New York Law Review

Tag: Right of First Refusal

  • Morrison v. Piper, 77 N.Y.2d 165 (1991): Right of First Refusal and the Rule Against Remote Vesting

    77 N.Y.2d 165 (1991)

    A right of first refusal in a deed conveying residential property is subject to the rule against remote vesting (EPTL 9-1.1[b]), but the presumption is that the creator intended the estate to be valid; therefore, courts should construe the instrument to avoid violating the rule if possible.

    Summary

    This case concerns whether a right of first refusal created in a deed between private parties violates New York’s rule against remote vesting. The Court of Appeals held that the rule generally applies to such rights, but that the specific right in this case did not violate the rule. The deed created mutual rights of first refusal between an aunt and nephew for adjacent residential parcels. The court emphasized that the right was explicitly limited to the lifetimes of the original parties, and subsequent language further restricted who could exercise the right. The Court reversed the lower court’s decision, stressing the presumption that the grantor intended a valid conveyance.

    Facts

    Lilian Maier conveyed a 2.3-acre parcel to her nephew, Robert Morrison, in 1977, retaining a contiguous 30-acre parcel. The deed created mutual rights of first refusal: Maier had the right to match any offer for Morrison’s land, and Morrison had the right to match any offer for Maier’s land. These rights were intended to bind the parties, their heirs, and assigns, but only during the life of the other party and those who directly took by gift or inheritance, continuing until the donees or beneficiaries conveyed the property or died. In 1979, Maier died, leaving her property to her sisters. In 1987, Owens and Whelehan (two of Maier’s sisters) received an offer from the Pipers to purchase their land. Morrison was not given the opportunity to exercise his right of first refusal, and the property was sold to the Pipers.

    Procedural History

    Morrison sued to enforce his right of first refusal. The Supreme Court denied Morrison’s summary judgment motion, holding that the preemptive right violated EPTL 9-1.1(b). The Appellate Division modified, granting summary judgment to the defendants, agreeing that the right contravened the rule against remote vesting. The Court of Appeals granted leave to appeal.

    Issue(s)

    Whether New York’s rule against remote vesting (EPTL 9-1.1[b]) applies to a right of first refusal created in a deed conveying noncommercial, residential property between private parties.

    Whether the specific right of first refusal in this case violates the rule against remote vesting.

    Holding

    Yes, the rule against remote vesting generally applies to such rights because the holder of a right of first refusal has an interest in land that vests, if at all, in the future.

    No, the specific right in this case does not violate the rule because the deed limited the rights to the lives of the original grantor and grantee, and the court must presume that the grantor intended the estate to be valid.

    Court’s Reasoning

    The Court acknowledged that while a right of first refusal differs from an option, both involve future interests in land that could vest beyond the permissible period. However, the Court distinguished this case from *Metropolitan Transp. Auth. v. Bruken Realty Corp.*, where it held that the rule against remote vesting did not apply to preemptive rights in a commercial context. The court emphasized that the *Bruken* exception was limited to commercial and governmental transactions serving a public interest, unlike the private residential transaction here. Because the parties to this transaction are individuals, the time limitations in EPTL 9-1.1(b) are relevant.

    Regarding the validity of the specific right, the Court noted EPTL 9-1.3(a), which directs that unless a contrary intention appears, it shall be presumed that the creator intended the estate to be valid. The Court interpreted the language of the deed as creating a right of first refusal limited to the lives of Morrison and Maier, with subsequent clauses merely restricting who could exercise that right to direct donees or beneficiaries. The Court reasoned that reading the deed as a whole demonstrated an intent to narrowly circumscribe the group of people permitted to exercise the right. By adopting the construction urged by defendants, the courts below did exactly what the statutory presumption was designed to prevent. The Court stated that “an instrument should not be interpreted as violating the rule against remote vesting ‘unless (it) shows beyond mistake that such was the intent.’” Given that the conveyance was between an aunt and nephew for adjacent property, the Court found it reasonable to limit exercise of the right to immediate family members. Therefore, the Court reversed, finding that the right of first refusal did not violate EPTL 9-1.1(b).

  • LIN Broadcasting Corp. v. Metromedia, Inc., 73 N.Y.2d 54 (1988): Revocability of First Refusal Offer After Third-Party Deal Fails

    LIN Broadcasting Corp. v. Metromedia, Inc., 73 N.Y.2d 54 (1988)

    A right of first refusal offer, triggered by a contract to sell to a third party, is revocable by the seller during the specified duration of the right if the third-party transaction is abandoned, unless the contract explicitly states otherwise.

    Summary

    LIN Broadcasting and Metromedia had agreements giving each other first refusal rights regarding the sale of their interests in cellular telephone ventures. When Metromedia contracted to sell assets, including these interests, to Southwestern Bell, it notified LIN of its first refusal rights. After negotiations, Metromedia and Bell amended their agreement, excluding the cellular interests. Metromedia then notified LIN that the first refusal offers were no longer valid. LIN attempted to exercise its first refusal rights. The court held that the offers were revocable because a right of first refusal does not create a binding option and the underlying third-party transaction had been abandoned. This case clarifies the distinction between a right of first refusal and an option, emphasizing that a first refusal offer is not irrevocable unless explicitly stated in the agreement.

