Thursday, September 22, 2011, 8:50 AM

COA: Circumstances critical in determining whether right of first refusal is enforceable

On Tuesday, in the case of Taylor v. Miller, a panel of the North Carolina Court of Appeals (Geer, Martin, Elmore) held that a right of first refusal in a deed may be enforceable even if it contains a fixed price option. In this decision, the Court recognized the need to enforce arms-length negotiations and the importance of rights of first refusal in certain contexts, such as real estate development and family law.

Mr. Taylor and Ms. Miller were married in 1982 and separated in 1993. In 1994, they executed a warranty deed to Mr. Taylor for a piece of property in Morehead City, North Carolina. The deed contained a provision regarding Ms. Miller's right to repurchase the land should Mr. Taylor decide to sell it. That provision stated, in part, that Ms. Miller could buy the property (1) on the same terms and conditions of a bona fide offer received by Mr. Taylor, or (2) for the sum of $41,500 plus the costs of repairs and improvements made since the execution of the deed. In 2009, Mr. Taylor and his current wife filed a complaint seeking a declaration of rights under the deed and a determination whether the right of first refusal provision was enforceable.

A right of first refusal requires that, before the designated property may be sold to another party, it must first be offered to the person that holds the right of first refusal. Although a right of first refusal is considered a restraint on alienation of property, which is generally disfavored by the courts, a right of first refusal is not void per se and will be enforced if it is reasonable. To determine whether a right of first refusal is reasonable, courts consider two primary factors: (1) the duration of the right, and (2) the provisions for determining the price of exercising the right.

The Taylors argued that the right of first refusal in this case was unenforceable because it failed to satisfy the second prong. Specifically, they contended that the right of first refusal was unreasonable because of the fixed price option ($41,500), which, they argued, did not link the price of the property to the fair market value of the land or to a price they would accept from another buyer.

The Court of Appeals explained that in considering the second prong, courts must look to the circumstances existing at the time the contract was made to determine whether the price is reasonable. Here, the record contained a letter from Mr. Taylor to Ms. Miller indicating that the deed was part of their separation agreement. According to the Court, if the fixed price option was a "bargained-for sum" arising out of Mr. Taylor and Ms. Miller's negotiations during their property division, then those circumstances could suggest that the fixed-price right of first refusal was reasonable. However, because genuine issues of fact existed, summary judgment was not proper for either party.

Related links: Record on appeal; Taylors' brief; Miller's brief; Taylors' reply brief.

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