
contract, lease assign, or recipients of an assignment, and lay
a claim to a right or option.
Part IV of the Article discusses issues when
exercising rights and options. Issues arise from complications
relating to Landlord/Tenant (including vendor/vendee),
Tender, Doctrines of Good Faith and Fair Dealing, Restraints
and Perpetuities, and contiguous and unrelated parcels. Part
V rounds out the discussion with thoughts and reflections on
how the law may be re-shaped through modification of
existing frameworks, crafting of a uniform statute governing
rights and options in consideration of the “boots on the
ground confusion” that is being displayed in courtrooms
across America. While this article is not a comparison of
every type of right versus option case, the sum of the parts is
intended to provide a starting point for dialogue in the halls
of those drafting model and uniform rules. Additionally, it
may spur a more critical examination of the issues that truly
affect parties and their counsel when the law remains in this
confused state, such as whether there is an option or right.
II.
INTRODUCTION
In the real estate context, when it comes to buyers and
sellers or lessors and lessees, there are many commonalities.
A general theme is that by virtue of contractual promises with
each other, parties are often found contracting away their
rights, responsibilities, and liabilities. In both commercial and
residential leasing, parties enter into arrangements where they
can restrict or expand their options to control or convey the
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 88
real estate, or meet third-party prices at a future time.
Similarly, in the buy/sell context, parties often tie up
additional promises about nearby, contiguous, or additional
property, hoping that they can expand the scope of the
transaction at a later date.
Loosely known as future interests, although the term
applies to more than just the concepts outlined herein,
options, or rights of first refusal, are restrictions or
expansions of the contractual arrangements in real estate that
allow the parties to have rights when certain events take
place. While there are many reiterations of these terms, it is
clear as of the last century, in the context of documenting real
estate transactions, finding a meeting of the minds can prove
difficult when parties are left to their own devices to draft
right and option clauses. Even when seasoned lawyers are
involved in assisting the parties, issues can be complicated
when a dispute arises because courts across this country do
not agree on the black letter of the law.
Rights and options are becoming widely known and
utilized in the real estate industry by sophisticated parties and
their counsel. Both rights and options provide the contracting
parties with security, which bestows upon them certain
obligations and privileges, and provides additional
opportunities to secure and enter into negotiations for the
continued use and/or sale of real property. Confusion can
stem from the meaning of a certain phrase in a real estate
instrument, or the non-intended result the language will
generate once the parties go back to the instrument to claim
their rights.
The remainder of the Article will address the idiosyncrasies
of rights and options to the respective owners and drafters. It
will highlight different ways in which such provisions can
and should be interpreted, and how courts across the country
have dealt with the issues presented.
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 89
III.
DIFFERENTIATING BETWEEN RIGHTS AND
OPTIONS IN REAL ESTATE CONTRACTS
Although a discussion over rights and options may
seem fairly straightforward, many attorneys and courts alike,
cannot agree on what language creates a right as opposed to
an option.1 There is extensive litigation in the area of options,
which suggests there is a need for legal uniformity. Rights
and options are most often negotiated within a larger context,
such as a lease or employment contract. Rights, options, and
similar provisions find homes in many different written
agreements; however, regardless of the type of document,
there are immeasurable ways for rights and options to be
entered into and/or negotiated.2 Rights, options, and lease
extras, are typically conceived when a parcel of real property
has been identified and the parties are beginning to discuss
the terms of a deal, whether it be a purchase, sale or lease.
When drafted and utilized properly, rights and options
are effective tools for outlining rights of possession, purchase
terms, property conveyance, and for parsing out superiority
issues when multiple parties are interested in purchasing or
occupying a property. Rights and options are generally
thought to provide a party with a level of emotional security
when entering into what would otherwise be an arm’s length
transaction amongst strangers because they provide a way to
decipher the pecking order in real estate transactions. The
emotional security occurs because options and rights appear
to provide parties with the knowledge of different outcomes
if specific situations arise. The existence of this knowledge
gives the party a perception of security before entering into
the contract.
1
Stuart v. D’Ascenz, 2000 CJ C.A.R. 5654 (Co.Ct.App. 2001). There, the
trial court found that an instrument with a fixed price had to be an option
because a right of first refusal does not have a price because it provides
the right to meet someone else’s price.
2
WALKER, DAVID I., RETHINKING RIGHTS OF FIRST REFUSAL, 5 Stan. J.L.
Bus. & Fin. 1, 9 (1999).
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 90
A right or option may cause a party to cancel or avoid
n negotiations altogether. For these reasons, property owners
or lessors who wish for rights and options in the contract are
advised to make painstaking efforts to clearly draft the
pertinent provisions, and to correctly record notice of the
same, so that a potential downstream transaction is not
thwarted due to poor and inefficient drafting and/or exercise.
Obvious to this problem is the fact that rights and options are
often mistaken, mischaracterized, implicitly amended
through mutual mistakes of the parties, and simply
misunderstood.3
A.
DIFFERENT TYPES OF RIGHTS AND OPTIONS
Counsel often seeks to include rights and options in a
contract, especially in a commercial real estate transaction.
Litigation can arise when the parties and their counsel do not
fully understand the difference between an option and a right.
“Although options are often linked to stipulated prices, and
rights of first refusal (or pre-emptive rights) to third-party
offers, neither stipulated prices nor third-party considerations
determine whether or not a particular clause is an option or a
3
See Lee v. Shaw, 822 P.2d 1061 (Mont. 1991). In Lee, the court was
unsure of whether the particular lease provision was an option or a right,
and ultimately concluded that on the basis of an omission (notably the
lack of a notice of intent to sell) that the clause at issue was “probably a
right of first refusal” and was not triggered in the face of the seller’s
omission. Id. at 1062-63. The failure of the court to definitively decide or
rule on what the language meant, confirms the author’s opinion that some
of this jurisprudence is really made up as parties and cases go along – and
not defined by hard and fast rules of property. See also Phillips v. Homer
(In re Egbert R. Smith Trust), 745 N.W.2d 754 (Mich. 2008). There, a
right of first refusal was treated as an option, which begs the question of
whether it was actually a right at all, or whether courts that end up
interpreting one clause as the other are ultimately reforming the contracts
at issue.
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 91
right of first refusal.” 4 Often, what is determinative of
whether a particular clause in a contract is a right or an option
is ascertained on the basis of which party initiated the
communication regarding exercise of a given right. 5 This
confusion over what is a right as compared to an option is
something that desperately needs clarity in the law.6
1.
Right of First Refusal
Although right of first refusal is a seemingly simple
name, there are a significant number of variances in the
words used to describe this right. A right of first refusal is a
contractual right to preempt another buyer; also called a
preemptive right, preferential right to purchase, first right to
purchase, or first option to buy.7 A preemption right has also
been described as a conditional option under which a party
has the right to purchase subject to some condition. The
condition being generally that the owner must arrive at a
decision to sell.8 The preemptive right is merely contingent
until the owner arrives at a full decision to sell the property.
If the owner decides to sell, the right ripens into a full option
thus giving the party the first choice to buy the property.9
4
MURRAY, JOHN C., OPTIONS AND RELATED RIGHTS WITH RESPECT TO
REAL ESTATE: AN UPDATE, 47 REAL PROP. TR. & EST. L.J. 63 (2012)
(CITATIONS OMITTED IN ORIGINAL).
5
See G.G.A., Inc. v. Leventis, 773 P.2d 841, 846 (Utah Ct. App. 1989).
6
See, Urban Hotel Mgmt. Corp. v. Main & Wash. Joint Venture, 494
N.E.2d 334, fn. 1 (Ind. Ct. App. 1986) (“there is a difference of opinion
over the proper term for this kind of business arrangement… and labels
such as ‘options to purchase’ and ‘pre-emptive right’, while not wholly
inaccurate are confusing because these terms also describe other,
distinctly different situations.”) The court there elected to use the term
“right of first refusal” for clarity – showing that the terms “right” and
“option” and their progeny, are often interchangeable – depending on
who is asking.
7
BROWN, RONALD BENTON, AN EXAMINATION OF REAL ESTATE
PURCHASE OPTIONS, 12 Nova L. Rev. 147, 172 (1987).
8
McNabb v. Barrett, 257 S.W.3d 166, 170 (Mo. Ct. App. 2008).
9
Id.
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 92
The following landlord/tenant arrangement is a
standard method of outlining the typical right of first refusal:
the owner/landlord grants to the tenant a right to meet the
terms of a third-party offer and to preempt any sale between
the owner and the third-party, during a specified term in the
lease.10 It is sometimes considered that a right of first refusal
is weaker than an option under the holder’s viewpoint. This is
because the holder, or tenant, has no control over the timing
of the opportunity, which it may arise in a manner and at a
time that he is unable or unwilling to deal with the real
estate.11
By holding and exercising this right, the tenant beats
the third-party to the purchase and becomes the purchaser-inpossession, whom then may close on the transaction as if he
and the owner had never engaged in a landlord-tenant
relationship. In the case where the tenant either fails or
chooses not to exercise the right of first refusal, the landlord
is typically free to move on with the third party, subject to
any leasehold rights held by the tenant. If the sale is not
completed with the third party then the right is recharged or
reactivated. Thus, the tenant once again has to be given the
appropriate notice if the landlord elects to sell the property to
another third party, during the lease term.12
A right of first refusal in the sales context is an option
to purchase, which is subject to an agreed upon condition
precedent. This is usually the receipt of an offer coupled with
the recipient’s obligation to tender that offer to the optionee,
who must match it.13 In this context, the right of first refusal
is very different than the option because the right of first
refusal does not provide a specific price in advance, and
10
Walker, supra note 2, at 8.
