Right of first refusal in real estate contract is personal to buyer

by Gary Taylor

Malone et al. v. Flattery et al.
(Iowa Court of Appeals, February 9, 2011)

In 1993, the Flatterys entered into a contract to sell their farmland to Stanek Cattle Company.  Under the terms of the contract, the Flatterys retained the acre of land on which the house was located, and Stanek acquired a right of first refusal to that one-acre tract.  In 1996 the Flatterys executed a warranty deed to Stanek transferring title in satisfaction of the real estate contract.  One year later, in March 1997, Stanek transferred the farmland William and Sharon Malone.  Stanek’s warranty deed stated the farmland was being transferred, along with the “right of first refusal to purchase the [homestead] on the terms provided in the contract [between the Flattery’s and Stanek].”  The Flatterys eventually transferred the one-acre homestead by warranty deed to the Cralls in 2004.  Then on May 14, 2009, the Malones filed a petition against the Flatterys, their children, and the Cralls. Their petition sought to rescind the deeds transferring the homestead, to quiet title to the homestead, and to enforce the right of first refusal through specific performance by allowing them to purchase the homestead.  Following a hearing and briefing, the district court granted summary judgment in favor of the Flatterys, their children, and the Cralls. The court held that rights of first refusal were presumed personal unless express language confirmed an intent to the contrary. Referencing language that had been included in the original contract  that gave Stanek an easement over the one-acre parcel, and made that easement “binding on the Sellers’ and Buyer’s personal representatives, distributes, heirs, successors, transferees and assigns.” the court determined “these parties were aware of what language to use in order to make the right of first refusal transferable to a subsequent … owner.”

“Is a right of first refusal in a real estate contract freely assignable, or is it personal to the party who contracts for it unless stated otherwise?”  The Court of Appeals recognized the issue as one never before addressed by Iowa courts. After consulting legal treatises and judicial opinions from other states, the Court of Appeals agreed with the district court and concluded that the right of first refusal is presumed to be personal and is not ordinarily construed as assignable unless there is clear language in the contract showing the parties intended the right be assignable.  The court drew a distinction between a right of first refusal and an option to purchase (which may be assigned absent specific language to the contrary).  “Options generally have a value that can be ascertained; rights of first refusal may not. Because [a right of first refusal’s] very indefiniteness can impede the marketability of real estate, it is logical to construe them narrowly.”

The court could not construe the contract between the Flatterys and the Staneks as containing an intent to permit the assignment of the the right of first refusal.  Accordingly, the Court of Appeals affirmed the district court’s grant of summary judgment in favor of the Flatterys.

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