12 Sep You Have a Right of First Refusal. Or Do You?
The majority of people have heard of a right of first refusal (a “ROFR”); especially those of us who have co-owned property with others or who have worked in any way in real estate. ROFRs are also extremely common in both commercial real estate (including clauses inserted in leases), farming and ranching communities, and in oil and gas transactions. Legally speaking, a ROFR is an (written) agreement between a prospective purchaser of real property; property that is not for sale at that time and a property owner who is not ready to sell its property. What a ROFR is not is an option to buy at any time certain or a requirement to sell, nor does it compel a seller to sell its property to a holder of a ROFR on any certain terms. Rather, a ROFR requires a seller, if it decides to sell, to offer the property to the holder of the ROFR under the same terms the seller received from an unrelated third party (and only then if the third-party offer is a bona fide offer). While ROFRs are perfectly legal and can be effective tools for the acquisition of real property, there are several requirements that must be satisfied to have a valid ROFR.
As a preliminary matter, a ROFR is a contract and a contract requires consideration—that is, something of value exchanged between the parties. While there is some case law that even the recitation of consideration between the parties in the contract satisfies the consideration requirement (even if no consideration is actually “paid”), the holder of a ROFR should always provide some form of tangible consideration—whether it be money, a mutual promise, or something else of value. While it is entirely possible that a ROFR that merely mentions consideration when none was actually exchanged, there is no reason to be a “test case” on this issue when it can easily be addressed while drafting the ROFR.
Second, to constitute a valid ROFR, the ROFR must satisfy the statute of frauds. The statute of frauds requires that the right must be in a writing (a) signed by the grantor (Tex. Bus. & Com. Code Ann. §26.01(a)(1) & Tex. Bus. & Com. Code Ann. §26.01(b)(4)); (b) memorializing a binding agreement (Haase v. Glazner, 62 S.W.3d 795, 798 (Tex. 2001); (c) that identifies the parties to the agreement (BACM 2001-1 San Felipe Rd. L.P. v. Trafalgar Holdings 1, Ltd., 218 S.W.3d 137, 144 (Tex. App.–Houston [14th Dist.] 2007, no pet.)); and, (d) that identifies the subject matter of the agreement (Garner v. Redeaux, 678 S.W.2d 124, 126 (Tex. App.– Houston [14th Dist.] 1984, writ ref’d n.r.e.)).
The biggest issue that I have personally seen when analyzing ROFRs for clients are non-existent or defective legal descriptions, which run afoul of the third prong of the test above. In layman’s terms, this means a ROFR must adequately describe the property subject to the ROFR. It has long been held that: “The well settled rule to test the sufficiency of a description in a deed is that ‘the writing must furnish within itself or by reference to some other existing writing, the means or data by which the land to be conveyed may be identified with reasonable certainty.”’ Morrow v. Shotwell, 477 S.W.2d 538, 539 (Tex. 1972)). Logically, a ROFR is a contract for the sale of real property that must comply with the statute of frauds. See Matney v. Odom, 210 S.W.2d 980, 982 (Tex. 1948). Accordingly, a ROFR on the sale of real property is unenforceable unless it satisfies the statute of frauds. See Reiland v. Patrick Thomas Props., Inc., 213 S.W.3d 431 (Tex.App.-Houston [1st Dist.] 2006, pet. denied). Accordingly, a signed writing with an adequate legal description is absolutely critical to in ensuring that a holder has a valid ROFR.
Additional consideration must be given when deciding what triggers a ROFR and those considerations, regardless of what they are, must be memorialized in the ROFR. Typically, the only event that triggers a ROFR is a seller’s receipt of a bona fide offer to purchase. Typically, death of seller, gifts by seller to its family, or legal proceedings (bankruptcy, foreclosure, etc.) do not invoke a ROFR. However, these are all, at least in part, points that can be negotiated when drafting and agreeing on a ROFR. As a matter of prudence, it is better to over-plan and address these contingencies.
There is some commentary regarding both notice (that is, should a ROFR be recorded in the real property records) and whether the fact that a ROFR generally has no duration is prohibited by the Rule Against Perpetuities. As for the former, Texas courts have implicitly disfavored a recording requirement for ROFR. Their logic is simple: should a seller violate a ROFR and not offer the property to a holder of a ROFR, the holder is expected to discover any conveyance in violation of the ROFR within the four-year statute of limitations that exists for a breach of contract. See Via Net v. TIG Ins. Co., 211 S.W.3d 310, 314 (Tex. 2006). That notwithstanding, a holder of a ROFR may put notice of their rights in the public record to offer itself additional protections. Regarding, the latter, both Texas courts and federal courts have rejected the application of the Rule Against Perpetuities as voiding a ROFR. See Forderhause v. Cherokee Water Co., 623 S.W.2d 435, 439 (Tex. Civ. App.–Texarkana 1981), rev’d on other grounds, 641 S.W.2d 522, 525 (Tex. 1982); Weber v. Tex. Co., 83 F.2d 807, 808 (5th Cir. 1936).
Finally, it must be noted that in the event an otherwise valid ROFR is violated by a seller the holder of the ROFR has two options: specific performance or damages. The remedy of specific performance is available against the seller if it still owns the property subject to the ROFR or the third-party purchaser if they acquired the property with actual or constructive knowledge of the ROFR. Additionally, the holder of the ROFR also possesses a breach of contract claim against the seller. While those topics are beyond the scope of this article, remedies for failure to adhere to a ROFR are readily available.
Should you find yourself with questions regarding the creation or interpretation of a right of first refusal or in a dispute regarding a right of first refusal, it is important to engage a qualified attorney to assist you.
ABOUT THE AUTHOR: Scott F. Seidl is Counsel at Rapp & Krock, PC in the Litigation group and the Probate, Estates, Elder Law, and Trusts group. He has handles cases concerning informal marriages as well as other probate and property litigation matters.
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