Brief Fact Summary.
Plaintiff and Defendant agreed that Plaintiff would have a first right of refusal to purchase any other property that Defendant may sell. Plaintiff sued Defendant for specific performance after Defendant refused to sell one of its lots to Plaintiff. The trial court held that Defendant’s 1984 notice to Plaintiff was an offer, which Plaintiff accepted by exercising its right of first refusal. However, the court held that the contract was nevertheless void because the right of first refusal violated the rule against perpetuities. The court of appeals reversed, holding that the rule against perpetuities did not apply and the right of first refusal was valid.
Synopsis of Rule of Law.
A right of first refusal is subject to the rule against perpetuities.
In 1981, Dennis Rourke Corp. (Plaintiff) purchased two lots of land from Ferrero Construction Co. (Defendant), agreeing that Plaintiff would have a first right of refusal on the future sale of any of the remaining surrounding lots owned by Defendant. In 1984, Defendant received a third-party offer to buy one of those lots and notified Plaintiff, who exercised its right and matched the offer. However, Defendant ultimately declined to sell, rejecting both offers.
Whether a right to first refusal is subject to the rule against perpetuities.
Yes. The court of appeals ruling is reversed and the trial court’s ruling is affirmed. A right of first refusal is more than a mere contractual right; it creates a real property interest.
(Cole, J.): The rule against perpetuities is meant to make land freely transferable and to prevent restrictions on alienation. Therefore, it should not apply to rights of first refusal based on a market price because they do not restrict the sale of land. Additionally, a right of first refusal differs from an option in that the latter would force an unwilling owner to sell to the option holder. The preemptive right in the instant case does nothing to restrict alienation because it is based on a price that the owner is willing to accept from a third party and presumably represents fair market value. Therefore the decision of the court of appeals should be affirmed.
A right of first refusal is a type of option. The majority rule is that the rule against perpetuities applies to options. Thus, a right of first refusal must comply with the rule against perpetuities. The rule against perpetuities exists to facilitate the transfer of land and to support the value of land. A right of first refusal at a fixed price unreasonably inhibits alienability because it fails to account for a change in the value of land over time. A right of first refusal at a price equal to a bona fide third-party offer restricts alienation because a potential third-party purchaser is less likely to make an offer in the first place knowing that the pre-emptioner need only match his offer. Therefore, the interest created by a right of first refusal must vest, if at all, within twenty-one years after a life in being at the creation of the interest. Here, the preemptive right did not have an expiration date, and the parties to the agreement were corporations, which can last forever. It is therefore impossible to know whether Plaintiff’s interest would vest within twenty-one years after a life in being. Accordingly, Plaintiff’s right of first refusal violated the rule against perpetuities and is void.