PAUL S. RUTTER AND DUANE M. MONTGOMERY, OPTIONS, RIGHTS OF
FIRST REFUSAL, RIGHTS OF FIRST NEGOTIATION: A GUIDE THROUGH THE
MAZE, 1999.
12
Walker, supra note 2, at 8.
13
Brown, supra note 7.
11
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 93
instead leaves the matter open and subject to a third party.14
This avoids issues that can come up in the option context
where the price may not be relative to the current value of the
property. Instead this right puts to the parties the task of
ascertaining whether or not the offer on the table is
worthwhile. This allows the owner to determine the price by
his acceptance of the third party offer, subject only to the
tenant’s rights.
In some courts a conundrum is created when a party
notifies a right-holder that they wish to sell and concurrently
presents the right-holder with a contract executed by a bona
fide purchaser. Then, before anything is said or done by the
right-holder, the deal between the seller/lessor and the bona
fide purchaser is cancelled or terminated. In this situation,
what happens to the rights in the holder? In the case of
G.G.A., Inc. v. Leventis, this exact scenario presented itself. 15
There, the lessee, G.G.A., Inc. brought an action against its
landlord, Leventis, to enforce the leasehold right of first
refusal. In this case, the lease provided a provision entitled
“Option to Purchase and Right of First Refusal.” It stated that
after expiration of the initial term, the tenant would have an
option to purchase for an agreed upon price or at market
value, which would be determined by three appraisers.16
The following paragraph provided the option, with
language that provided in part that should landlords desire to
sell at any time, or if they receive a bona fide offer to
purchase, the landlords shall first notify tenant of the desire
or of the offer and the price at which the landlords were
14
Some courts have found that there are multiple types of rights of first
refusal: 1) fixed price; 2) market price; and 3) bona fide offer price. See
Ferrero Constr. Co. v. Dennis Rourke Corp., 536 A.2d 1137, 1142-44
(Md. 1988). The confusion about terms rests upon whether or not the
holder can compel a sale of the property.
15
G.G.A. Inc 773 P.2d 841. This case uniquely presents a scenario where
the court differentiates between the clauses based upon what party
initiated the contact with the other rather than by relying on the terms of
the contract or the conditions precedent to exercise of the provision.
16
Id. at 843.
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 94
willing to sell.17 Later, the landlord received an offer to sell
the property upon which the landlord provided notice to the
tenant along with a copy of the offer.18 About a week later
the tenant orally advised the landlord that it would exercise
its option to purchase.19 A short time thereafter the landlord,
through counsel, wrote to the tenant stating that the thirdparty offer had been rescinded, and included a note stating, “I
do want to sell my property and will entertain new offer(s) to
sell it; accordingly I do not consider myself bound to sell at
the price of…”20
Months later the landlord received a higher offer, and
notified the tenant pursuant to the right of first refusal.21 In
response the tenant issued a written letter offering to buy the
property for the lower amount that was specified in the prior
transaction. 22 The tenant then filed a specific-performance
action to request an injunction preventing a sale to the third
party at the higher price, and later closed on the transaction at
the higher price while reserving its rights under the original
offer for the lower price.23
After the closing and the filing of the suit, the tenant
amended its complaint to include a claim of breach and to
enforce the lower price, all of which was ultimately resolved
in the trial court on summary judgment for the tenant.24 In
resolving the case for the tenant the Utah Court of Appeals
held that because the tenant did not initiate the discussion
17
Id.
Id.
19
Id.
20
Id.
21
Id.
22
Id.
23
Id. at 844. Representative of an interesting trend, the author feels that
parties should be obligated to consummate transactions and reserve
disputes for formal initiated legal action so as not to hold up property
rights during long periods of litigation (and to free third-parties from
being tied into litigation), lest those rights be waived for failure to close
on the proposed terms in spite of the reservation.
24
Id.
18
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 95
with the landlord about the purchase and sale, it was obvious
to the court that the parties were not operating under the
initial option paragraph within the lease, but instead were
operating under the second paragraph, the right of first
refusal.25 The court held that it was a right of first refusal
because the tenant initiated the discussions, and the price was
set by a third party in the first offer that had been previously
withdrawn.26
The court found that the usual meaning of the term
option was different in that context because it described an
“alternate right to purchase upon the offered and accepted
terms and conditions of a third party, a right of first
refusal.”27 The court also noted that in other courts the term
option is really meant as a right of first refusal.28 Thus, the
Utah court resolved that when the landlord clearly and
unequivocally accepted the initial offer and presented it to the
tenant, it triggered the right of first refusal. Therefore, the
right of first refusal was not extinguished by the later
withdrawal of that offer, nor by cancellation of the
transaction by the initial third party. Thus leaving in its wake
a fully viable right for the tenant capable of enforcement even
where the landlord desired to take advantage of the
cancellation and obtain a higher price.29
Conversely, there are authorities that provide that a
right of first refusal is not an option at all. They distinguish
between a contingent option and a unilateral option. The
difference is that in the case of an option to purchase, the
holder has a unilateral right to trigger the option at the
previously agreed upon price. Instead, with the right of first
refusal, the holder of the right has the rights which are solely
contingent upon the owner’s indication of a willingness to
25
Id. at 846.
Id.
27
Id.
28
Id. (citing Cummings v. Nielson, 42 Utah 157, 129 P.619, 621 (1912)).
29
G.G.A 773 P.2d at 846.
26
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 96
sell.30 Courts have said that remedies for violation of such a
right are a cause of action for damages against the seller, or
in the alternative, a right of specific performance against a
purchaser if they took notice of the right.31
In the case of Hasty v. Health Service Centers, Inc., it
was found that granting an option to another party could
trigger a right of first refusal. 32 In Hasty, the Georgia
Supreme Court reviewed a right of first refusal held by a
tenant, Health Service Centers, Inc. who leased from an
individual owner named Dr. Boddy.33 The tenant’s right of
first refusal provided that:
. . . during the term of the lease, prior to any
sale of the premises or any interest therein,
lessor shall give written notice specifying
specific terms upon which it will sell the
premises, whether resulting from an offer to
purchase or otherwise, and lessee would then
have 30 days to purchase on the same
conditions as set forth in the notice.34
After the lease was commenced, Dr. Boddy granted an option
to Jupiter Hospital Corp., which provided in pertinent part
that:
. . . seller does hereby grant and convey to
purchaser the exclusive option to purchase….
The option may be exercised by purchaser by
giving notice of the exercise thereof to
seller…from and after the giving of notice,
this agreement shall for all purposes a legally
enforceable contract between seller and
purchaser for the sale and purchase… subject,
however, to the right of first refusal in the
30
Walker, supra note 2, at 9-10.
McNabb 257 S.W.3d at 170.
32
Hasty v. Health Serv. Ctrs., 373 S.E.2d 356 (Ga. 1988).
33
Id. at 357.
34
Id.
31
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 97
“lease” (as hereinafter defined) if exercised
during the term of the lease…35
On review the Georgia Supreme Court, held that the
option, known to the court as a preemptive right, triggered
the right of first refusal such that the prayed for relief of
specific performance should have been granted thus
affirming the trial court’s decision.36 Here, the court found
that pursuant to the language in the right of first refusal,
which required notice to the tenant of not just a sale, but of
the specific terms of a sale, the granting of the option (not its
exercise) was enough to trigger the right of first refusal. As
such, the Georgia Court found that the preemptive right of
first refusal was triggered by the grant of the option because
it was a “method by which the lessor ‘otherwise’ committed
himself to sell the premises on specific terms.” 37 What can
be gleaned from this case is that the use of the term “or
otherwise” can lead to unintended consequences when
inserted into a lease provision when the likely intent was to
provide clarity.
An un-ripened preemptive right leaves the holder with
no power to force the owner to sell.38 As such, the question
for many courts is what constitutes a ripening of such a right
and should a suit for specific performance be allowed?
Courts differentiate between an option and a preemptive
purchase right where only an option contract may be
specifically enforced; a preemptive right is not subject to
specific performance because it is not a contract. 39 An
irrevocable option is a contract made for consideration. An
option to keep an offer open for a prescribed period of time is
a unilateral contract, which is binding on both parties. If the
35
Id. at 356.
Id. at 358.
37
Id.
38
Murray, supra note 4, at 63. (citing No. 8167819, 2004 WL 1387849
(Cal. Ct. App. 2004)).
39
Id.
36
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 98
seller refuses to perform the contract, they may be liable for
specific performance. Further, the decision to exercise rests
with the prospective purchaser.
By contrast, a preemptive purchase right gives the
holder the first opportunity to purchase property if the owner
chooses to sell. If the owner elects not to sell, the buyer
cannot compel a sale. For this reason, a preemptive purchase
right is not a contract and may not be specifically enforced.40
However, a right of first refusal is not ordinarily triggered by
an offer that is subject to conditions that have not been met at
the time of the offer.41 Therefore it is necessary to note that
as in the Hasty case, where specific language operates as a
trigger point, even where the conditions have not been met by
the holder of the right, where his right preempts that of the
option holder, the party holding the right may be entitled to
specifically enforce those rights. This is true even in
jurisdictions that normally would not enforce them by way of
specific performance. For this reason, it is extremely
important that the vesting lease provide the parties with the
exact guidelines for exercise of the right, including the
manner of notice. This includes but is not limited to whether
it must be in writing, the pertinent dates and restrictions
thereto (i.e. business days as opposed to calendar days),
tender of earnest money or specific consideration for the deal,
notice to any third parties, and requirements to close in a
specified period of time among others.
