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RIGHT OF FIRST REFUSAL

The Minnesota Court of Appeals recently decided a case of significant interest to all people in the real estate industry.  In Hempel v Creek House Trust, Minnesota Court of Appeals, Case Number A06-2473, filed December 31, 2007, the Court ruled on an appeal related to the right-of-first-refusal in a contract for purchase of real property.

FACTUAL SUMMARY

The case involves two adjacent parcels of land.   Hempel owned one parcel (First Parcel).  The second parcel is owned by Creek House Trust (Second Parcel).   Both parcels were owned at one time by the same person.   The buyer of the First Parcel wanted the have the right-of-first-refusal on the Second Parcel.   In 1981, the Hempel (First Parcel) property was sold.   A right-of-first-refusal on the Second Parcel was included as part of the sale.   This right-of-first-refusal was recorded with the county recorder the same time as the deed.   There were additional transactions which took place on the First Parcel in 1982 and 1985, which included specific assignments of the right-of-first-refusal.  In 1992, the property subject to the right-of-first-refusal  (Second Parcel) was sold.   There is a factual dispute as to whether or not the purchaser was aware of the right-of-first-refusal.   The seller executed a document at closing which stated the right-of-first-refusal had lapsed.  The Second Parcel was sold again in 2004 to Defendant Creek House Trust.  Hempel, the current owner of the First Parcel, discovered the transfer which occurred in 2004.  Legal action was brought in 2005.

COURT DECISION

            The court ruled that the Statute of Limitations had run, and the right-of-first-refusal therefore was unenforceable.  The issue in legal terms is:  when does the six year Statute of Limitations start?  Does it start when the problem was discovered?  Does it start when the first sale occurred, in this case back to 1992?  The court ruled the Statute of Limitations started when the first sale occurred in 1992.  However, the Court also ruled the person who was claiming rights under the right-of-first-refusal has a right to have that right-of-first-refusal decision to be decided in a declaratory judgment action.  The Court talked about two inconsistent documents before the District Court, the right-of-first-refusal agreement and the lapse statement.  Frankly, I am not sure what the Court meant.  The Court stated "The fact that appellants' claimed a breach that was based on a 1992 conveyance is time barred by Statute of Limitations does not determine whether the appellants still have a right-of-first-refusal".  Perhaps the Court is saying that the holder of the right-of-first-refusal may have a right-of-first-refusal for subsequent transactions, I am not entirely sure.

Also, the Court did not address the issue of constructive notice to the purchasers of the property, given the right-of-first-refusal was placed of record.  It is not clear whether it was indexed properly or the legal description was attached to the recorded document on the property which was subject to the right-of-first-refusal.

PRACTICE TIPS

            I have never been a fan of the creation of first refusal rights.  They are very difficult to enforce.  They can create difficult, if not impossible, situations.  If, for example, a party is willing to do a trade of properties, a right-of-first-refusal is very difficult to exercise.  If the property is sold with any type of seller financing, the right-of-first-refusal is also difficult.  The credit worthiness of one purchaser might be dramatically different from the credit worthiness of another purchaser.  The purchase may involve a longer period of time before closing and may require obtaining government approvals.  This is something one party may have the capacity to do, yet another one does not.  This case points out the difficult nature of enforcing a right-of-first-refusal.  If you hold the right-of-first-refusal, the Court appears to say you are obligated to monitor the record to see if any sale has occurred.  You are probably also obligated to monitor the property to see who the occupant is in case they are a purchaser under a lease or lease option or an unrecorded contract for deed.

            If you do a right-of-first-refusal, absolutely, positively, have it drawn up by an experienced real estate attorney.  We strongly recommend the legal description of the property to be purchased, which is subject to the right-of-first-refusal, be in the document so it can be indexed properly.  The right-of-first-refusal holder's rights need to be clarified whether or not the right runs with the land or whether it is a personal property right.  A right-of-first-refusal is an idea which sounds very good in concept, but is difficult to execute as you work through the various details in an agreement.

 

 
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