    Facts

    LIN and Metromedia formed partnerships and corporations to provide cellular telephone service in New York City and Philadelphia. The New York agreement provided LIN a 45-day right of first refusal, and the Philadelphia agreement had a 10-day right to request appraisal of shares with 30 days to purchase at appraised value. In June 1986, Metromedia agreed to sell various assets, including its cellular interests, to Southwestern Bell for $1.65 billion, conditioned on waivers of first refusal rights. Metromedia notified LIN of the proposed sale and its first refusal rights. After some discussion and extensions, Metromedia and Bell amended their agreement in September 1986, with Metromedia retaining the cellular interests and reducing the purchase price by $453 million. Metromedia then notified LIN that the first refusal offers were no longer valid.

    Procedural History

    LIN sued Metromedia for specific performance to compel the sale of the New York interests and initiated a proceeding to expedite the appraisal of the Philadelphia interests. The trial court denied Metromedia’s motions to dismiss and granted LIN’s petition for appraisal. The Appellate Division reversed, concluding that neither agreement conferred an irrevocable right to compel a sale, and that Metromedia could change its mind about selling before the right of first refusal was invoked.

    Issue(s)

    Whether a contractual right of first refusal, triggered by a contract to sell to a third party, may be exercised during the specified duration of the right but after the third-party transaction has been abandoned?

    Holding

    No, because a right of first refusal does not create a binding option requiring the offer to remain open after the third-party transaction is abandoned, unless the contract explicitly states otherwise.

    Court’s Reasoning

    The court emphasized the distinction between a right of first refusal and an option. A right of first refusal requires the owner, when and if they decide to sell, to offer the property first to the holder of the right, allowing them to match a third-party offer. An option, on the other hand, is an offer that is contractually kept open. The court stated that “[t]he effect of a right of first refusal…is to bind the party who desires to sell not to sell without first giving the other party the opportunity to purchase the property at the price specified.” Since neither the New York nor Philadelphia agreement bestowed an irrevocable right to compel a sale, LIN only had a standard right of first refusal. The court reasoned that requiring the selling party to keep the offer open after the third-party sale was abandoned would give the first refusal offer all the attributes of an option, which was not the intent of the agreement. The court noted the clause itself operates as a restriction by preventing a party from making a sale without first making the first refusal offer. The court stated, “When, as here, the selling party has fully complied with its obligations under the first refusal clause by not selling without first making the required offer, the nonselling party has received the bargained-for performance.” The court further reasoned that imposing an irrevocable option on the seller carries substantial risks, as the buyer could wait until the end of the option period to buy only if the price is advantageous. The court concluded that unless the parties explicitly agree to such an allocation of risks and benefits, the law should not impose it. The court found that other jurisdictions supported this conclusion.

  • Marynick v. City of New York, 71 N.Y.2d 818 (1988): Interpreting ‘Dispose Of’ in Eminent Domain Law

    Marynick v. City of New York, 71 N.Y.2d 818 (1988)

    Under New York’s Eminent Domain Procedure Law (EDPL) 406(A), the term “dispose of,” which triggers a former owner’s right of first refusal, refers to a sale, assignment, or other method of transferring title, not merely leasing the property.

    Summary

    The City of New York condemned Marynick’s property in 1971 for a courthouse that was never built. In 1986, Marynick sued to prevent the City from leasing the property to private tenants without offering him a right of first refusal, citing EDPL 406(A). This statute grants former owners a right of first refusal if the condemned property isn’t materially improved and the original project is abandoned. The courts dismissed Marynick’s claim, holding that leasing wasn’t a “disposition” under the statute. The New York Court of Appeals affirmed, reasoning that “dispose of” refers to transferring ownership, aligning with common usage, the purpose of offering a right to purchase, and legislative intent.

    Facts

    <ol>
    <li>In 1971, the City of New York condemned property owned by the petitioner, Marynick.</li>
    <li>The stated purpose of the condemnation was to construct a new courthouse for the New York City Civil Court.</li>
    <li>The courthouse was never built, and the project was abandoned.</li>
    <li>In 1982 and 1986, the City attempted to lease the condemned property to private tenants.</li>
    <li>Marynick commenced a proceeding in 1986, arguing that the City could not lease the property without first offering him a right of first refusal to purchase it.</li>
    </ol>

    Procedural History

    Marynick initiated the proceeding in a lower court, seeking to prevent the City from leasing the property without offering him a right of first refusal. Both the initial court and the Appellate Division rejected Marynick’s claim, finding that a lease did not constitute a “disposition” under EDPL 406(A). Marynick then appealed to the New York Court of Appeals.