2.
Option (To Purchase or Lease)
The most definite right that a party can have for doing
something at a later date is the grant of an option, which
provides the right, but not the obligation, to lease, purchase
or control a specific asset in the future.42 To be valid, an
40
Abadjian v. Superior Court (Thrifty Oil Co.), 168 Cal. App. 3d 363,
214 Cal. Rptr. 234 (1985).
41
Brown, supra note 7, at 173. (citing H.G. Fabric Discount, Inc. v.
Pomerantz, 515 N.Y.S.2d 823 (1987)).
42
Rutter, supra note 11, at
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 99
option within a written instrument must detail the specifics as
to how the right is to be exercised, the notice to be provided,
the documentation and/or consideration to be provided by the
exercising party, and the relevant dates for the proper
exercise of the right. Essentially the instrument spells out the
required next steps. The option language should likewise
make clear whether the written notice regarding exercise is
itself the exercise or whether it will be considered merely a
notice of intent to do something in the future. Also, since the
option usually carries with it a specific price component, the
option language must provide that price or provide the parties
with a clear and definite methodology for ascertaining the
price.
Issues often arise in option contracts for the purchase
of leased premises when the property’s value goes drastically
up or down in between the time of the original vesting lease
and the date that the tenant elects to exercise his option. This
can create significant issues, and in many cases, litigation.
Determination of whether or not enforcement is even an
option may be made upon distinctions between options
appurtenant and options in gross. An option appurtenant is an
option that is connected, or annexed, to another document,
for example a deed, involving ownership of land.43 An option
in gross regarding real estate is an option in which the holder
does not own a leasehold or other interest in the land which is
the subject of the option.44
3.
Right of First Negotiation
Under the right of first negotiation, the owner is
obligated to notify the tenant that he intends to sell or lease
the property and, upon effective notice, a window of time is
opened within which the parties negotiate a mutually
acceptable arrangement. If no arrangement is made, the
43
English v. Longo, No. 326126, 2008 WL 597611 (Mass. Land Ct. Mar,
6, 2008).
44
http://www.ncleg.net/EnactedLegislation/Statutes/PDF/ByArticle/Chapt
er_41/Article_3.pdf.
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 100
holder will then lose out on the benefits that the right
provided and the owner is able to do as he wills with the
property free of any rights or issues from the tenant.45 The
right of first negotiation can avoid the chilling effect a right
of first refusal has on a deal. The obvious advantage to the
owner is that with a right of first negotiation, the right ends
before the owner invests time and money into negotiating a
deal; therefore no frustration of his ability to market and
convey the property ensues.46
4.
Right of First Offer
A right of first offer gives the holder the opportunity
to make an offer for the purchase of the property before the
owner can sell the property to a third party. The owner then
has a specific period of time to accept or reject the offer.47 If
the owner rejects, he is free to sell to the third party, except
that he cannot accept a price that is lower, or in some cases
less than a percentage of the price offered by the holder of the
right of first offer. This restriction forces the holder to name
his price without knowing what the owner thinks the market
will bear for the property, and without requiring the owner to
sell at an agreed price. This minimizes the risk of frustrating
the property’s marketability.48 It has been said that a right of
first offer is the reversal of a right of first refusal.49
With a right of first offer, the owner may accept or
reject the offer. Since the owner still controls the timing of
any potential sale, he is not obligated to reduce the price
asked, even if the price is unreasonable.50 The right of first
offer is often used in the context of a buyer obtaining a right
to purchase adjoining parcels of real estate when they
become available for sale and where the owner has been
45
Murray, supra note 4, at 75.
Id.
47
Id. at 76.
48
Id. (citing Rutter, supra note 11).
49
Walker, supra note 2, at 10.
50
Id.
46
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 101
unwilling to grant an option or right of first refusal.51 Upon
notice from the seller, the holder of the right of first offer is
provided with an opportunity to offer a price for the property.
If the price is not acceptable to the seller, it becomes the
seller’s floor in negotiations with other parties. 52 In this
context, the right-holder is required to calculate an amount
for the property to be included within his offer. 53 Even
though the owner in the right of first offer context is free to
accept or reject the holder’s offer, he is often prohibited from
selling to a third party for the lower price offered.
A variation to the right of first offer could be that the
owner/landlord would communicate with the lessee/holder
and make him an offer before making any offers or advising
outsiders that he intends to sell. This would require the tenant
to either purchase at that offered price or to pass. This
strategy relies on the doubt that an outsider would value the
property as highly, and thus betting on another crack at the
property when the seller never obtains the higher price.54 This
gives the holder the advantage of knowing the owner’s
trigger point or ideal price, if the owner is obligated to sell at
that price.55 In that case however, the holder makes a risky
bet that he will obtain another chance to purchase, whereas a
third party who has a lesser valued offer may enter into the
picture and obtain the contract.56 Because that is precisely the
situation that the contract provision in the lease was intended
to avoid, the right of first offer and its attendant variations are
somewhat unattractive concepts in long-term leasing.
B.
PRIORITY CONCERNS
51
Rutter, supra note 11.
Walker, supra note 2, at 39. (citing 1 E. ALLEN FARNSWORTH,
FARNSWORTH ON CONTRACTS § 3.23a (2d ed. 1990)).
53
Walker, supra note 2, at 39.
54
Id.
55
Rutter, supra note 11.
56
Walker, supra note 2, at 39.
52
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 102
Given the vast amount of litigation over these terms,
one might wonder how courts resolve them in terms of
priority, and why parties use them at all. Taking the easier
question first, the right of first refusal is utilized for multiple
reasons. First, it provides a tenant with some security and
bargaining power because they hold a right to buy or extend
their rights to possess the property for terms that are often
negotiated up front. On the landlord’s part, such an option is
attractive because it can provide a clear-cut method of
assuring a long-term rental income stream, and it can provide
the owner an out if they desire to end their ownership of the
property within the term of the lease.57
In relation to priority issues, it has been held that a
right of first refusal trumps an option, and that delivery of a
third-party offer will extinguish an option. In the case of
Tantleff v. Truscelli, a tenant sought to invoke his right of
purchase for a fixed price after a landlord presented him with
a bona fide third-party offer in conformity with the tenant’s
right of first refusal.58 In this case, the tenant held both an
option to purchase for $100,000 cash at any time the lease
was in force, as well as a right of first refusal, which gave the
tenant the opportunity to purchase on the same terms as a
bona fide third-party.59
In December of 1981, the owners presented the tenant
with notice of a third-party offer for $300,000, to which the
tenant responded by exercising his option for $100,000.
Subsequently, the owner denied the option.60 The trial court
found that the option and right were not mutually exclusive
and held for the tenant. The court stated that a contract with
the third party was nothing more than an indication of intent
to sell, but that it was not a sale such as would terminate the
option held by the tenant.61 The New York Appellate Court,
57
Id. at 8.
Tantleff v. Truscelli, 110 A.D.2d 240 (S.Ct.App. 2d. 1985).
59
Id. at 242.
60
Id. at 243.
61
Id. at 244.
58
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 103
2nd Division, reversed and found that it made no sense to
provide the tenant with the ability to preempt a third-party
offer to the tune of $200,000 because it would render the
right of first refusal a nullity when the third party offer
exceeded the option price. This decision was based on a rule
that a contract could not be interpreted in such a way as to
leave a contract provision substantially without force or
effect.62 Quoting the Indiana Court of Appeals, the Tantleff
Court held
where both the fixed-price purchase option
and an option giving the lessee the right of
first refusal are contained in a lease, the
parties must specifically designate which takes
precedence over the other… if before the
lessee exercises his option to purchase at a
fixed amount or before such option comes into
existence, whichever is later, the lessor
properly notifies the lessee of a bona fide offer
to purchase the leased premises, and the lessee
refuses to exercise his option to purchase
under the terms of such offer, then the lessee
forfeits his right to purchase under the
option.63
In the case of Stuart v. D’Ascenz, the Colorado Court
of Appeals reversed a lower court’s finding of an option
based upon fixed-price language, instead finding an
unambiguous right of first refusal for a fixed price.64 There,
the court mused that although options and rights are often
“linked to stipulated prices and rights of first refusal to third
party offers, neither stipulated prices nor third party
considerations determine whether a particular clause is an
62
Id. at 246.
Id. at 246 (citing Tarrant v. Self, 180 Ind. App. 215, 387 N.E.2d 1349,
1353 (1979)).
64
Stuart v. D’Ascenz, 22 P.3d 540, 541-42 (Co. Ct.App. 2000).
63
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 104
option or a right of first refusal.” 65 The court suggested a key
feature of an option is the absence of any lease language that
one party had a “right of demand” as to a conveyance at any
time prior to the owner’s decision to sell.66 The Stuart case
creates more questions than answers because some of the key
features of the option vs. right debate are the fixed price and
third party offers. Thus, as if the Colorado Court of Appeals
has suggested those things are not outcome determinative,
then we might reasonably wonder what kind of solid
foundation is being created nationwide in this area.
C.
ASSIGNABILITY
The general rule in this country is that rights are
personal and not freely assignable unless otherwise provided
for.67 However, as to options, the general rule is the opposite;
absent agreement to the contrary options are presumed to be
assignable.68 In Malone v. Flattery, Iowa’s default rule of
assignability was questioned and it was decided that rights of
first refusal are deeply personal to the contracting party and
thus may not be freely assigned.69 The majority rule in many
jurisdictions is that where a right is personal it cannot be
assigned. This is sometimes at odds with other practices that
favor the free assignability of contractual rights.70
65
Id. at 542. This creates a significant amount of confusion in the
jurisprudence, as the result of this holding and its progeny given that the
whole methodology in deciphering between options and rights centers on
examining language without parole evidence, there is little else to go on.
