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Option vs. Right of First Refusal

Apr 13, 2014

Posted by

Chip Misko

Chip is co-managing partner of the St. Louis office of the law firm, Stinson Morrison Hecker, LLP. He currently provides counsel to a number of publicly and privately held businesses, assisting on a r Read more

Missouri courts have given us a little clearer meaning of the difference between an option to purchase real estate and a right of first refusal to purchase real estate in the case of Anderson v. Parker, et al., (Missouri Court of Appeals, Western District, No. WD 72431).

In 1979, the Riley brothers, John, James and Camden, owned approximately 115 acres of real property in Kansas City. On the property was a house and a stone barn. The Andersons sought to buy the house and the stone barn on an area comprised of about 6 acres of real property, but the Riley brothers were only interested in selling the house with about 3½ acres, and not the stone barn. In June, 1979, the Riley brothers and the Andersons entered into a contract for the sale of an approximately 3½ acre tract which included the house. On the same day, the Andersons and the Riley brothers entered into a side agreement which provided, "It is agreed that in the event additional acreage is disposed of involving the area between the existing house and the stone barn, including the stone barn, that James Anderson and his wife (Rose Mary) will have first option to purchase this area (approximately 2 to 2½ acres) at a cost deemed fair by a competent appraiser" (hereinafter, the "Agreement").

Over the ensuing years, Mrs. Anderson would from time to time reiterate her interest in buying the stone barn and would remind the Rileys about the Agreement.

The last of the Riley brothers died in 2004. In 2004, Patricia Parker, the daughter of Camden Riley, sold the rest of the Riley property to a real estate development company for $20,000 per acre, or approximately $2.3 million dollars. Mrs. Riley did not inform the Andersons about the sale of the property to the developer, and did not tell the developer about the Agreement, even though she was aware of it. Mrs. Parker did not offer to sell any of the Riley property to the Andersons prior to the sale to the developer.

The Andersons sued for breach of contract and fraud. The jury returned a verdict in favor of the Andersons against Mrs. Riley individually for fraud, and the trial court entered judgment accordingly. Thereafter, Defendants filed a motion for judgment notwithstanding the verdict, or alternatively, for a new trial, and the trial court granted defendants' motion for the following reasons: (1) the Agreement did not adequately provide a description of the real estate; (2) the Agreement did not adequately describe a price and did not recite consideration; (3) the Agreement did not bind anyone other than the three brothers who were signatories and was not binding on their heirs, successors or assigns; (4) the Agreement was not binding on the defendants; (5) if the Agreement was anything other than the personal promise of the brothers, it violated the rule against perpetuities; (6) the plaintiffs did not prove the damages awarded; (7) Mrs. Parker did not make any actionable statements or representations to the plaintiffs; and (8) plaintiffs did not sustain any damages as a result of any representation by Mrs. Parker. The Andersons appealed.

The court briefly described the difference between an option and a right of first refusal:

"A true option creates in the optionee a power to compel the owner of property to sell it at a stipulated price whether or not he is willing to part with ownership. On the other hand, a right of first refusal, or preemptive right, requires the seller, when and if he decides to sell the stipulated piece of property, to first offer the property to the holder of the right, either at the stipulated price or at a price and on the terms the seller is willing to sell…. The preemptive right is merely contingent until the owner arrives at a decision to sell the property, at which point the preemptive right ripens into a full option…. The person holding the right of first refusal or preemption cannot compel an unwilling seller to sell…. Rather, once the seller chooses to sell, the holder of the preemption has the option of purchasing the property in accordance with the agreement."

The court found that the Andersons were given a preemptive right to purchase the additional property. However, the court also found that a preemptive right that does not specifically provide that it is binding on the heirs and assigns of the parties, and does not indicate an intent that it survive beyond the lifetime of the parties, is personal to the parties, and expires on their death.

In this instance, the right of first refusal did not specifically provide that it was binding on the heirs or assigns of the parties. This indicated to the court that the signatories to the Agreement, the Riley brothers and the Andersons, intended that the preemptive right be personal to the Riley brothers and the Andersons only. The Agreement, therefore, was a personal one that expired on the death of the last of the Riley brothers, and could not be enforced against heirs or assigns.

This case is important for two reasons. First, the court once again clearly delineated the difference between a purchase option, and a right of first refusal to purchase. Second, parties should be aware that if they enter into an option or a right of first refusal, and intend that it be binding past the deaths of the parties in interest, the agreement must specifically provide for that.

Before entering into a contract which contains either a purchase option, or a right of first refusal to purchase, we recommend that you seek advice of your counsel.