First Right of Refusal - Real Estate & Contract Law

Real Estate Dispute lawyer Austin Texas

May 2, 2013 — by Jeff Mundy
Tags: Contract Law Commercial Litigation Real Estate

 

Lack of Consideration

Peltier and Smith first contend that the trial court correctly granted summary judgment in their favor because they established that the option agreement between Smith and Jarvis was not supported by consideration.

Consideration is a fundamental element of every valid contract. Critchfield v. Smith, 151 S.W.3d 225, 233 (Tex. App.--Tyler 2004, pet. denied). Consideration is defined as either a benefit to the promisor or a loss or detriment to the promisee. N. Natural Gas Co. v. Conoco, Inc., 986 S.W.2d 603, 607 (Tex. 1998). In a partition, each cotenant receives a specific share of property and holds it to the exclusion of the other cotenants who formerly had equal rights to possession with him. Garza v. Cavazos, 221 S.W.2d 549, 552 (Tex. 1949). The resultant holding of each in severalty is a benefit accruing to each, and alone constitutes sufficient consideration for the partition. Hamilton v. Keller, 148 S.W.2d 1011, 1014 (Tex. Civ. App.-- Eastland 1941, no writ).

The consideration for the privilege of purchasing property under a right of first refusal is not separate from the consideration for the partition of real property. See Riley,808 S.W.2d at 188. Where an agreement to partition real property and a right of first refusal constitute one contract, the provisions of which are interdependent, the consideration for the partition will also support the right of first refusal. See Henderson v. Nitschke, 470 S.W.2d 410, 414 (Tex. Civ. App.--Eastland 1971, writ ref'd n.r.e.).

In this case, Jarvis told Smith that he wanted the eight contiguous acres adjoining his two acre tract, and would file a partition suit if he and Smith could not reach an agreement. Smith wanted the middle four acres because he farmed it. Jarvis agreed to Smith's proposal on the condition that he be granted an "option" to purchase the middle four acres. The option agreement states that it is a part of the consideration for the partition. Thus, the agreement to partition real property and the option agreement constitute one contract, and its provisions are interdependent. See id.As such, the resulting ownership of the tracts in severalty constituted consideration for partition as well as the March 11, 1998 option agreement. See Hamilton, 148 S.W.2d at 1014.Accordingly, we hold that Peltier and Smith failed to establish their right to summary judgment on their affirmative defense of lack of consideration. Therefore, summary judgment in their favor on this ground was improper.

Rule Against Perpetuities

Peltier and Smith next contend that the trial court correctly granted summary judgment in their favor because they established that the option agreement violated the rule against perpetuities. We have concluded, however, that the option agreement is, in substance, a right of first refusal. In Texas, a preferential right to purchase or a right of first refusal does not violate the rule against perpetuities. Cherokee Water Co. v. Forderhause, 641 S.W.2d 522, 526 (Tex. 1982). Therefore, the option agreement in this case does not violate the rule against perpetuities. See id. Consequently, Peltier and Smith failed to establish their right to summary judgment on their affirmative defense that the option agreement violates the rule against perpetuities. Thus, summary judgment in their favor on this ground was improper.

Noncompliance with Option Agreement

Finally, Peltier and Smith argue that the trial court correctly granted summary judgment in their favor because Jarvis failed to comply with the terms of the option agreement when he attempted to enforce it. Jarvis responds that because Peltier and Smith refused to provide him with the terms of their sale, he never had the opportunity to comply. He also argues that his duty to strictly comply with the option agreement was excused.

A right of first refusal is essentially a dormant option. A.G.E., Inc. v. Buford, 105 S.W.3d 667, 673 (Tex. App.--Austin 2003, pet. denied). It requires the owner, before selling the property to another, to offer the property to the rightholder on the same terms or conditions specified in the offer by or to a bona fide purchaser. See Tenneco, Inc., 925 S.W.2d at 644; City of Brownsville, 192 S.W.3d at 880. The property owner has an initial duty to make a reasonable disclosure of the offer's terms. McMillan v. Dooley, 144 S.W.3d 159, 174 (Tex. App.--Eastland 2004, pet. denied). When the property owner expresses its intention to sell, the rightholder must, in compliance with the terms of the right, elect to either purchase the property or decline to purchase it and allow the owner to sell it to another. See Buford, 105 S.W.3d at 673.

A purchaser from a seller who has given a right of first refusal to buy takes the property subject to that right. See Sanchez, 551 S.W.2d at 485. A transfer in violation of the preemptive right is equivalent to a declaration by the owner that he intends to sell the property. Martin v. Lott, 482 S.W.2d 917, 922 (Tex. Civ. App.--Dallas 1972, no writ). Consequently, when the rightholder learns of a sale in violation of his right, he again has the opportunity to elect to purchase or decline to purchase within the time frame specified in the contract creating the right of first refusal. See Buford, 105 S.W.3d at 673. The rightholder does not have a duty to act in order to exercise his preferential purchase right unless and until he receives a reasonable disclosure of the terms of the sale. See McMillan, 144 S.W.3d at 174. The new property owner has a duty to make reasonable disclosure of the terms of the purchase to the rightholder. See Buford, 105 S.W.3d at 673.

Where a defendant has openly and avowedly refused to perform his part of the contract or declared his intention not to perform it, the rightholder need not make tender of payment of the consideration before bringing suit. See Chambers v. Hunt Petroleum Corp., 320 S.W.3d 578, 583 (Tex. App.--Tyler 2010, no pet.). Moreover, a tender of consideration is excused where the property owner intentionally avoids giving the rightholder an opportunity of making it. Id.

Here, Smith failed to comply with the option agreement by not informing Jarvis of Peltier's offer and then selling the property to Peltier. Once Jarvis learned of the sale, which was approximately two years after it was completed, he contacted Peltier and Smith in an attempt to learn the terms of the sale and exercise his right of first refusal. Neither Peltier nor Smith provided Jarvis with the information he requested, and he filed suit against them. Ultimately, Jarvis learned the terms of the sale by conducting discovery in his suit.

Nevertheless, Peltier and Smith argue that Jarvis is not entitled to enforce his right of first refusal because he did not exercise it within thirty days after he learned of the sale. They assert that Jarvis's right matured into an enforceable option once he learned of the sale and that he was then required to act in strict compliance with its terms. However, upon learning of the sale, Jarvis was unable to obtain reasonable disclosure of the terms under which Peltier purchased the property. Therefore, he was prevented from exercising his right of first refusal within thirty days after he learned of the sale. See Chambers, 320 S.W.3d at 583. This excused his failure to act. See id.Accordingly, we hold that Peltier and Smith did not establish their right to summary judgment on their affirmative defense that Jarvis failed to comply with the option agreement. Thus, summary judgment in their favor on that ground was improper.

 

Our Friendly Staff
Is Ready to Answer
Your Questions!

Email Us

* Denotes required field
To: The Mundy Firm PLLC

From (email)*:


Dear The Mundy Firm PLLC,
Hello, my name* is and I am interested in scheduling an appointment with you and would like to receive information about .
Please call me at at your earliest convenience.

Expand to Personalize Your Message


"