66
Id. (citing Winberg v. Cimfel, 532 N.W.2d 35, 40 (Neb. 1995)).
67
Malone v. Flattery, 797 N.W.2d 624 (Iowa Ct. App. 2011). 2011 WL
444853 (Iowa App.)
68
Id. at 3 (citing Dahl v. Zabriskie, 249 Iowa 584, 586, 88 N.W.2d 66, 67
(1958)).
69
Id.
70
See, Sweeney v. Lilly, 198 W. Va. 202, 479 S.E.2d 863, 866 (1996);
Mitchell, Jonathan F., Can A Right of First Refusal Be Assigned? 68
U.Chi.L.Rev. 985 (2001).
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 105
In the case of The Nature Conservancy of Wisconsin,
Inc. v. Altnau the Wisconsin Court of Appeals considered the
issue of assignability in relation to rights of first refusal when
deciding whether a right could be transferred to anyone, or
whether it had to be transferred with adjoining parcels.71 Here
an agreement concerning real property was entered into in
1967 giving a right of first refusal on one property to owners
of adjoining properties, and stating that the right belonged to
these owners and their “heirs, successors and assigns.”72 The
Court, after reviewing the language of the agreements, in
contravention of the appellant’s argument that the right was
held by him because he received it by way of assignment and
the agreement included the term assigns found instead that in
the absence of contrary language the right runs with the land
and that the right will stay with the land unless it can be
proven that it would be more useful to the original grantee
than to one who later owned the land.73 The Court relied
heavily on the Restatement (Third) of Servitudes §4.5, which
provided rules for determining whether a servitude should be
interpreted in gross or appurtenant to the land. The Court
found that the assignee of the right of first refusal, Altnau,
had no particular rights to the land and was an improper party
in the matter because the right of first refusal was not capable
of being assigned to him as a non-owner of the adjoining
lands.74
Having a default rule that provides clarity to assists
courts in resolving cases and protects the rights of contracting
parties to craft agreements as they see fit would be very
beneficial.75 It is clear that when an agreement is capable of
assignment, it should very narrowly describe the right and the
identity of the beneficiary, or class of beneficiaries, and
71
See, The Nature Conservancy of Wis., Inc. v. Altnau, 313 Wis.2d 382,
2008 WI App 115 (Wi. Ct. Ap. 2008).
72
Id. at 390.
73
Id.
74
Id. at 396-97.
75
Mitchell, supra note 70, at 8.
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 106
specifically detail whether the right is meant to be personal or
to run with the land.
IV.
ISSUES IN EXERCISING OPTIONS AND RIGHTS
There is a popular philosophical question that asks: if
a tree falls in a forest and there is no one there to hear it, does
it make a sound? A similar applicable question in is: if a
party exercises an option or a right just by saying so, did it
really happen? This question is debated time and time again
in trial courts all around this country. There is no consensus
on how an option or right is to be exercised. If an option is
not exercised, no contract of sale exists.76 When a specified
period within an option ends, the unexercised option expires
and the optionee no longer has the power to accept the
offer. 77 The optionee no longer has the right to return
whatever consideration he paid for that option because he has
received exactly what he was promised: the option.78 Some
courts have held 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
holder of the right fails to or refuses to exercise the right of
first refusal after being presented with a bona fide third party
offer.79
As to deadlines in contracts for the exercise of options
and rights, courts typically strictly construe this language.
Additionally, a court can treat one type of clause like another,
as in treating a right of first refusal as an option, or vice
versa, in order to provide relief to a petitioning party. In the
76
Brown, supra note 7, at 150.
Id.
78
Id. (citing Chubb v. J. Harker Chadwick & Co., 93 Fla. 114, 111, So.
538 (1927) Where the option provided for installment payments and
provided that upon default in any payment the option would be
extinguished and the prior payments retained as consideration for the
option the court held that the optionor was not required to return the
money upon termination of the option).
79
Murray, supra note 4, at 92.
77
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 107
case of Smith Trust v. Homer, the Supreme Court was called
upon to decide whether a right of first refusal is revocable
once the holder of the right receives notice of a third-party
offer.80 This case involved a residential lease for a 75-acre
tract, with a lease that provided the tenant with an option to
purchase consisting of a “right of first refusal to match any
bona fida [sic] offer to purchase made with regard to the
subject property.”81 The tenant had been holding the property
pursuant to the lease when the successor trustee in control
received an offer to purchase, although the trustee denied that
the offer was ever accepted. 82 Subsequent thereto, the
trustee’s lawyer sent notice to the tenant informing them that
the trustee had in fact signed a contract for the purchase and
sale of the property and was providing a 30-day notice
period. Later, before any acceptance, the trustee’s lawyer
gave notice that the trustee had declined the original offer and
was not selling the farm.83 However, the tenants gave written
notice of exercise within the 30-day period, resulting in a
dispute regarding the trustee’s position that she had never
accepted the original offer and was not selling.84
In Smith Trust, although the terms option and right of
first refusal are both within the same lease provision, they
effectively referred to an irrevocable option as outlined by
the Michigan Supreme Court. The Court decided that
… an option contract is an enforceable promise
not to revoke an offer… which is continuing
offer to keep an offer or agreement open and
irrevocable for a specified period of time…
until the option is exercised, the optionor has a
duty not to revoke the offer during the life of
the option.85
80
Phillips, 480 Mich. 19 (Mi. 2008).
Id. at 21.
82
Id. at 22.
83
Id.
84
Id.
85
Id. at 25.
81
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 108
The trustee’s position was that the lawyer’s notification was
nothing more than a simple offer that could be withdrawn
before acceptance, which was rejected in favor of the more
stringent application of the option, resulting in the court’s
grant of specific performance. An issue that often creates
frustration is the notion of whether something is effective
when it is sent or received. However, there is no mailbox rule
in the world of exercising options. 86 The mailbox rule
provides that a notice is effective when sent as opposed to
being effective when received. However, when the
acceptance of an option involves the exchange of money or
consideration, that consideration is not operational to exercise
an option or right until it is received.87 As such, when counsel
for a tenant or option-holder is planning to review its choices
for exercising an option they would be wise to be sure that
the notice will be timely received and that it is in strict
conformity with the terms of the option or right.
A.
LANDLORD TENANT
Options and rights are often found in the context of a
landlord-tenant relationship. Questions and disputes are
inevitable when a tenant exercises an option. Specifically,
landlords often have issues about default when they believe a
tenant did not conform to their obligations in the lease with
regard to rights or options. In general, when a tenant
exercises a right in a lease, their status as a tenant might
change. Landlords must be familiar with the legalese and
their counsel familiar with the legal standards for exercise,
waiver, and proper interpretation of rights and options. A
common issue in landlord-tenant contracts is the right to hold
onto a right or option when there has been a default or a
premature termination by the right-holder. Since what
constitutes a default is often a question of fact and each case
86
Brown, supra note 7, at 162.
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 109
is unique, there is no clear-cut way to ascertain, as a whole,
whether or not a particular right or option must be honored
on the basis of a purported exercise.
A right or an option is almost always extinguished by
the failure to exercise it. 88 Likewise, the termination or
expiration of a lease divests a right holder from the ability to
exercise an option. The termination of the contract rights in
whole take with them the particular right to the option at the
time of the termination or lapse.89 Bridging those concepts
together is the case of The Wendy and William Spatz
Charitable Foundation v. 2263 N. Lincoln Corp.90 In Spatz,
the property owner, a non-profit theater company and its
joint-venture partner leased a restaurant/tavern space to the
tenant for fifteen years. The lease contained what the parties
deemed a right of first offer that obligated the landlord, if it
desired to sell, to offer the property to the tenant at a price it
was willing to accept in as-is condition.91
Well after the inception of the lease, the tenant in
Spatz made several inquiries about renewal, but they were
rebuffed.92 In April 2008, the tenant received a letter from the
landlord that enclosed a third-party offer to purchase the
property conditioned on the third-party’s acceptance of
restrictive covenants, which would be recorded against the
property and restrict its use for 25 years.93 The tenant issued a
letter in early May 2008 accepting the offer and announced
88
Moon v. Haeussler, 153 A.D.2d 1002, 1003 (S.Ct.N.Y. 1989). The
failure to exercise a right of first refusal operated to also divest the rightholder of any opportunity to exercise a fixed-price option. See also
Markert v. Williams, 874 S.W.2d 353 (Tx. App.- Houston [1st Dist.]
1994) (where the lessee’s fixed price option was extinguished by his
failure to exercise a right of first refusal).
89
Bateman v. 317 Rehoboth Ave., L.L.C., 878 A.2d 1176, 1183-84
(De.Ct. Ch. 2005), (citing Wanous v. Belaco).
90
Wendy and William Spatz Charitable Foundation v. 2263 N. Lincoln
Corp., 2013 IL App (1st) 122076, 998 N.E.2d 909 (Ill. App. Ct. 2013).
91
Id.at 913.
92
Id.
93
Id.
