Is a right of first refusal (ROFR) always a good thing?
No. Many property owners have found out through bitter experience that a ROFR granting another party first dibs to purchase the property can become a big hindrance.
We’ve covered the pros and cons of granting a ROFR to a potential buyer in a previous blog. One big potential drawback for the property owner/potential seller is unreasonable restraint on his or her “power of alienation,” that is, the property owner’s power to freely dispose of the property through sale or transfer.
This was the core issue in the South Carolina Court of Appeals case Crescent Homes SC, LLC v. CJN, LLC (2024) (read it here), which we’ll go into below. It’s an important case that reinforces the need for clear, precise terms for an enforceable ROFR and demonstrates just what can happen when an ROFR becomes an “unreasonable” restraint.
Restraint on the Power of Alienation: Brief Background of the Crescent Case
The Agreement: Develop and Build Lots for Homes
CJN, LLC bought and developed property. Crescent Homes, LLC was a homebuilder.
In 2018, the two parties entered into an agreement (the Agreement) under which CJN would develop 32 lots in Greenville County and sell them to Crescent to build homes on. This was referred to as “Phase 1.” In “Phase 2,” aka “Future Phase,” the plan was for CJN to develop more lots. Crescent would have the right of first refusal to buy those lots.
The Agreement did not contain any specifics on the ROFR, such as price or procedure, and only stated that “A memorandum of such right of first refusal in a form reasonabl[y] acceptable to the Parties will be recorded in the public records of Greenville County at the Initial Closing.” Such a memorandum was never written or recorded with the County, as the parties could not agree on terms.
Third-Party Offers and Crescent’s Response
The project moved slowly, and while Phase 1 was still in progress, CJN received two separate offers to purchase the Phase 2 property. One was for $775,000 in June 2020, and the other was for $1.25 million in April 2021.
Crescent did not accept or refuse either offer. Crescent argued that it was under no obligation to accept or refuse the first offer, as it was made before the Initial Closing (which took place soon after in August 2020). In response to the second offer, Crescent said the ROFR was not triggered because it was not a bona fide offer. Crescent also filed lis pendens (public notice of a lawsuit affecting real property) after each offer.
Still, CJN attempted to find a buyer, listing the property on MLS and the commercial property listing website Costar in May 2021.
Legal Proceedings in Crescent
For details on the various complaints, motions, and lawsuits filed in this case starting in 2019, refer to the court’s opinion. Here we’ll cover only what’s pertinent to our discussion.
In 2021, CJN sought a declaration that the ROFR was void and unenforceable. The master denied Crescent’s motion to dismiss and issued an order determining the ROFR was unenforceable as it constituted an unreasonable restraint on the alienation of an interest in land.
This appeal followed.
Issue 1: Ripeness
First the appeals court addresses the issue of ripeness, or whether the matter was ready to be litigated when the master made his decision.
Crescent argued that the master erred in ruling on the enforceability of the ROFR, as the matter was not yet “ripe” since there were no pending offers on the Phase 2 property at the time. Crescent argued that since the two previous offers had been withdrawn before trial, there was no justiciable controversy.
The appeals court disagreed.
A justiciable controversy must be real and concrete, not hypothetical. The two offers on the Phase 2 Property were real, even if they were no longer pending at the time Crescent took legal action. The court cites previous cases, including Peoples Federal (1989), that found an offer does not need to be pending, saying, “Once a bona fide offer has been made the matter is ripe.” Additionally, CJN listed the property online for sale, which the court says can be interpreted as an offer for sale.
Issue 2: Unreasonable Restraint on Alienation
Next, the appeals court address the main issue: Did Crescent’s failure to either exercise or refuse the ROFR constitute an unreasonable restraint on CJN’s power of alienation?
A restraint on alienation does not automatically make a ROFR void; the question is whether such a restraint is “reasonable” or “unreasonable.” The appeals court cites Clarke v. Fine Housing, Inc. (2023) (read a summary on our blog here) in which the SC Supreme Court examined three factors:
- The clarity of what is encumbered;
- The price; and
- The procedures to exercise the right
While Crescent argued that the lack of specific terms meant the ROFR was not an unreasonable restraint, the exact opposite is true. Looking again at the three factors:
- Clarity of encumbrance: The ROFR was not clear about what property it encumbered, as it only mentioned “lots,” but the “lots” did not yet exist
- Price: The ROFR contained no specifics on price or how to arrive at a price
- Procedures: The ROFR contained no specifics on procedures
The appeals court affirmed the master’s decision, finding that all three factors support the conclusion that the ROFR did constitute an unreasonable restraint on alienation.
Issue 3: Evidence of the Parties’ Conduct and Intent
Finally, the court considers Crescent’s argument regarding the parties’ conduct and intent. Crescent argued that the master should have looked beyond the Agreement itself to the parties’ conduct to supply the missing terms of the ROFR. Even if those terms were not written down on paper, Crescent argues that both parties agreed on some of the basic terms of the ROFR, and the master should have considered that.
The appeals court did not find this argument valid and disagreed with Crescent, again affirming the master’s finding.
Do You Know What You’re Agreeing To?
The ruling is great news for CJN, who can now sell the property on the free market or otherwise dispose of it without restraint. However, CJN could have avoided all the years, stress, and expense of litigation by either 1. not including a ROFR in their agreement with Crescent at all, or 2. drafting a clear, enforceable ROFR in the first place.
Whether you’re the property owner or the potential buyer, you need someone looking out for your best interests with extensive experience. Gem McDowell has over 30 years practicing law in South Carolina and has handled everything from drafting simple deeds to handling multi-million-dollar commercial real estate transactions. He and his team at the Gem McDowell Law Group can help you draft an agreement that’s favorable to you, or review and explain an existing agreement before you sign, and much more.
Schedule your free consultation today by calling (843) 284-1021.
