O owns Greenacre, an unimproved tract of land that O plans to turn into a residential subdivision. O and A enter into a contract that provides: “If O shall ever decide to sell Greenacre, then A shall have the right of first refusal at the prevailing market price.” O records this contract in the appropriate public records office as required by law.
O has formally asked a nearby town to annex Greenacre, which would give the subdivision residents access to desirable municipal water, police, and fire services. Annexation requires approval by a majority of the members of the town council. More than half of the council members have told O informally that they will approve the annexation when it is time to vote. However, there is no deadline by which the town must act, and the council members’ informal discussions with O are not binding on the town.
A buyer, B, wants to purchase a lot in the subdivision, but only if the subdivision is annexed. O and B therefore enter into a contract that provides: “B shall have the right to purchase Lot #2 in the subdivision within 60 days of the annexation of the subdivision by the town.” B records this contract in the appropriate public records office as required by law.
Before the annexation can be approved, O dies, leaving Greenacre to C. The town council indefinitely suspends action on the annexation. Immediately, C puts Greenacre up for sale. C believes that Greenacre is worth more as a commercial development than as a residential subdivision, and C wants to clear the title to Greenacre to get the best price. Accordingly, C notifies B that C is cancelling B’s option to buy. B does not agree to this idea, but does offer to release the option in exchange for a monetary payment. C refuses.
Shortly afterward, C receives an offer from X to buy Greenacre for its fair market value of $1,000,000. Upon learning of this offer, A seeks to exercise A’s option to buy Greenacre by tendering $1,000,000 to C. However, C and X are friends, and C does not want to sell Greenacre to A.
C then seeks legal advice regarding C’s obligations to A and to B.
The applicable law regards rights of first refusal as nontransferable. The applicable law regards options to buy real property as transferable. The applicable law also recognizes the cy pres doctrine as applied to the Rule Against Perpetuities.
- Does A’s right of first refusal violate the Rule Against Perpetuities? Explain.
- Is A’s right of first refusal an unlawful restraint on alienation? Explain.
- Does B’s option to buy violate the Rule Against Perpetuities? Explain.