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 110
its intent to exercise its option. 94 The contract contained an
earnest money requirement and a closing deadline, which
mirrored the language of the right granted to the tenant in the
lease that required a closing within 90 days.95 Additionally,
despite that language in the lease and within the third-party
contract, no earnest money or contract was ever tendered by
the tenant and no closing took place, although some
correspondence was exchanged.96
The landlord closed the transaction with the thirdparty who later demanded that the tenant move out at the end
of the lease.97 When the tenant received a thirty-day notice
from the landlord, the tenant refused to move and responded
to eviction proceedings by arguing, inter alia, that it had
exercised the option and that it could not be evicted.98 The
trial court found after trial that not only had there been no
exercise, but the landlord was entitled to an order of
possession.99
Upholding the trial court’s decision on appeal, the
Illinois First District Appellate Court ruled that in fact there
was no exercise and when the lease lapsed the tenant was
obligated to move and no longer had any rights under the
lease to the rights within it.100 Although the tenant in Spatz
believed that by virtue of its valid exercise it was a vendee in
possession which would prevent eviction, in fact, because no
earnest money was tendered and no closing took place per the
contractual requirements, no such vendor/vendee relationship
was ever established.101 This reinforces the concept that when
tenants and their counsel are communicating about rights and
options, they must be sure that they are aware of all
94
Id.
Id.
96
Id.
97
Id.at 914.
98
Id.
99
Id.at 918.
100
Id. The Illinois Supreme Court later denied a Petition for Leave to
Appeal.
101
Id.
95
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 111
obligations that must be met for effective exercise. An
exercise of a right or option is not effective just by saying so
in the majority of cases. Instead, more is generally required.
B.
TENDER
It has been argued in many disputes regarding
effective exercise that tender of the purchase price may be a
dispositive factor as to whether or not an exercise was
effective. In the case of Best v. Miranda, an Arizona Appeals
court held that in the absence of a tender of the purchase
price on or before the time provided for acceptance and
exercise of the option, no exercise occurred.102 It is generally
accepted that options and rights must be exercised in strict
conformity with the language of the clause granting the
rights, where tender of the purchase price was not made, no
exercise was effected.103 Similarly, it is important to note that
where there is a legitimate claim of exercise, and an issue
arises that leaves the parties somewhat uncertain as to how to
proceed or what rights to protect first, one holding a right or
option must strictly comply with the terms of the agreement.
Where there is a dispute about exercise or closing a particular
transaction, it may be wise to close under a reservation of
rights and a non-merger clause with a subsequent suit to
enforce or declare rights, so as to avoid any chance of rights
lapsing or being waived.104 If there is no mode specified for
exercise, payment of the sums due under the option is
required to exercise.105
102
Best v. Miranda, 274 P.2d 516, 517-18 (Ct.App.Az. 1st Div. 2012).
There the court emphasized the particular language of the agreement
called for tender of the price on or before the expiration date, which did
not occur.
103
Id. at 519.
104
See e.g. Waste Connections of Kansas, Inc. v. Ritchie Corporation,
296 Kan. 943 (Kan. Sup. Ct. 2013).
105
Mills v. Brody, 929 P.2d 360, 363-64 (Utah Ct.App. 1996). In Mills,
the court ruled that under controlling Utah law, options to purchase that
fail to specify mode of exercise or time of payment must be read to
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
C.
2 Prop. L. J. 86 (2015) 112
GOOD FAITH / FAIR DEALING
Although “good faith is a concept that defies precise
explanation,” 106 it has been defined as “honesty in fact and
the observance of reasonable commercial standards of fair
dealing in the trade” and “conduct that does not violate
community
standards
of
decency,
fairness
or
107
reasonableness.” “Good faith performance or enforcement
of a contract emphasizes faithfulness to an agreed common
purpose and consistency with the justified expectations of the
other party.”108
All contracts contain an implied covenant of good
faith and fair dealing which may prevent the optionor from
preventing exercise of the right or option,109 but is there any
obligation to notify the other side when the attempt to
exercise has been ineffective? Most authorities indicate no
such duty exists.110 In the Florida case of Koplin v. Bennett,
the court stated that there was no rule that required an
optionor, when served with an ineffective notice, to instruct
or inform the optionee of the particulars in which the
purported exercise fails to meet the terms and conditions
thereof; nor did the court find that under those circumstances
require payment upon exercise. Id. at 364. See also Ferris v. Jennings,
595 P.2d 857 (Utah 1979).
106
See, Brunswick Hills Racquet Club, Inc. v. Route 18 Shopping Ctr.
Assocs., 864 A.2d 387, 395 (N.J. 2005).
107
Id.
108
Id. (citing Restatement (Second) of Contracts §205 (1981)). The
covenant of good faith and fair dealing “calls for parties to refrain from
doing anything that would have the effect of destroying or injuring the
right of the other party to receive the fruits of the contract.” Palisades
Props., Inc. v. Brunetti, 44 N.J. 117 (1965).
109
Brown, supra note 7, at 163. (citing Stockton v. Sowerwine, 690 P.2d
1202 (Wyo. 1984)). Note that in the case of 397 W. 12th St. Corp. v. Zupa,
34 A.D.3d 236 (2006) the New York Supreme Court stated performance
by payment was not a requirement of exercise.
110
Brown, supra note 7, at 163. (citing Koplin v. Bennett, 155 So. 2d 568
(Fla.1st DCA 1963)).
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 113
the optionor is required to take any affirmative action on the
theory that the optionor will amend or correct an inadequate
acceptance.111 There is no duty to either accept a purported
exercise of an option or to notify the party whose attempt has
failed that the opponent does not believe the exercise is
valid.112 There is no required notice or cure period when an
attempted exercise is defective.113 However, as a general rule
“subterfuges and evasions in the performance of a contract
violate the covenant of good faith and fair dealing even if the
actor believes his conduct to be justified.”114
In the case of Flynn v. Hanna, there was no bad faith
when landowners refused to convey property in reliance on a
clause in the contract that was contingent upon attorney and
accountant approval.115 In Flynn, after the offer was received,
the owners came to the conclusion that the listing price was
too low, so they instructed their broker to raise it.116 Their
lawyer ratified this decision because there hadn’t been an
acceptance of the contract.117 Although the owners’ lawyer
had sent a copy of the original offer to the tenant holding the
right of first refusal, the tenant was later notified that they
were declining the third-party’s offer and that they would
notify him if they found another buyer. 118 The tenant’s
counsel instructed the tenant to issue a written acceptance of
the offer and exercise of the right of first refusal and to have
an earnest money check accompany it.119 Around the same
111
Id. at 573.
Best v. Miranda, 274 P.3d 516, 519 (Ct.App.Az. 1st 2012).
113
Id.
114
Brunswick Hills Racquet Club 864 A.2d at 396, (citing Restatement
(Second) of Contracts §205 cmt. D (1981). However, see also, Ireton v.
JTD Realty Invs. L.L.C., 944 N.E.2d 1238 (Ohio CCP 2010) (a breach of
duty of good faith and fair dealing is not a “stand alone” cause of action
and the failure to respond to an offer under the right of first refusal is not
bad faith).
115
Flynn v. Hanna, 131 P.3d 844 (Or. Ct. App. 2006).
116
Id.
117
Id. at 846.
118
Id.
119
Id.
112
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 114
time, the third-party issued a communication that they were
asserting a right to purchase on the basis of the price increase,
claiming they had an enforceable right of purchase at the
lower figure. 120 Thereafter, due to the owner’s medical
issues, the property was taken off the market. 121 Counsel
reviewed the contract submitted by the initial third-party and
determined that it could not be approved, based upon issues
with the language and compliance with state law. 122
Interestingly, the plaintiff/tenant argued, among other things,
that the “agreement contemplated that attorney disapproval
would relieve the parties from performing only as to those
matters that the parties could not work out…”123 The Flynn
court rejected the tenant’s argument, relying on the wording
of the clause, which lacked any indicia of a requirement for
further negotiation. Thus, as a result of the court’s analysis,
the court held that there was never any contract enforceable
by the tenant.
There are some cases that highlight questions
involving a property owner’s good faith when terms are
negotiated with a third-party that are outside the owner and
right-holder’s contemplation when the right is negotiated.124
For example, in Stevens v. Foren, the implied right of good
faith and fair dealing was heavily examined when a rightholder was denied a property based upon rejecting a portion
of a third-party offer that he found unreasonable, and which
he believed was set up for the express purpose of thwarting
his rights.125 There, the Oregon appellate court held that a
right holder has to deal with whatever terms the owner and
120
Id.
Id.
122
Id. at 847. The contract was rejected by counsel based upon the failure
to reserve oil, gas, mineral and water rights, incorrectly documented
property description and boundary issues, an incorrect property
designation and the violation of Oregon law as to certain required
disclosures and disclaimers.
123
Id. at 849.
124
See Waste Connections of Kansas, Inc., 296 Kan. 943.
125
Stevens v. Foren, 959 P.2d 1008, 1009-10 (Or. Ct. App. 1998).
121
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 115
any third party come up with, even if those terms end up
being far outside the discussions that occurred at the time of
the option or right’s negotiation. 126 In Stevens, the owner
agreed with the third party that construction would be
completed within a certain time-frame and that because the
agreement was at arm’s length and served the owners and
third-party’s legitimate interests, the fact that the right-holder
was unprepared for those later-agreed terms did not suggest
compensable bad faith.127 Ultimately, while bad faith is to be
taken on a case-by-case basis, courts essentially hold that the
right-holder takes the third party as they find them, and they
will be hard-pressed to argue that a deal is structured just for
interference when any legitimate purpose can be found on an
arm’s length deal.
It may be useful for counsel in dealing with such
transactions and disagreements to be sure that the
communications exchanged regarding options are consistent
and include all pertinent information pertaining to the deal.
Where there is lack of consistent communication, counsel for
an optionor would do well to advise their clients that an
interest in real estate should be preserved before any timelimits expire so that there is no argument about observance of
relevant deadlines, since many courts will refuse to find bad
faith where there is any concurrent breach by the other side.
D.
