In the Spotlight: Outparcels and Rights of First Refusal

The right of first refusal stated in part that the Chapmans would have the “first right of refusal to match any future offers on the approximately 20 acres of irrigated farm land that was part of the original 40 acre tract with the farm house.” The court held that there was no offer on the ROFR Tract because there was no offer at a fixed price for the ROFR tract alone and, therefore, the Chapmans had no occasion to exercise their right of first refusal. The court enjoined Mutual from selling the ROFR Tract until it received an offer for the burdened land unrelated to the sale of any other property.

Wilber Lime Products, Inc. v. Ahrndt

Other courts, however, have held that a package deal activates a right of first refusal, and have either granted specific performance of the burdened parcel or specific performance of the entire parcel. In Wilber Lime Products, Inc. v. Ahrndt, 673 N.W.2d 339 (Wisc. 2003), Wilber Lime held a right of first refusal to purchase 25 acres of a 180-acre tract of land owned by Ahrndt. The right of first refusal granted “unto Lessee the Right of First Refusal to purchase any of the lands herein described for an amount equal to any bona fide written offer to purchase tendered to owner by a third party.” When Ahrndt died, the entire 180-acre farm, including Wilber Lime's 25 acres, was sold to a third party without notice to Wilber Lime. The latter filed suit, and the court held that the sale of the 180-acre tract triggered Wilber Lime's right of first refusal to the 25 acres. The court granted Wilber Lime specific performance as to the 25-acre tract alone, reasoning that Wilber Lime expected to be offered the opportunity to purchase the 25 acres, regardless of whether or not it was sold alone or together with additional property. The court remanded the case to the trial court to determine the fair market value of the 25-acre tract.

FWT, Inc. v. Haskin Wallace Mason Property Mgt., L.L.P.

In contrast, while holding that a package deal activated a right of first refusal, the court in FWT, Inc. v. Haskin Wallace Mason Property Mgt., L.L.P., 301 S.W.3d 787 (Tex. App. 2009), granted specific performance of the entire property. FWT sold Haskin Wallace approximately six acres of undeveloped real estate adjacent to FWT's plant. The deed conveying the six acres reserved a right of first refusal for such six acres in favor of FWT, which stated in part, “Grantor shall have 20 days after receipt of the notice in which to elect to purchase, lease or otherwise accept such conveyance, as the case may be, at the same price and under the same terms and conditions offered by the prospective purchaser.” Haskin Wallace operated a galvanizing plant on the property it purchased from FWT and decided to sell its galvanizing business. Haskin Wallace notified FWT that it had an offer from a purchaser for the assets of the galvanizing business, to lease the six acres for five years with two additional five-year options, and an option to purchase. FWT elected to exercise its right of first refusal to purchase the land, but Haskin Wallace claimed such purchase had to include the “bundle of assets” in order to exercise the right of first refusal properly. The deal never closed and litigation ensued.

The court in this case noted that the general rule is that a holder of a preferential right cannot be compelled to purchase assets beyond the scope of the agreement subject to the preferential right. However, the court found an exception to this rule when the preferential right is expressly made subject to the “same terms and conditions” offered by a prospective, bona fide, third-party purchaser. The court in this case relied heavily on the express language of the right of first refusal and held that because the preferential right provision clearly and unambiguously conditioned the exercise of the right of first refusal on FWT meeting the same price and the same terms and conditions as that offered by a prospective purchaser, FWT was required to meet those terms and conditions of the third-party offer. This included the conditions to purchase the business assets unless those conditions were not commercially reasonable, were imposed in bad faith or were specifically designed to defeat FWT's right of first refusal.

Specific Performance

The award of specific performance by the courts in such situations is not without criticism. Specific performance of the burdened parcel alone when the offer is made on additional property often creates valuation issues. It also may be unfair to the owner if the sale of the
burdened and unburdened property together will bring a greater price than the individual pieces would bring separately, or the remaining property is difficult to sell without the attached burdened property. Requiring specific performance of the entire parcel is also criticized as enlarging the right holder's bargained-for right. Another criticism of specific performance of the entire parcel is that it places too great a burden on the right holder, because she will only be able to exercise her right if she is willing and able to match a third party's offer for the whole property.