    Issue(s)

    Whether an attempt by the City of New York to lease condemned property to private tenants constitutes a “disposition” of the property under EDPL 406(A), thereby triggering the former owner’s right of first refusal.

    Holding

    No, because the term “dispose of,” as used in EDPL 406(A), refers to a sale, assignment, or other method of transferring title to the property, not merely leasing it.

    Court’s Reasoning

    The Court of Appeals based its decision on several factors:
    <ol>
    <li><strong>Statutory Construction:</strong> The court applied the primary rule of statutory construction, stating that words in legislative enactments are to be given their “natural and most obvious meaning” (citing <em>Matter of Capital Newspapers v Whalen, 69 NY2d 246, 251</em>).</li>
    <li><strong>Common Parlance:</strong> The court found that the term “dispose of” is most often used to convey a permanent and complete transfer of property ownership.</li>
    <li><strong>Statutory Purpose:</strong> The court reasoned that the purpose of EDPL 406(A) is to give the former owner a right of first refusal “to purchase the property”, a remedy that would be disproportionate if triggered by a short-term lease.</li>
    <li><strong>Legislative Intent:</strong> The court cited statements from the statute’s drafters, indicating that the purpose was to give former property owners a right of first refusal “before [the] property is offered for public sale” (citing 1973 Report of State Commn on Eminent Domain and Real Property Tax Assessment Review, at 51).</li>
    <li><strong>Practical Implications:</strong> The court implicitly recognized that interpreting “dispose of” to include leasing would create significant hurdles for municipalities managing condemned properties, as every lease, even short-term, would trigger the right of first refusal.</li>
    </ol>

    The court concluded that Marynick, alleging only that the City attempted to lease the condemned property, had not stated a basis for relief under EDPL 406(A).

  • Elston v. Schilling, 42 N.Y. 79 (1870): Interpreting ‘Dispose Of’ in a Lease Agreement

    Elston v. Schilling, 42 N.Y. 79 (1870)

    A conveyance of property, even to a family member for nominal consideration, constitutes a disposition of the property that terminates a tenant’s right of first refusal to purchase or renew a lease, provided the tenant was first given the opportunity to exercise their right.

    Summary

    Elston, the tenant, sought specific performance of a lease renewal option against Schilling, the landlord. The lease granted Elston the right to purchase the property within four years and a renewal option if Schilling didn’t “dispose of” it. Schilling conveyed the property to his son before the lease expired, after Elston declined to purchase it. The court held that Schilling’s conveyance to his son constituted a disposition of the property, terminating Elston’s renewal option. The court reasoned that Schilling effectively reserved the right to dispose of the property if Elston declined to purchase it, regardless of his motive for doing so.

    Facts

    Andrew Schilling leased property to David Elston for four years, granting Elston the option to purchase the property for $12,000 within that term. The lease also stipulated that if Schilling did not “dispose of” the premises before the lease expired, Elston could renew the lease for another four years on the same terms. Before the lease term expired, Schilling offered Elston the opportunity to purchase the property for $12,000, but Elston declined. Subsequently, Schilling conveyed the property in fee simple to his son, Frederick Schilling, for a stated consideration of $2,500, subject to Elston’s purchase option and an existing mortgage.

    Procedural History

    Elston sued Andrew Schilling to compel specific performance of the lease renewal option in the Superior Court. After Andrew Schilling’s death, the suit continued against Frederick Schilling. The Superior Court dismissed the complaint, finding that Andrew Schilling’s conveyance to his son constituted a disposition of the property, thus negating Elston’s renewal option. The plaintiff appealed to the General Term of the Superior Court, which affirmed the lower court’s decision. The plaintiff then appealed to the New York Court of Appeals.

    Issue(s)

    Whether Andrew Schilling’s conveyance of the leased premises to his son, Frederick Schilling, constituted a “disposition” of the premises within the meaning of the lease agreement, thereby terminating Elston’s right to renew the lease.

    Holding

    Yes, because Andrew Schilling, in effect, reserved the right of disposition if Elston did not elect to purchase the property. The conveyance to his son constituted a valid disposition under the terms of the lease.

    Court’s Reasoning

    The court interpreted the lease agreement to mean that Elston had the right to purchase the property at any time within the four-year term, but Schilling also retained the right to dispose of it, provided Elston was given the opportunity to exercise his purchase option first. Since Elston declined to purchase the property when offered, Schilling was free to dispose of it. The court found that the conveyance to Frederick, even for a nominal consideration, constituted a valid disposition. Even if Schilling’s motive was to avoid the lease renewal, the court reasoned that Schilling had effectively reserved the right of disposition with such motive, provided Elston declined to purchase the property at the agreed-upon price. The court stated, “He had, in effect, reserved the right of disposition, with such motive or for such purpose, if the plaintiff did not elect to purchase at $12,000, the sum mentioned in the provision.” The court concluded that the judgment dismissing the complaint should be affirmed.