RESTRAINTS, PERPETUITIES AND FRAUDS
While many have forgotten the rule against
perpetuities since muddling through its channels while
pursuing their legal educations, litigation and questions still
abound in regards to this principle in courtrooms across this
country. Simply put, the laws of most states have specific
rules about when an interest in real estate can vest, so that
when it comes to analyzing a particular transaction, a contract
relating to real estate or the interests of a particular party,
126
127
Id. at 1011-12.
Id. at 1012.
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 116
those rules and statutes are often consulted to provide clarity
on whether or not the transaction was appropriate, whether
the interest has vested, or whether something can be
enforced. Initially, there are two rules that have the courts’
ears abuzz, and which flow there from a majority and a
minority viewpoint.
Traditionally, the rule against perpetuities sought to
prevent remote vesting, that is, the owner’s right to control
the property indefinitely with the underlying objective being
to protect the alienability of property. 128 Options and
purchase rights are generally subject to rule against
perpetuities. 129 The majority of jurisdictions, finding that
options and rights of first refusal are interests in property and
not mere contract rights, recognize that these interests are
subject to rule against perpetuities.130 The majority viewpoint
seems to suggest that a right of first refusal and an option
must be limited in duration or else the rule against
perpetuities could void it.131 In contrast, the minority view
contends that unlike ordinary options, some rights of first
refusal do not restrain alienation and thus, should not be
subject to the rule against perpetuities. 132 The minority
suggests that rights of first refusal should not be subject to
the rule against perpetuities unless the interest amounts to a
restraint on alienation.133
Many courts differ on whether or not rights of first
refusal are subject to the rule against perpetuities.134 This
128
Murray, supra note 4, at 94.
Id.
130
Id.
131
MARSHALL, HEATHER M., INSTEAD OF ASKING “WHEN,” ASK “HOW”:
WHY THE RULE AGAINST PERPETUITIES SHOULD NOT APPLY TO RIGHTS
OF FIRST REFUSAL, 44 N.E. Law Rev. 763 (2010).
132
Murray, supra note 4, at 97.
133
Id.
134
Ferrero Constr. Co., 536 A.2d at 1137. The Ferrero court indicated in
the majority opinion that it hesitated before attempting to fashion any
exception to RAP for rights of first refusal, because vested rights and
settled expectations were at stake, a departure from settled law might
129
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 117
includes courts in Georgia, Washington, New York, Texas
and Wyoming, which are perhaps relying on the writings of
Professor Merrill I. Schnebly.135 Where it is apparent that the
sole purpose of the rule against perpetuities is the elimination
of restraints upon alienation, the minority viewpoint finds
that an interest should not be subject to the rule against
perpetuities unless the interest constitutes a restraint on
alienation, thus distinguishing rights and options and then
further differentiating them on the basis of vesting and
possible alienation. 136 Because the minority contends that
some rights of first refusal do not actually constitute
restraints on alienation, it creates an issue in determining the
difference between perpetuity and alienation.
The rule against restraints on alienation and the rule
against perpetuities are two separate and distinct rules, which
should not be forgotten. The rule against restraints on
alienation serves to promote alienability, while the rule
against perpetuities does the same thing in part; the rule also
deals with uncertainties of title in the future. Thus, through
the rule against perpetuities, certain future interests are
voided which makes title interests certain and distinct.137
Critics have stated that the rule against perpetuities
protects against uncertain interests in real estate, such as in
the case of when a remotely vesting interest could divest the
current owner of ownership or future right.138 Where there
are concerns about divestment and the threat thereof, whether
or not something is remote, actual, imminent or even likely is
not the issue. Rather, the issue is that if it appears to be
possible under any set of circumstances to restrict alienation
have introduced doubt as to the value of settled rights, also proving hard
to define, and because the policies of certainty and stability supported
application of RAP to rights of first refusal. Id., at 1140.
135
Schnebly, Merrill, Restraints Upon the Alienation of Legal Interests:
III, 44 Yale L.J. 1380, 1390-05 (1935).
136
Ferrero Constr. Co., 536 A.2d at 1141.
137
Murray, supra note 4, at 99.
138
Ferrero Constr. Co., 536 A.2d at 1143, (citing 2 H. Tiffany, The Law
of Real Property §392 (3d ed. 1939)).
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 118
then the rule against perpetuities would apply, so that there is
no issue of deterrence in pushing property to the limits of
highest and best use. This is certainly a grey area when we
are talking about real estate, future interests and possibilities.
In the case of Tucker v. Ratley, an option to
repurchase surface rights, which was unlimited in time, was
found to violate the rule against perpetuities. The court
upheld a decision by a property owner not to comply with a
purchase option.139 The court in Tucker outlined one method
of analyzing the rules in order to ascertain whether or not
certain future interests are enforceable. Specifically, Missouri
courts utilize a possibilities test, a method by which they
determine the validity of a future interest by refusing to take
into account any subsequent actual events that would vest an
otherwise valid interest and instead examine what might
happen in order to decisively determine validity. 140 Some
courts, rather than finding a future interest void ab initio,
instead find that reforming the instrument granting the rights
in the first place is the better method.141 Still other courts,
analyzing when a particular transaction falls within a
business context, will elect to impute a reasonable time-frame
into the transaction in order to validate the future interest
vesting or taking in order to fall within the rule against
perpetuities boundaries.142 Finding that because commercial
business interests should ideally fall within the boundaries of
the court’s duty to preserve the sanctity of and enforcement
of contracts, a willingness to impute a reasonable time frame
where none was previously provided for, was appropriate.143
139
Tucker v. Ratley, 568 S.W.2d 797 (Mo. Ct. App. 1978).
Id. at 799.
141
Ind. Code, Unif. Stat. Rule Against Perpetuities, § IC 32-17-8-1.
142
Peterson v. Tremain, 621 N.E.2d 385 (Mass. App. Ct. 1993). In
Peterson v. Tremain, the court found that the contract was subject to two
differing interpretations and elected that which avoided perpetuities
problems, and held that it was appropriate to impute a reasonable time
limit to the exercise of the option.
143
Id. at 387. See also, English No. 326126, 2008 WL 597611 (Mass.
Land Ct. Mar. 6, 2008). The court found that the option had no time for
140
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 119
The court declined to impute limitations that established the
instrument were longer than that which the rule against
perpetuities would allow, only imputing where the time
limitation was blank.144
In this case the solution for practitioners to ensure
validity and enforcement of instruments providing for future
interests must outline time limits, which are compliant with
the rule against perpetuities. In order for the existence of
remotely vesting interests to be identifiable, all such interests
or contingent interests must be recorded. This is because
there exists an argument that if an interest is unrecorded, then
it could be overcome by a bona fide purchaser for value who
took without notice.145 If an interest is unknown then it can
hardly be said to be the appropriate subject of a discussion on
restraints. This should encourage counsel to advise and draft
instruments, so the owner’s rights and remotely vesting
interests are protected.
The Statute of Frauds has presented a perplexing set of
circumstances in courtrooms and indeed the world involving
real estate. In Ireton v. JTD Realty Investments, L.L.C., the
sellers of real estate sued a buyer’s assignee for breach of
contract, alleging that a right of first refusal had been
exercise and was not specifically measured by lives in being at the time of
execution (therefore violating RAP), and was appropriately reformed to
add a time frame consistent with the RAP, allowing exercise within
twenty-one years from the death of any original parties to the option,
finding that courts should be reluctant to invalidate voluntarily enteredinto agreements under RAP. The Court enforced the option.
144
Id.
145
See Ferrero Constr. Co., 536 A.2d at 1144. However the court in
Ferrero makes mention of the fact that if a right of first refusal is
unrecorded the task of finding and ascertaining the holder of the
preemptive right at some remote point in the future would be hard so that
the difficulty in and of itself is or could be considered a restraint on
alienation. The author argues that any lack of recordation should
automatically divest the holder of rights, because of the very difficult in
due diligence and the well-outlined rights of bona fide purchasers in most
jurisdictions.
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 120
exercised. 146 In Ireton, there was a contract between the
Iretons, as Sellers, and JTD, as Buyer of a parcel in
Cincinnati, which was later assigned by JRD to Katherine’s
Ridge. Katherine’s Ridge held a right of first refusal as a
result of the assignment.147 Per the terms of the operational
contract, if the Iretons received a good faith offer from a
third-party they were to notify JTD by certified mail
triggering a fourteen-day notice and exercise period. 148 A
third-party offer was received and notices were issued, but a
dispute arose as to the form of notice. This dispute resulted in
the buyers backing out and the seller was unable to complete
a transaction, which damaged them in the process.149
On summary judgment, the case turned on whether an
oral agreement resulted in a meeting of the minds as to the
real estate transaction between the Iretons and JTD.150 The
Statute of Frauds was used in a defensive manner for the
proposition that there had been no meeting of the minds so
that the contract could not have been breached.151 It was
argued that under the Statute of Frauds the writing does not
need to contain the entire agreement but that it must merely
evidence that an agreement was reached.152
This version of the Statute of Frauds, allowing only proof
that an agreement was reached but no evidence of its terms
may turn the typical treatment of the doctrine on its head. The
Court ultimately found that there was no contract and thus
nothing to breach, but assuming that a contract was formed,
there was no compliance with the Statute of Frauds because
the correspondence between the parties, although in writing,
contemplated that at a later date there would be a formal
146
Ireton, 944 N.E.2d 1238, at 1245.
Id.
148
Id.
149
Id. at 1246.
150
Id. at 1249.
151
Id.
152
Id. at 1249. (citing Stickney v. Tullis -Vermillion, 165 Ohio App.3d
480 (2006)).