Avoiding Litigation

Parties can and should attempt to avoid the uncertainty of litigation by drafting a right of first refusal provision that directly addresses the package deal. For example, a right of first refusal provision may describe the property subject to the right of first refusal as being the leased premises either alone or together with up to five (5) acres of additional land (whether or not located adjacent to the leased premises). This language would prevent the owner from defeating the right of refusal by including a de minimis amount of additional property (e.g., an adjacent drive aisle or parking area), but also would avoid requiring the tenant to purchase an entire shopping center development. The right of first refusal should also be clear that if such right is not triggered because of a sale of the property together with more than five (5) acres, the right of first refusal shall continue to bind the successor owner. Rights of first refusal should also include the types of transfers that would not trigger the right of first refusal, such as sales of all the property owned by the grantor if the burdened parcel is part of a shopping center, sales of property in connection with the sale of all or substantially all of the assets of the owner or an affiliated operating company, and sales of multiple properties subject to a franchise.

Conclusion

As the foregoing cases demonstrate, where an outparcel is involved, and the grantor owns additional property, whether adjacent to the outparcel as part of a shopping center or otherwise, failing to address the package deal scenario at the drafting stage is likely to create uncertainty for our clients as well as undesired or not bargained for results.

Anne R. Kerns is an associate in the St. Louis, MO, office of Lewis, Rice & Fingersh, L.C. Ms. Kerns focuses primarily on commercial litigation with an emphasis on banking law and employment law.

Whether we are representing our clients in connection with drafting a right of first refusal or assisting them in exercising such a right, those rights of first refusal involving an outparcel deserve special consideration when the grantor of the right owns additional property. An example is when the grantor owns the shopping center of which the outparcel is only a part. Specifically, is the outparcel tenant's right of first refusal triggered when the owner receives an offer to purchase the entire shopping center, including the outparcel? If the right of first refusal is triggered, must the tenant exercise the purchase right as to the entire center, or may it carve out and purchase the outparcel only? Whether intentionally or unintentionally, the express language of most rights of first refusal do not directly address these questions, often leaving the courts to determine what effect, if any, this “package deal” has on the exercise of the right of first refusal. This article focuses on the different approaches taken by the courts to enforce rights of first refusal involving the package deal, and offers drafting suggestions to better address the parties' expectations.

Chapman v. Mutual Life Ins. Co.

In Chapman v. Mutual Life Ins. Co. , 800 P.2d 1147 (Wy. 1990) the Chapmans entered into a contract for deed for approximately 20 acres of land, which also gave them a right of first refusal to purchase an adjacent parcel of approximately 20 acres (the “ROFR Tract”). Mutual Life Insurance Company, the owner of the ROFR Tract, advertised for sale a large parcel of land broken into several tracts, including the ROFR Tract. Mutual received an offer to purchase 273 acres of the advertised real estate, including the ROFR Tract, and Mutual accepted the offer. The Chapmans were given the opportunity to exercise their right of first refusal, but the Chapmans and Mutual could not agree upon a price for the ROFR Tract. The Chapmans did not respond to Mutual's last offer, and instead filed suit. Two days later, Mutual informed the Chapmans that the original offer had been voided, that it believed that the Chapmans had failed to exercise their preemptive right, and that it decided it would market the ROFR Tract without any notice to the Chapmans.

The right of first refusal stated in part that the Chapmans would have the “first right of refusal to match any future offers on the approximately 20 acres of irrigated farm land that was part of the original 40 acre tract with the farm house.” The court held that there was no offer on the ROFR Tract because there was no offer at a fixed price for the ROFR tract alone and, therefore, the Chapmans had no occasion to exercise their right of first refusal. The court enjoined Mutual from selling the ROFR Tract until it received an offer for the burdened land unrelated to the sale of any other property.

Wilber Lime Products, Inc. v. Ahrndt

Other courts, however, have held that a package deal activates a right of first refusal, and have either granted specific performance of the burdened parcel or specific performance of the entire parcel. In Wilber Lime Products, Inc. v. Ahrndt , 673 N.W.2d 339 (Wisc. 2003), Wilber Lime held a right of first refusal to purchase 25 acres of a 180-acre tract of land owned by Ahrndt. The right of first refusal granted “unto Lessee the Right of First Refusal to purchase any of the lands herein described for an amount equal to any bona fide written offer to purchase tendered to owner by a third party.” When Ahrndt died, the entire 180-acre farm, including Wilber Lime's 25 acres, was sold to a third party without notice to Wilber Lime. The latter filed suit, and the court held that the sale of the 180-acre tract triggered Wilber Lime's right of first refusal to the 25 acres. The court granted Wilber Lime specific performance as to the 25-acre tract alone, reasoning that Wilber Lime expected to be offered the opportunity to purchase the 25 acres, regardless of whether or not it was sold alone or together with additional property. The court remanded the case to the trial court to determine the fair market value of the 25-acre tract.

