When You Can’t Sell Your Own Property: ROFRs and the Power of Alienation
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.
Seller Beware: Think Twice Before Granting the Right of First Refusal (ROFR)
Is it smart to include a right of first refusal (ROFR) clause in a contract? Not always.
If you’re the property owner/potential seller, think twice before including a ROFR in your contract. The ROFR tends to favor the potential buyer while restraining the seller.
Below, we’ll look at what you, as a property owner, should know about the pros and cons of ROFRs, and what makes a ROFR enforceable in South Carolina.
Pros and Cons of the Right of First Refusal (ROFR) for Property Owners/Sellers
We’ve previously covered the basics of the right of first refusal in South Carolina and some of the pros and cons of including one in an agreement. Here’s a quick recap:
The upsides of a ROFR are clear for potential buyers. They get “first dibs” on buying property when it comes up for sale, giving them the opportunity but not the obligation to purchase it.
Property owners, instead, have the obligation to offer the property to the ROFR holder first* without the guarantee the sale will go through, and with a strong possibility that if it does, the final sales price will be lower than what could have been gotten on the free market. For these reasons, a property owner should not automatically agree to a ROFR clause.
* Note that South Carolina courts in recent decisions have not differentiated between the “right of first refusal” and “right of first offer,” and the discussion of ROFR here also includes rights typical of the ROFO.
Here are primary pros and cons from the property owner’s perspective:
Pros:
- Having a pre-agreed terms and a potential buyer already lined up could save property owner time, money, and effort when it comes time to sell
- Terms of the ROFR could ensure the property does not sell below market value
Cons:
- Keeps property owner locked into terms that were likely determined months or years ago, which may no longer be favorable
- Often deters third-party bids, which can result in a lower final sales price
- Can restrain the owner from selling or disposing of the property entirely
To this last point: A ROFR can act as an unreasonable restraint on the property owner’s “power of alienation” (aka right of alienation), or ability to freely dispose of the property, effectively preventing its sale or transfer altogether. This is the core issue in the 2024 SC Court of Appeals case Crescent Homes SC, LLC v. CJN, LLC. Read more about that case and the court’s decision here on our blog.
Enforceability of Right of First Refusal (ROFR) Clauses in South Carolina
South Carolina courts have routinely ruled that a ROFR is enforceable only when drafted with clear, precise terms that impose reasonable restraints on all parties. In the 2023 case Clarke v. Fine Housing, Inc., the SC Supreme Court laid out criteria for an enforceable ROFR.
An enforceable ROFR should include:
- Clear description of the property being encumbered by the right
- Terms on price
- A fixed-dollar sales price, OR
- A clear formula to determine a sales price
- Terms on procedure
- What event triggers the ROFR
- How notice is given
- How long the ROFR holder has to respond
- What happens if the ROFR holder declines to exercise the right
- The duration of the right
A few things to consider about the duration of the right:
We rarely set forth ROFRs in contracts we draft for our clients here in our practice, but when we do, we make the price extremely clear and always include an expiration date and time, e.g., “This right expires at 11:50 pm ET on December 31, 2026.” An earlier expiration date is generally better for the property owner/potential seller.
If you are the potential buyer, a later expiration date – or none at all – is better for you. Now you can include a ROFR of “perpetual” duration, since the Supreme Court of South Carolina’s January 2026 ruling in the Spring Valley Interests case has conclusively affirmed that the Rule Against Perpetuities (RAP) does not apply to nondonative commercial transfers in South Carolina. This must be explicitly stated in the terms of the agreement for it to be enforceable. (Read more about the Spring Valley case and the RAP here on our blog.) If you are the property owner/potential seller, it’s in your best interest to avoid granting such a right to another party.
Should You Skip the Right of First Refusal Altogether?
If you are the potential buyer, you may benefit from agreeing to a ROFR with favorable terms on price and procedure.
But if you’re the property owner/potential seller, you should strongly consider skipping it, for all the reasons explained above. The benefits, which are small and uncertain to begin with, don’t outweigh the potential downsides, in our experience. If you do want or need to include a ROFR, make sure it’s drafted by an experienced corporate and commercial real estate attorney like Gem McDowell.
