MS Real Estate Holdings, LLC v. Donald P. Fox Family Trust (WI)

Summary: An agreement for a right of first refusal that did not specify a termination date was determined to last until there was a sale of the property. 

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MS Real Estate Holdings, LLC v. Donald P. Fox Family Trust, 2015 WI 49, 362 Wis.2d 258 (Wis. 2015).

Facts: MS Real Estate operates a dairy farm in Outagamie County, Wisconsin that adjoins approximately 450 acres of farmland owned by the Foxes. On January 16, 1998, MS Real Estate contracted with the Foxes for a right of first refusal to purchase or lease the Fox Land.  MS Real Estate paid $4,000 for this right of first refusal.

MS Real Estate executed two right of first refusal agreements, one for sales and one for leases. Under the right of first refusal, MS Real Estate had 15 days to accept or reject any acceptable offer the Foxes received to purchase or lease the property.  The agreement allowed the right of first refusal to reattach if the third-party sale or lease did not close. The agreements contained a “Binding Effect Provision,” which made the agreement binding upon the respective parties, their heirs, personal representatives, successors in interest and assigns.

The lease portion of the agreement contained a “Continuing Rights” provision, which states that the right to lease “shall continue for any subsequent renewal of a Lease with another party or upon entering into a new Lease with any other party. It is specifically intended that this leasing right shall not extinguish unless waived by [MS Real Estate].”

On December 5, 2011, the Foxes sent MS Real Estate a proposal from Tinedale Cropping to lease the property at $200 per acre, for 4 years. MS Real Estate believed the proposal was acceptable to the Foxes, and notified the Foxes on December 16, 2011 that it accepted the terms of the Tinedale proposal. MS Real Estate included a signed lease agreement under the terms of the Tinedale proposal, but the Foxes refused to execute the lease.

On February 8, 2012, the Foxes delivered a second lease proposal to MS Real Estate from Kavanaugh Farms. This was another 4 year lease, but the price was now $225 per acre in the first year, with a two percent annual increase in the cost per acre.

On February 12, 2012, MS Real Estate filed suit, seeking a declaratory judgment that the Tinedale Proposal was an offer to lease which MS Real Estate had accepted under the right of first refusal contract, as well as damages for breach of contract. The Foxes responded on March 6, 2012, claiming that the right of first refusal contracts were terminated. The Foxes claimed that the contract failed to specify the duration and did not expressly state that it was intended to be perpetual, thus is could be terminated after a reasonable time.

On April 5, 2012, the parties agreed on the Kavanaugh terms.  The Foxes still sought to move for summary judgement on the right of first refusal contract, arguing the termination was valid because the contract was indefinite and lacked the express language needed to indicate an intent to endure perpetually. The circuit court granted summary judgement in favor of the Foxes.

The court of appeals reversed, concluding that the right of first refusal to purchase does not apply to the general rule of indefiniteness applied by the circuit court. The court of appeals determined that the right of first refusal is not indefinite because the contract entirely terminates upon the sale of the Fox land. The court also determined that MS Real Estate’s failure to exercise the right of first refusal to purchase would constitute a waiver of the right of first lease under the contract.

Holding: Affirmed. First, the court determined that when the right of first refusal provides for purchase on: (1) the same terms and conditions as the owner receives from a third party, (2) the procedure for exercising the right is clear, and (3) the time for exercising the right when it arises is reasonably short; it does not prohibit or restrain the sale of property.  Instead, the right of first refusal contract gives the holder the right to preempt a third party’s purchase when that third party has made an offer the owner will accept.

Second, the Foxes argued that the triggering event, the sale of the property, is an uncertain as to when—or even if—the triggering event will occur. The Foxes’ argued that this uncertainty in the duration of the contract violates Wisconsin’s policy disfavoring perpetual contracts. The court rejected this interpretation and determined that a right of first refusal contract has a definite duration when it specifies an event, even when the event is not certain to occur. Therefore, the right of first refusal contract at issue is not terminable at will after a reasonable period of time.

Third, the right of first refusal was determined to last until the sale of the property. The court interpreted the agreement to mean that the agreement is effective unless MS Real Estate abandons their legal right or advantage under the contract.  In this case, that can only mean the abandonment of right to purchase.  Thus, the right of first refusal contract right remains with MS Real Estate until the property is sold to MS Real Estate or MS Real Estate chooses not to exercise its right of first refusal when the Foxes receive a third-party offer to purchase the property. 

Finally, the “binding effect” provision was interpreted to bind subsequent generations of the Fox family that inherit the property until it is sold. There was also determined to be no restraint on the Foxes’ ability to alienate the property because the Foxes may do whatever they wish with the property. The Foxes are only required to give MS Real Estate the opportunity to accept or reject an offer they find acceptable.

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By: ATG Underwriting Department | Posted on: Thu, 04/21/2016 - 2:14pm