FWT, Inc. v. Haskin Wallace Mason Property Mgt., L.L.P.

In contrast, while holding that a package deal activated a right of first refusal, the court in FWT, Inc. v. Haskin Wallace Mason Property Mgt., L.L.P. , 301 S.W.3d 787 (Tex. App. 2009), granted specific performance of the entire property. FWT sold Haskin Wallace approximately six acres of undeveloped real estate adjacent to FWT's plant. The deed conveying the six acres reserved a right of first refusal for such six acres in favor of FWT, which stated in part, “Grantor shall have 20 days after receipt of the notice in which to elect to purchase, lease or otherwise accept such conveyance, as the case may be, at the same price and under the same terms and conditions offered by the prospective purchaser.” Haskin Wallace operated a galvanizing plant on the property it purchased from FWT and decided to sell its galvanizing business. Haskin Wallace notified FWT that it had an offer from a purchaser for the assets of the galvanizing business, to lease the six acres for five years with two additional five-year options, and an option to purchase. FWT elected to exercise its right of first refusal to purchase the land, but Haskin Wallace claimed such purchase had to include the “bundle of assets” in order to exercise the right of first refusal properly. The deal never closed and litigation ensued.

The court in this case noted that the general rule is that a holder of a preferential right cannot be compelled to purchase assets beyond the scope of the agreement subject to the preferential right. However, the court found an exception to this rule when the preferential right is expressly made subject to the “same terms and conditions” offered by a prospective, bona fide, third-party purchaser. The court in this case relied heavily on the express language of the right of first refusal and held that because the preferential right provision clearly and unambiguously conditioned the exercise of the right of first refusal on FWT meeting the same price and the same terms and conditions as that offered by a prospective purchaser, FWT was required to meet those terms and conditions of the third-party offer. This included the conditions to purchase the business assets unless those conditions were not commercially reasonable, were imposed in bad faith or were specifically designed to defeat FWT's right of first refusal.

Specific Performance

The award of specific performance by the courts in such situations is not without criticism. Specific performance of the burdened parcel alone when the offer is made on additional property often creates valuation issues. It also may be unfair to the owner if the sale of the
burdened and unburdened property together will bring a greater price than the individual pieces would bring separately, or the remaining property is difficult to sell without the attached burdened property. Requiring specific performance of the entire parcel is also criticized as enlarging the right holder's bargained-for right. Another criticism of specific performance of the entire parcel is that it places too great a burden on the right holder, because she will only be able to exercise her right if she is willing and able to match a third party's offer for the whole property.

Avoiding Litigation

Parties can and should attempt to avoid the uncertainty of litigation by drafting a right of first refusal provision that directly addresses the package deal. For example, a right of first refusal provision may describe the property subject to the right of first refusal as being the leased premises either alone or together with up to five (5) acres of additional land (whether or not located adjacent to the leased premises). This language would prevent the owner from defeating the right of refusal by including a de minimis amount of additional property (e.g., an adjacent drive aisle or parking area), but also would avoid requiring the tenant to purchase an entire shopping center development. The right of first refusal should also be clear that if such right is not triggered because of a sale of the property together with more than five (5) acres, the right of first refusal shall continue to bind the successor owner. Rights of first refusal should also include the types of transfers that would not trigger the right of first refusal, such as sales of all the property owned by the grantor if the burdened parcel is part of a shopping center, sales of property in connection with the sale of all or substantially all of the assets of the owner or an affiliated operating company, and sales of multiple properties subject to a franchise.

Conclusion

As the foregoing cases demonstrate, where an outparcel is involved, and the grantor owns additional property, whether adjacent to the outparcel as part of a shopping center or otherwise, failing to address the package deal scenario at the drafting stage is likely to create uncertainty for our clients as well as undesired or not bargained for results.

Anne R. Kerns is an associate in the St. Louis, MO, office of Lewis, Rice & Fingersh, L.C. Ms. Kerns focuses primarily on commercial litigation with an emphasis on banking law and employment law.