For help drafting, revising, or reviewing corporate and commercial real estate documents, call Gem. Gem help business professionals grow their businesses, avoid mistakes, and protect their interests. Gem and his team at the Gem McDowell Law Group serve business owners and professionals across the state from offices in Myrtle Beach and Mount Pleasant, SC. Call today at 843-248-1021 to schedule your free consultation.
What is a Right of First Refusal and When Is It Enforceable?
The right of first refusal sounds simple on the surface. A right of first refusal (ROFR) gives the right-holder the opportunity to enter into a business transaction with another party before anyone else. It’s most commonly seen in real estate contracts, such as when a lessor signs a contract giving them the ROFR to put in an offer to purchase the property if it ever comes up for sale.
But as straightforward as it sounds on paper, it’s not always so straightforward in the real world. Contracts that include an ROFR must be clear and detailed in order to be enforceable.
The Supreme Court of South Carolina addressed this issue in the 2023 case Clarke v. Fine Housing, Inc. (here). We’ll look at the factors required for an enforceable right of first refusal in South Carolina and how they played out in this recent case.
The Pros and Cons of a Right of First Refusal
An ROFR can benefit both parties. In the example of a lessor with the ROFR to purchase the property, if and when it comes up for sale, they can be sure not to miss out on the opportunity to put in an offer. There’s no downside for the potential buyer; if they don’t want to buy the property, they simply refuse.
The property owner can benefit by having a potential buyer already lined up when it’s time to sell, which may help them in negotiations with other potential buyers. However, the downside for the property owner is that a ROFR can restrict their power of alienation, which is their ability to dispose of property.
“South Carolina law prohibits enforcement of unreasonable restraints on alienation of real property,” the court says in the Clarke opinion. The key word here is “unreasonable.” Whether a particular ROFR is enforceable depends on whether the restraints on alienation are considered unreasonable.
Unreasonable Restraints on Alienation of Property: What is Unreasonable?
In the Clarke opinion, the SC Supreme Court turns to the Restatement (Third) of Property. The Restatements of the Law (Third) are a comprehensive set of legal treatises widely referenced and relied upon by courts, judges, lawyers, and others across the U.S. On the subject of the ROFR, it says, “Reasonableness is determined by weighing the utility of the restraint against the injurious consequences of enforcing the restraint.”
The Supreme Court of South Carolina uses the factors listed in the Restatement (Third) of Property (Comment f) to determine, on a case-by-case basis, whether a right of first refusal is enforceable. The factors are:
- The legitimacy of the purpose of the right,
- The price at which the right may be exercised, and
- The procedures for exercising the right
These factors are not exclusive.
Let’s look at each one of the factors and how they figure into the Clarke case.
Background of Clarke v Fine Housing (2023)
First, the pertinent background of 2023 Supreme Court of South Carolina case Clarke v. Fine Housing, Inc.: Barry Clarke owned a strip club in Charleston. In 1999, he entered into a lease agreement with the owners of another strip club across the street to use part of their unimproved land for parking. The lease contained the following language:
- Section 5.2. Right of First Refusal: Lessor grants the Lessee the right of first refusal should it wish to sell.
Note that there’s no mention of price, timing, how to exercise the right, or any other specifics – not even which property this right of first refusal applies to.
In 2013, then-owner RRJR conveyed the property in question to Fine Housing, Inc. Clarke learned of the sale in 2014 after it was a done deal, having had no opportunity to exercise what he believed to be his enforceable right of first refusal (Right).
In 2015, Clarke brought this action for specific performance against Fine Housing and RRJR. The case eventually came before the Supreme Court of South Carolina, which agreed with the SC Court of Appeals that the Right was not enforceable because it constituted an unreasonable restraint on alienation.
Factors for an Enforceable Right of First Refusal
Here are the three factors the Supreme Court of South Carolina uses to determine enforceability of a right of first refusal on a case-by-case basis and how they show up in Clarke.
