Business Transaction Newsletter – September 2017

RIGHT OF FIRST REFUSAL – MUST HAVE CONSIDERATION TO BE ENFORCEABLE

In the case of Deatherage v. Hailey, the Court of Appeals found that e-mail correspondence between a Tenant and a rental manager did not rise to the level of having adequate consideration to support a right of first refusal.  In the Deatherage case, the Tenants e-mailed with Landlord’s rental property manager about the idea of purchasing the property that they were renting.  The property manager e-mailed back that the Landlord was not ready to sell the property, but that if he ever decided to sell, then the tenants would have a right of first refusal.

The Landlord later sold the property to a third party, but never gave the Tenants an opportunity to purchase the property.  Thereafter, the Tenants filed suit for specific performance and breach of contract, asserting that through his agent, the Landlord had entered into a contract which gave the Tenants a right of first refusal.

Both the Trial Court and the Court of Appeals ruled that the e-mail exchange did not constitute a right of first refusal because it was not supported by consideration.  The Court of Appeals wrote that the basic rule for a contract is that it can be express or implied, and can be written or oral, but regardless, an enforceable contract must result from a meeting of the minds and mutual assent to the terms, must be based upon sufficient consideration, must be free from fraud or undue influence, not against public policy, and must be sufficiently definite to be enforced.

The Court further wrote that every contract must have mutual consideration.  The Court defined “consideration” as being either a benefit to the promisor or a detriment or obligation upon the promisee.  Consideration exists whenever a party does something he or she has no legal obligation to do or refrains from doing something that he or she has a legal right to do.  Without mutual consideration, a contract is invalid and unenforceable.

The Court explained in the Deatherage case that a lease renewal by the tenants before the email exchange was not adequate consideration for a right of first refusal.  Even a lease renewal after the e-mail correspondence did not constitute consideration.  The Court said there was no indication that this benefit was sought by the Landlord in exchange for granting the Tenant a right of first refusal.  Also, the Court wrote that the tenants forgoing purchasing other property did not serve as consideration for a right of first refusal.  Therefore, the Court concluded that the right of first refusal was not enforceable because it was not supported by adequate consideration.

MY RECOMMENDATION:   Rights of first refusal are just like any other contract.  They must meet all of the requirements of a contract to be enforceable.  To have an enforceable right of first refusal, a party specifically should identify in the right of first refusal contract what constitutes consideration to each party.  Also, the parties might consider some expiration date to the right of first refusal.  Frequently, rights of first refusal are found in deeds thirty and forty years old, and a question about an encumbrance on the title arises when the right of first refusal “hangs out there” indefinitely.

Yours very truly,

RAINEY, KIZER, REVIERE & BELL, P.L.C.

William C. Bell, Jr., Attorney at Law