Van Dam v. Spickler , 2009 ME 36, is a decision which casts some light upon the rights and duties attendant upon a right-of-first-refusal of real estate. This article first discusses what the case holds, and then sets forth some specific drafting recommendations for rights-of-first-refusal.
Although the duty to offer the property to the holder of the right-of-first-refusal is a duty of the seller, not the buyer, a purchaser who buys with knowledge of the existence of a right-of-first-refusal is not a bona fide purchaser and is subject to the possibility of a decree of specific performance. Van Dam, supra at ¶ 17.
The Law Court makes the distinction between a right-of-first-refusal and an option, by pointing out that generally, the "holder of a right-of-first-refusal on a piece of land only has the right to receive an offer to buy the land." … A right-of-first-refusal is therefore distinguishable from an option, which gives the option-holder the "power to make a contract solely by calling upon the owner to perform." (citations omitted).¶ 19. However, the court goes on to say that a right-of-first-refusal "ripens" into an option once an owner receives an offer and makes a good-faith decision to accept it. Furthermore, an owner who transfers property to a third party in violation of a right-of-first-refusal creates "an enforceable option in the rightholder." (citations omitted) ¶ 20.
When a transfer of property in violation of a right-of-first-refusal gives rise to an enforceable option, the option "is not perpetual and the rightholder must choose between exercising it or acquiescing in the transfer of property." (citations omitted) ¶21; but in determining whether or not to exercise an option, the option-holder must have "enough information about the terms of the . . . deal to make an informed choice about purchasing . . . on those terms." Initially, the new property owner must make a "reasonable disclosure of the terms of the purchase to the rightholder." However, once a reasonable disclosure is made, the "rightholder has a subsequent duty to undertake a ‘reasonable’ investigation of any terms unclear to him." The power of acceptance lapses after a reasonable time. (citations omitted) ¶21.
Interestingly, none of this discussion by the court seems to have been undertaken with the citation of the court’s earlier decision in DiPietro v. Boynton, 628 A.2d 1019, 1023 (Me. 1993) that an option does not create any interest in land, but "is nothing more than an irrevocable and continuing offer to sell, and conveys no interest in land to the optionee, but vests in him only a right in personam to buy at his election. At best it is but an irrevocable right or privilege of purchase and does not come within" the statute of frauds…" (A decision cited by Justice Levy himself in Macomber v. Macquinn-Tweedie, 2003 ME 121). The analysis in Van Dam is based upon documents that are recorded in the registry of deeds. Justice Levy’s discussion certainly sounds as though he is speaking in terms of interests — albeit equitable interests — in land.
Another point worth pondering is that because this right-of-first-refusal was not time-limited, it was possible that the creation of the rights could have violated the rule against perpetuities. This issue, although raised in the Superior Court, was not discussed by the Law Court.
Moving ahead to the issue of drafting, what should we take away from the Van Dam case in drafting a right-of-first-refusal?
1. Be clear as to whether the right-of-first-refusal gives the right to buy (a) at the same price; or (b) upon the same terms. The credit one might extend to one person may not be the same credit one will extend to others. Taking a mortgage back from one person without a personal guaranty may not offer the same security as a mortgage without a personal guaranty from another person.
2. Spell out just what information must be provided by the owner/seller when he has an offer he intends to accept. The more specific the information is, the more confident can the buyer be that the terms of the right-of-first-refusal have been complied with prior to the conveyance.
3. The specific information set forth in the right-of-first-refusal to be provided by the owner/seller should be acknowledged by the holder of the right-of-first-refusal to be sufficient to enable the holder of the right-of-first-refusal to make an informed choice about whether to exercise his or her rights.
4. Set a firm time limit after the provision of the specific information after which the right-of-first-refusal will have expired.
5. Upon closing, a buyer needs to obtain assurance that the holder of the right-of-first-refusal has not exercised his or her option. This can be done in a number of ways.
6. The burden of notifying the seller/owner of a change of address of the holder of the right-of-first-refusal should be placed firmly on the holder of the right-of-first-refusal.
7. Imposing a time limit upon the right-of-first-refusal can help avoid the assertion of a defense of the Rule against Perpetuities. This can be true of long-term options as well.
The best way to make the interesting discussion by the Law Court in Van Dam irrelevant is to properly draft rights-of-first-refusal.