Factor 1: Legitimacy
In Clarke, Fine Housing didn’t challenge the legitimacy of the purpose of the Right, so the court didn’t address the issue.
Factor 2: Price
Price may or may not be an unreasonable restraint on alienation. If, for example, the ROFR were dependent on a fixed price, that could restrain alienation. If the price were to be matched to a third party’s offer, there would be less restraint.
In Clarke, Clarke argued that the Right left the price to be determined entirely by RRJR and required him to match any offer from a third party. He also argued that exercising the Right would have started a bidding war that would have benefitted RRJR.
The court agreed with Fine Housing that the absence of any method for determining the purchase price in the lease constituted an unreasonable restraint on alienation. Absence of specifics on how to determine price may not be as restraining as a fixed price, says the court, but it is still a restraint, and “a right of first refusal should contain some method for determining the price at which it may be exercised.” The lease Clarke signed had no method, and therefore this factor worked against him.
Factor 3: Procedures governing the exercise of the right
Comment f to the Restatement stresses the importance of provisions governing the exercise of the right, stating, “Lack of clarity may cause substantial harm by making it difficult to obtain financing and exposing potential buyers to threats of litigation. Lengthy periods for exercise of rights of first refusal will also substantially affect alienability of the property.”
Time is also an important consideration. How soon after the owner decides to sell does the right holder have to exercise their right? An extended period of time can be a restraint on the property owner, while a “reasonable” time frame does not impose unreasonable restraint and is generally enforceable.
In Clarke, Clarke argued that a ROFR does not require detailed instructions on how to exercise it to be valid, but this directly contradicts the Restatement (Third) of Property. He also argued that the lease provided satisfactory procedures regarding the exercise of the right. The court disagreed “because the Right contains no such procedures whatsoever.”
As for timing, Clarke argued that if there’s no mention of a timeline in the language of the agreement, then it must be done within a “reasonable time.” The court disagreed, saying that the point of the Restatement is to include a predetermined time limit so as to protect the property owner’s power of alienation, rather than having the owner rely on a “judicially implied ‘reasonable time.’”
Because of the total lack of provisions regarding timing and procedures on how to exercise the Right, the court found again in favor of restraint on alienation.
Additionally: Which Property?
The court also addressed a matter specific to Clarke: to which property did the Right ostensibly apply? The entire property that includes the unimproved land Clarke leased for parking, or the unimproved land only?
Clarke argued that the Right applied to the entire property, but the court disagreed because the language in the lease was not clear. That uncertainty constitutes an additional unreasonable restraint on alienation.
Takeaway: Rely on Clear, Specific Contracts
The SC Supreme Court affirmed the appeals court’s decision, finding in favor of Fine Housing and against Clarke, stating “The Right does not identify the property it encumbers, contain price provisions, or contain procedures governing the exercise of the Right. We conclude the Right is an unreasonable restraint on alienation. We therefore affirm the court of appeals’ holding that the Right is unenforceable.”
An important takeaway for anyone entering into a contract with a right of first refusal in South Carolina: Make sure the language in your contact is clear and specific and that it addresses the three factors discussed above. It must contain language on how the price should be determined and how the right should be exercised. Language that unreasonably restrains the property owner’s power of alienation may render it unenforceable, so the right cannot be construed too favorably to the would-be buyer.
Call Gem McDowell for Contracts, Strategic Business Advice, and Commercial Real Estate
Many legal disputes come down to the language in a contract. Is it clear? Is it enforceable? Would the courts side with you if the matter were ultimately litigated? It’s critical to get the contract right before signing it, so you lessen the chances of complications and litigation down the road.
For help with business contracts and commercial real estate, call business attorney Gem McDowell at the Gem McDowell Law Group. Gem has over 30 years of experience working with business owners to help them start, grow, and protect their businesses. He and his team can help you with contracts, corporate governance documents, strategic advice, and more. He also has extensive experience in commercial real estate transactions in South Carolina. Call the Gem McDowell Law Group today to schedule a free consultation at 843-284-1021.