147
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 121
contract.153 Thus, as in Spatz, where correspondence of any
kind indicates a clear manifestation that a later or more
formal representation shall happen for the making of a
contract, the same is a requirement for a full meeting of the
minds. No contract can exist where that is lacking.
Additionally, not only must options and rights be
spelled out and fully executed in writing for enforcement of
the interests contained therein, extensions of rights or options
must also be in writing and may not be enforced if oral. In
Mills v. Brody, an oral extension of an option period was
considered to be void under the Utah Statute of Frauds in the
absence of an estoppel.154 There, the Utah Court of Appeals
confirmed that payment of the purchase price was required as
tender in order to exercise an option, but also found that an
oral extension of the period for exercise of the option was
void under the Statute of Frauds.155
It is typically found that where a particular contract
requires a writing to be within the Statute, any extension
thereto must also be in writing in order to be effective.
Interests in real estate are largely evidenced by writings and,
as a result, require writings for enforcement.156 Consequently,
the best rule of thumb is to require a clear and concise writing
for all transactions involving any interest, extension of a right
or modification of any right or claim, involving real estate, to
be in writing and to be fully executed.
153
Ireton, 944 N.E.2d. at 1253. While offer and acceptance were found,
there was lacking mutual assent lacking to specific terms and with the
failure of the parties to come together with a single contract for the
purchase. Thus, there was a total failure to enter into a contract for the
purchase. See Signal Mgmt. Corp. v. Lamb, 541 N.W.2d 449 (N.D.
1995)(exercise of an option for extension of lease did not have to be in
writing and authority of agent to exercise the same likewise did not have
to be in writing and oral acceptance of tenant’s agent’s exercise of option
was not violation of statute of frauds).
154
Mills, 929 P.2d at 363.
155
Id. at 364.
156
Id., at 364. See also, Utah Code Ann. § 25-5-3 (1995).
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
E.
2 Prop. L. J. 86 (2015) 122
CONTIGUOUS AND UNRELATED PARCELS
Although many believe the answer may seem
obvious, when an owner wishes to sell his encumbered
property as part of a larger tract or parcel or transaction,
courts are split as to whether a tenant or right-holder’s rights
are triggered in relation to a right of first refusal or option.
While one might think that any transaction that involved
encumbered property would automatically trigger a right or
option, when a transaction involves a contiguous or even an
unrelated parcel, there is no uniform method for dealing with
the issue.
In Whyhopen v. Via, the Florida Second District Court
of Appeal found in favor of a tenant after the landlord refused
to honor their right of first refusal.157 This represents the
minority viewpoint. Here, pursuant to their lease, tenants
were entitled to a right of first refusal in the event that the
landlord decided to sell. The landlord entered into a contract
with a third-party that involved the leased premises and other
parcels of contiguous property.158 As per the lease agreement,
the landlord gave the contract to the tenants, and they gave
timely notice to the landlord of their intent to move forward
with purchasing the leased premises on the same terms and
conditions as the third-party contract. However, the landlord
repudiated and indicated that the repudiation was because the
tenants had not agreed to purchase the additional property
that was under contract with the third party.159 The Court,
relying on Denco Inc. v. Belk, held that since the third-party
was on notice of the rights of the tenant/right-holder, it would
be improper to allow them to purchase the property and
defeat the tenant’s rights.160
157
Whyhopen v. Via, 404 So. 2d. 851 (Fla. Dist. Ct. App. 1981).
Id. at 852.
159
Id.
160
Id. (citing Denco Inc. v. Belk, 97 So. 2d 261 (Fla. 1957)). Interestingly,
the court made no reference to the fact that the third party had offered to
purchase land unrelated to the tenant-held right, which is different than
158
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 123
Conversely, the majority viewpoint is witnessed in
Kutkowski v. Princeville Prince Golf Course LLC, where a
holdover tenant brought a specific performance action on
their claim to a right of first refusal relating to a one-half acre
parcel which was part of a larger undivided parcel that their
landlord sold to a third party. 161 There, the Hawaii
Intermediate Court of Appeals held that a right of first refusal
extended into a holdover period except where expressly
otherwise agreed.162
As long as a holdover tenancy continues, subject to
the terms and conditions of the original lease, the law will not
imply a continued obligation to sell the leased property
absent the owner’s expression of that intent. In general, the
desire to sell a larger parcel may not be taken as a
manifestation of intent or desire to sell a smaller, undivided
parcel within it, so as to convert a right of first refusal into an
exercisable option for its purchase.163 As far as the question
of whether a right is triggered upon the contract for sale
involving a master and subservient parcel, the Court relied on
the fact that the particular license agreement containing the
option language did not spell out any express or implied
requirement of the owner to subdivide the master parcel in
order to offer the premises in question to the lessee.164
how other courts have analyzed the issue. See, Kutkowski v. Princeville
Prince Golf Course L.L.C., 129 Haw. 350 P.3d 980, 1009 (Haw. 2013)
where the Intermediate Court of Appeals held that a sale of a larger parcel
as a whole, inclusive of the tenant’s leased premises, did trigger the right
of first refusal since the sale included unrelated property, not subject to
the option.
161
See, Kutkowski 128 Haw. at 980. The case was one of first impression
in Hawai’i. This case was reversed on May 14, 2013 to hold that the
lessor’s sale of undivided parcel triggered right of first refusal in lease.
162
Id. at 1019.
163
Id. at 981.
164
Id. at 996. See also, Wilber Lime Prods. Inc. v. Ahrndt, 268 Wis. 2d
650, 673 N.W.2d 339, 342-43 (Wis.App.2003). Wilber Lime summarizes
the minority view that the sale of a larger parcel containing an optioned
property will trigger that option. However the issue in Wilber became the
ratio formula applied by the court for determining price which in effect
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 124
Similarly, on a case of first impression, Advanced
Recycling Systems L.L.C. v. Southeast Properties Limited
Partnership, the Supreme Court of South Dakota found that a
tenant’s right of first refusal was not violated when the
landlord sold the leased premises as part of a development
without first offering the property to them.165 The right of
first refusal on the leased premises provided in pertinent part
that “the tenant shall have the right of first refusal to the
leased premises in the event the landlord chooses to sell and
produces a written bona fide offer to purchase…”166
Pursuant to options to renew, Advanced’s lease was
extended until September 2006. Each extension expressly
provided that all of the original covenants and terms would
remain in full force and effect.167 In 2004, after the original
lease, but before Advanced’s lease was to end, the landlord,
Southeast, contracted to sell the leased premises as well as
other contiguous parcels as a development, which ultimately
closed.168 The landlord never provided Advanced with any
bona fide offers, and instead Advanced was provided notice
only after the sale had been consummated.169 Further, it did
not exercise any rights at that time and instead remained in
the property pursuant to its lease.170
In 2006, when Advanced was renegotiating another
renewal, it was reminded of its right of first refusal in the
existing lease.171 At this time Advanced contacted counsel
had no relation to the true value of the property and the fact that the
holder would ultimately acquire the property on terms that were never
agreed to and for likely an absurdly low price. The case involved a later
remand for a “fair market valuation.”
165
Adv. Recycling Sys., L.L.C. v. Se. Props., L.P., 787 N.W.2d 778 (S.D.
2010).
166
Id. at 781.
167
Id. at 782.
168
Id.
169
Id.
170
Id.
171
Id.
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 125
and later initiated legal action.172 The trial court found that
Advanced was entitled to monetary compensation for the
violation of the right of first refusal.173
Resolving the later-filed appeal in the Advanced case,
the South Dakota Supreme Court examined the differences
between rights and options and described an option as a
“right that gives the optionee the right to purchase the
property at his election within an agreed period at a named
price.”174 It found that an option contract is an irrevocable
offer by the owner to sell on specific terms, and that it creates
a power of acceptance in an optionee, but does not, like a
right of first refusal would, entitle the holder to compel an
unwilling owner to sell.175
A right of first refusal is a conditional and
presumptive right, which requires the owner, when presented
with a third-party offer to purchase the restricted premises,
who manifests an intention to sell on the offered or
negotiated terms, to offer the property first to the holder on
the same terms as the third party.176 A right of first refusal
ripens into an option contract when the owner receives the
third-party offer and manifests an intention to sell on those
terms.177
The Advanced Court found specifically that “an
attempt to sell the whole may not be taken as a manifestation
of an intention or desire on the part of the owner to sell the
smaller optioned part so as to give the [holder of the right of
first refusal] the right to purchase the same.”178 Because there
172
Id.
Id. at 783.
174
Id. (citing Crowley v. Texaco, 306 N.W.2d 871, 873 (S.D. 1981)).
175
Id. (citing Landa v. Century 21 Simmons & Co, 377 S.E.2d 416, 419
(Va. 1989) (quoting Cities Serv. Oil Co. v. Estes, 155 S.E.2d 59, 62 (Va.
1967)).
176
Id. (citing Chapman v. Mut. Life Ins. Co., 800 P.2d 1147, 1150 (Wyo.
1990) (quoting Hartnett v. Jones, 629 P.2d 1357, 1362 n.1 (Wyo. 1981)).
177
Id. (citing Crowley v. Texaco, Inc., 306 N.W.2d at 873).
178
Id. at 784, quoting Guaclides v. Kruse, 67 N.J. Super. 348, 357, 170
A.2d 488, 493 (N.J. Super. Ct. App. Div. 1961).
