Estate Planning : Right of First Refusal Clause

Funding for this content provided by King Law Offices, Shelby, NC

A right of first refusal clause is common in the contracts and deeds in North Carolina. It requires that, before the property conveyed may be sold to another party, it must first be offered to the conveyor or his heirs, or to some specially designated person. In North Carolina, a right of first refusal clause is not void by itself and will be enforced if reasonable.

Generally, a preemptive right is a restraint on alienability and hence it is disfavored. But a minimal interference with the alienability presented by a preemptive right does little disturbance to the primary reason of prohibiting restraints on alienation and hence it should not be by itself void. Further, just as the commercial device of the option is upheld, if it is reasonable, so too the provisions of a preemptive right should be upheld if reasonable, particularly where the preemptive right appears to be part of a commercial exchange, bargained for at arm's length. Finally, a preemptive right is a useful tool for planned and orderly real estate development. To hold such a provision void by itself would be an unnecessary limiting of the right of a developer and is in contradiction to a general trend to uphold restrictive covenants running with the land if those covenants are reasonable.

Two primary considerations dictate the reasonableness or unreasonableness of such preemptive rights, the duration of the right and the provision it makes for determining the price of exercising the right. The Supreme Court of North Carolina has adopted the following generally applicable rules. The better rule is to limit the duration of the right to a period within the ‘rule against perpetuities’ (described below) and thus avoid lengthy litigation over what is or is not a reasonable time within the facts of any given case. A reasonable price provision in a preemptive right is one which somehow links the price to the fair market value of the land, or to the price the seller is willing to accept from third parties.

As it has evolved in North Carolina, the rule against perpetuities may be described as “no devise or grant of a future interest in property is valid unless the title thereto must vest, if at all, not later than twenty- one years, plus the period of gestation, after some life or lives in being at the time of the creation of the interest. If there is a possibility such future interest may not vest within the time prescribed, the gift or grant is void. Its primary purpose is to restrict the permissible creation of future interests and prevent undue restraint upon or suspension of the right of alienation”. The rule against perpetuities has evolved to prevent property from being fettered with future interests so remote that the alienability of the land and its marketability would be impaired, preventing its full utilization for the benefit of society at large as well as of its current owners.