May 18, 2015 – In a unanimous decision, the Wisconsin Supreme Court has upheld a right of first refusal contact in a farmland case, despite one party’s claim that the contract was indefinite and could be terminated after a reasonable time.
Tidy View Dairy, which operated a dairy farm in Outagamie County, paid $4,000 for a right of first refusal to purchase or lease 450 acres of farmland owned by Donald and Jean Fox. The Fox farm adjoined the Tidy View Dairy Farm. They were neighbors.
Under the contract, Tidy View (and successor MS Real Estate Holdings) had the first right to purchase or rent the Fox farm, if it were ever offered for sale or lease.
In 2001, the Foxes leased the land to MS Real Estate Holdings for a five-year term, then offered about 37 acres for purchase in 2006. At that time, MS Real Estate declined to purchase the 37 acres, but said it still had a first right to purchase the remaining land.
The Foxes leased MS Real Estate land under another five-year deal, and offered to lease the land again upon expiration. This time, MS Real Estate offered to lease the land under a one- or three-year term. The Foxes said they would solicit other offers.
One came in, a five-year lease for $200 per acre. The Foxes sent the offer to MS Real Estate, and MS Real Estate indicated it would accept a lease on those same terms.
However, the Foxes refused to execute the lease. The Foxes then obtained a better lease offer – a five-year lease at $225 per acre, with a two percent annual increase.
The Foxes told MS Real Estate it could lease the land on those terms. MS Real Estate responded by filing a lawsuit in the Outagamie County Circuit Court, arguing that it was entitled to lease the Fox farm land under the terms of the first lease offer.
The Foxes responded that it was terminating the right of first refusal contract. They could do that, the Foxes argued, because the contract did not state that it was perpetual and thus the Foxes were entitled to terminate the contract after a reasonable time.
The parties resolved the lease issue: MS Real Estate agreed to accept the terms of the second lease offer. But the lawsuit continued to determine whether MS Real Estate had an enforceable right of first refusal contract that the Foxes could not terminate.
The circuit court ruled that the contract could be terminated after a reasonable time, and a reasonable time had passed. But a state appeals court reversed.
And in MS Real Estate Holdings LLC v. Donald P. Fox Family Trust, 2015 WI 49 (May 15, 2015), the court unanimously affirmed, siding with MS Real Estate Holdings.
“We hold that a right of first refusal contract is definite as to duration when it specifies an event that triggers the right and requires the right holder to either exercise or waive the right within a specified period of time thereafter, even if the triggering event is not certain to occur,” wrote Justice Michael Gableman for the court.
“Therefore, the right of first refusal contract at issue here is not terminable at will after a reasonable period of time,” wrote Gableman, who noted that the right of first refusal continues until the property is sold to MS Real Estate or the right is waived.
The court noted that contracts for a right of first refusal can be indefinite and terminable only if they restrain the sale of property, but that’s not the case when the contract holder can purchase on the same terms and conditions as another offer, the contract provides a clear procedure for doing so, and “provides a reasonable time for exercising the right.”
The Foxes had argued that the contract was not enforceable because there was no specified termination date – it could go on forever if the land was never sold – and Wisconsin policy disfavors perpetual contracts with indefinite durations.
But the court rejected that argument, concluding that contracts with a “triggering event” can still be enforceable even if the “triggering event” is uncertain to occur.
“[T]he right of first refusal contract at issue here is not a restraint on the Foxes’ ability to alienate the property,” Justice Gableman wrote. “A restraint on alienation occurs when a property owner contracts not to sell the property for a specified amount of time.”
The contract language and the Foxes’ actions indicated that the parties intended the agreement to run until the Foxes, or their successors in interest, sold the land.