173
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 126
was no evidence at the trial court hearings on summary
judgment that the owner and the parties had entertained any
negotiations on just the leased premises, Advanced’s rights
never ripened into an enforceable option to purchase.179 The
Court also found that because Advanced could have only
accepted an offer regarding the leased premises, since that
was the only real estate subject to the right of first refusal,
and there was no offer for the leased premises only,
Advanced never had anything to accept, and thus no contract
resulted that it could enforce. 180 Conversely, in Waste
Connections of Kansas, Inc. v. Ritchie Corp., the Supreme
Court of Kansas held that the sale of contiguous land is not a
barrier to the activation of a right of first refusal.181 In that
case, Ritchie conveyed the title of a tract of land to a waste
company.182 On the same day, Ritchie entered into an escrow
agreement whereby the purchaser would remain on the
property and make payments pursuant to the escrow terms
and to operate the property as a transfer station.183
The escrow agreement provided that the buyer would
re-convey title back to Ritchie at the end of the term, but the
buyer would have a right of first refusal with respect to
Ritchie’s interest including the reversionary interest in the
property. 184 It was expressly stated that the right of first
refusal would not apply to transfers or assignments by the
seller to an affiliate or a stockholder of an affiliate. 185
Thereafter, Ritchie, having a controlling interest in an
unrelated entity known as C&D Recyclers of Kansas, Inc.,
entered into an asset purchase agreement with a company
called Cornejo & Sons regarding the C&D assets and
179
Id. at 785 (citing Chapman, 800 P.2d at 1150-51).
Id. (citing Atl. Ref. Co. v. Wyo. Nat’l Bank , 356 Pa. 226, 232, 51 A.2d
719, 722-23 (1947)).
181
Waste Connections of Kan., Inc. v. Ritchie Corp. 298 P.3d 250, 264
(Kan. 2013).
182
Id at 255.
183
Id.
184
Id.
185
Id.
180
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 127
stock.186 This resulted in an agreement for $4.95 million, $2
million of which was to be specifically allocated to the
assumption of Ritchie’s escrow agreement and to the rights
and responsibilities thereunder.187
Under the particular provision at issue, Waste
Connections, as the right-holder, had the right to exercise if
and when Ritchie received any offer from a third party,
giving it the right on the same terms as the third party.188
Therefore, an issue arose as to the price and the requirement
of the sale of a contiguous parcel.189 The court found that on
the question of trigger of a right for a parcel with a
contiguous lot that was not subject to the right or option, so
long as the real estate is part of that subject to a right or
option, any offer related thereto would trigger the option.190
Kansas had not previously treated package status as a barrier
to activation of a right of first refusal on a portion of the
package. As this was the issue in the asset sale in the case,
the only issue actually raised by the parties was the price at
which the rights were exercised; therefore, the Court found
no reason to decline enforcement.191
There is something to be said for the parties to a lease
agreement to spell out how any provided-for rights or options
are to be handled if or when the owner decides to sell.
However, given that the landowner, and indeed the tenant,
may not necessarily foresee the shape of a future bona fide
186
Id. at 256.
Id.
188
Id. at 255.
189
Id. at 260.
190
Id. at 260.
191
Id. The Court relied heavily on the case of Pantry Pride Enters. v. Stop
& Shop Cos., 806 F.2d 1227 (4th Cir. 1986), for the proposition that “an
essential issue in package cases is the actual price for the encumbered
land offered by the third party.” In Waste Connections, ultimately because
the escrow agreement and asset purchase agreement did not provide any
clarity, the court turned to parole evidence and later determined that it
could not rule in summary fashion based upon the pervasive factual
questions that persisted. The case was remanded for a ruling on the
correct price for the rights.
187
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 128
offer from a third-party, courts are typically left to interpret
the contract on the basis of the words used, and avoid trying
to determine the intent when the parties were contracting,
through the use of parol evidence. To guard against these
issues, counsel should be prepared to fully discuss the pros
and cons of an option when negotiating leases in this context,
and to clearly draft a mutually agreeable manifestation of
their understanding as to triggers and exercise when dealing
with options and rights.
Because these questions and answers evolve from
year to year on a national stage, the majority and minority
viewpoints may end up further apart or drawn closer together.
Either of these would then require a more uniform method of
interpreting these clauses. Even where the clauses are clear,
there are instances where waiver may arise as the result of
dilatory practices on the part of a party claiming a right in
optioned property.192 As such, once a contract is executed the
parties ought to have clear and concise communications
involving their negotiations so as to avoid the implication of
any waiver principles.
F.
INVOLUNTARY SALES
One question that may arise in the context of rights is
whether or not a right may be triggered when an offer is
made on real estate pursuant to a court-ordered or involuntary
sale. In Pearson v. Schubach, this question was presented in
relation to a right of first refusal and whether it applies if the
owner was not a willing participant in the sale.193 In Pearson,
the tenant had a right of first refusal contingent upon the
lessor’s receipt of “a bona fide offer to purchase the demised
192
See, e.g. McNab, 257 S.W.3d 166, where an adjoining landowner who
held a right was found to have waived said right by the failure to take
action in a timely period whilst another party did construction and openly
held the property in violation of the right.
193
Pearson v. Schubach, 763 P.2d 834 (Wash. Ct. App. 3d 1988).
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 129
property which the lessor was willing to accept.”194 After the
lease was commenced, the lessor, a defendant in another
pending case, was subject to a judgment in the secondary
case, which resulted in a court-ordered sale of the real estate
subject to the lease.195 In this case, the tenant held the right
to the real estate.196
On the issue of whether the landlord was a willing
seller the court found that since willingness was a condition
precedent to the ripening of a right of first refusal that the
tenant could not advance a claim on the right. 197
Interestingly, this indicates that courts may begin to evaluate
motive and desire as important components of ascertaining
intent, contractual obligations, and outcomes as part of real
estate cases in this context. That opens more “boxes” of
confusion in terms of outlining a specific body of law
dedicated to options and rights in the United States. At least
if rights and options themselves were uniformly treated, then
it might give way toward the codification of transfers of real
property interests. However, given the existence of uniform
laws affecting real estate that are nationally accepted, that
concept seems far off.
V.
WHAT’S NEXT? CREATING CLARITY IN THE
LAW
Many people are likely to agree that uniformity in the laws
from place to place is a desirable goal when it comes to
certain kinds of topics, like crime or taxes. However,
depending on whom one asks, allowing states to craft their
own unique laws can have another and less desirable effect
on society, opening or closing doors depending on the subject
matter at hand. As far as rights and options in real property, it
is suggested that uniformity and clarity both are necessary
194
Id. at 835.
Id.
196
Id.
197
Id. at 837.
195
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 130
components of a larger national property scheme that is
forming as the result of the economy and the housing crisis.
Uniform laws involving rights of first refusal are
sparse, but have some origin in the landlord tenant act
legislation that requires a landlord, when converting an
apartment to a condominium or mixed-use property, to
provide their tenants with the first opportunity to purchase.198
Additionally, although the Uniform Law Commission has on
its books another model law for the transfer of real estate
including leases, the Uniform Land Transactions Act, it has
not been enacted, despite being more than twenty-five years
old.199 The failure of any particular jurisdiction to enact it
suggests that there is much hesitation regarding codification
of a uniform set of rules pertaining to land transactions.
Similarly, the Uniform Simplification of Land Transfers Act,
also promulgated by the Uniform Law Commission, has
failed to gain any traction and has not been enacted anywhere
in the United States.200
Clearly the minority opinions have a goal of crafting a
uniform law and the majority feels that long-standing rules
that are codified are adequate for the national real estate
scene and that there is no need for unification. The author
submits herein that options and rights, although coming in
many different shapes and colors, clearly evidence a growing
trend of confusion, lack of clarity and a need for the
uniformity that some have balked at. Where judges and
198
See, Uniform Residential Landlord and Tenant Act of 1972, as enacted
in Alabama, Alaska, Arizona, Connecticut, Florida, Hawaii, Iowa,
Kansas, Kentucky, Michigan, Mississippi, Montana, Nebraska, New
Mexico, Oklahoma, Oregon, Rhode Island, South Carolina, Tennessee,
Virginia and Washington.
http://www.uniformlaws.org/shared/docs/residential%20landlord%20and
%20tenant/urlta%201974.pdf
199
See, Uniform Law Commission, www.uniformlaws.org, Uniform
Land Transactions Act. This has never been enacted to date in any
jurisdiction.
200
http://www.uniformlaws.org/LegislativeFactSheet.aspx?title=Simplific
ation%20of%20Land%20Transfers
The Charlotte School of Law Property Law Journal Volume II Issue I
Options and Rights
2 Prop. L. J. 86 (2015) 131
lawyers alike across this country cannot agree, then most
definitely the parties to various transactions will be unable to
find the kind of information or guidance they require in order
to avoid certain issues in completing their transfers. What is
an option or right may be clear enough to most, but how they
are exercised and what is necessary to define one in the face
of distressed or attached property or even in package deals
across our nation, leaves much to be desired.201
The author proposes a model act governing rights and
options, which reviews the necessity for creation of a right or
option, a limit on affected parties, and a rule as to whether
rights and options are personal or whether they run with the
land. Additionally, rules as to exercise, waiver, affected
parcels, a need for a writing, and the effect on any perpetuity
issues should be encoded. No doubt any law drafted or
conceived of might still be lost at the enactment stage in any
particular jurisdiction. However, the failure to have any is
precisely the reason why states and courts alike disparately
treat these cases the way they do. More is needed. Clarity and
uniformity are but one way to make black letter, which has
traditionally been grey, positive.
201
See, Daskal, Bernard, Right of First Refusal and the Package Deal, 22
Fordham Urb. L.J. 461 (1994).
The Charlotte School of Law Property Law Journal Volume II Issue I