One method of securing the right to acquire property involves a mechanism commonly known as a right of first refusal (ROFR). A ROFR typically provides that if a seller receives an offer from a third party to purchase the property and the seller wishes to accept the offer, the seller must first give the holder of the ROFR the chance to buy the property, typically on the same terms and conditions set forth in the offer coming from the third party.
The ROFR is often related to some other interest held by the potential buyer. A tenant might have negotiated a ROFR to provide for circumstances in which a landlord decides to sell the building, or to secure space for future expansion. A ROFR might also be found where a buyer acquires property from a seller who continues to own neighboring property. A ROFR can be found in the form of a separate contract, or may be a single provision inserted into contract involving a broader transaction. Regardless of form, a ROFR should the term for which it is in effect.
In MS Real Estate Holdings LLC v. Donald P. Fox Family Trust, 2015 WI 49 the Wisconsin Supreme Court considered circumstances in which a ROFR did not clearly specify a term. The Foxes argued that because the ROFR did not state that it was perpetual they were entitled to terminate the ROFR after a “reasonable” time, consistent with Wisconsin law. According to the Foxes, because the ROFR could continue forever if the land was never sold it was of indefinite duration and disfavored in the eyes of the law. The Circuit Court agreed, found that a reasonable time had passed (around 15 years) and that the Foxes had legally terminated the ROFR.
The Wisconsin Supreme Court disagreed that the ROFR was perpetual such that it was subject to termination, and found that it was definite as to duration because it specified an event that triggered the right and required the right holder to either exercise or waive that right within a specified period of time thereafter, even if the triggering event is not certain to occur. The existence of a triggering event made the duration definite, even if the triggering event might never occur. The Court observed that ROFR can be indefinite and terminable if they restrain the sale of property, but are not when (1) the contract holder can purchase on the same terms and conditions as another offer, (2) the contract provides a clear procedure for doing so, and (3) “provides a reasonable time for exercising the right.”
The ROFR in the Fox case had been drafted to govern property between neighbors. While never mentioned in the Supreme Court opinion, it is worth noting that the Foxes took no part in drafting the ROFR and were not represented by legal counsel in connection with its preparation or execution.
Rights of first refusal are valuable. Great care should be taken during their negotiation. Even in the context of a friendly transaction the interests of the buyer and seller are divergent, and proper drafting of a ROFR can ensure clarity regarding future rights and limit the time and expense of dealing with disputes.
If you have questions regarding real estate transactions – commercial or residential – please discuss with legal counsel who can help get the proper documentation in place. It is less expensive than you think and will save you in the long run.