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Do first refusal rights need termination dates to be enforceable?

Without a termination date, would a 1998 agreement giving a local dairy company the right of first refusal to buy or rent 450 acres of farmland in Outagamie County be enforceable?

Overruling a circuit court, the Wisconsin appellate court recently answered in the affirmative. The court decided the agreement was enforceable even though the underlying contract was drafted by the dairy company’s attorney and the landowner-farmer was without counsel when the right of first refusal was signed.

The Wisconsin Supreme Court heard oral arguments in the first week of March in the case of MS Real Estate Holdings, LLC v. Donald P. Fox Family Trust et al., 2013 AP 679.

If the appellate court’s decision stands, the Fox family warns about what might happen to a longstanding Wisconsin precedent against such contracts running in perpetuity.

But according to MS Holdings, the appellate court’s interpretation favoring Tidy View Dairy is the only way to be faithful to the intent of the parties while keeping all terms of the agreement intact.

In January 1998, farmers Jean and Donald Fox met representatives of Tidy View Dairy Inc. to review and sign a right-of-first-refusal agreement.

Tidy View was looking for extra land to use near its dairy operation, which used products such as alfalfa and corn in its daily operations.

The Foxes didn’t have an attorney to review the terms of a right of first refusal. They were paid $4,500 for the right of first refusal for both lease and purchase of the property, giving Tidy View the chance to meet any lease or purchase offer for the property within a 15-day period.

There was no specific date of termination noted on the agreement.

In addition to the right-of-first-refusal language pertaining to leases and sales, the document stipulated that the contract was “binding upon the respective parties, their heirs, personal representatives, successors in interest and assigns.”

After first leasing the property to Tidy View, the Foxes received two offers to lease the farm property in 2011 for the 2012 growing season. They quickly moved to accept the “Kavanaugh” offer because the terms were more favorable.

Tidy View insisted that it had the right to meet and thus accept terms of the second but less favorable offer – the Tisdale contract. When the Foxes moved to conclude the Kavanaugh agreement, Tidy View filed suit in Outagamie County to declare its rights and stop the Kavanaugh lease.

Although Tidy View ultimately agreed to lease according to the Kavanaugh terms, the Foxes sent notification several months after the suit was filed to Tidy View that they were terminating the entire right of first refusal.

The circuit court granted summary judgment to the Foxes. In his opinion, Judge Michael Gage stressed that there was no indication in the right of first refusal that the parties intended the agreement to be indefinite, that 15 years was a reasonable duration, and that the right of first refusal was properly terminated at will. Tidy View quickly appealed.

The appellate court reversed, saying in part that the language of the right of first refusal had to be carefully separated into its lease and sale components to be correctly interpreted.

“The only way that you can reconcile all terms of the agreement,” according to the appellate court, “is to assume that everyone understood that the termination event was fixed as being the sale of the property.”

The Foxes assert that the appellate court was dead wrong in its interpretation. The appellate court actually rewrote the contract, according to the Family Trust’s brief, adding terms and creating certainties which were insupportable and outside the functions of the appellate court.

In doing that, “it was lending definition and clarity in a place where the court has no right to do that,” as noted in the Family Trust brief.

Also, the appellate court and plaintiff had relied on numerous state and federal cases involving right of first refusal, including Schneider v. Schneider, 132, Wis.2d 171 (Ct. App. 1986), and Pallange v. Mueller, 206 Wis.109 (1931). But in fact, as stated in the Family Trust briefs, each cited case involved facts for which there was a specific event of termination that had to occur, such as the death of a party, and were thus unpersuasive.

The Foxes could own the property two generations from now. If the property were never sold, according to the Family Trust brief, they could still be saddled with the Tidy View right of first refusal decades into the future. This scenario was inconsistent with a long-running Wisconsin inclination toward free alienation of property.

MS Holdings contends that the Foxes were looking at the case the wrong way. Instead of viewing the facts within the framework of simple commercial-contract law, the right of first refusal’s language and creation had to be viewed within the body of law affecting properties in land and perpetuities.

In that case, the entire right of first refusal was completely straightforward and consistent, in particular if one takes the “heirs and assigns” section to read that the parties implied that the sale of the underlying property would be a terminating event.

And such an interpretation was well supported by Schneider v. Schneider, in which the Wisconsin appellate court said that a right of first refusal could be anchored to an event without needing a specific date.

In Schneider, two brothers owned land as tenants in common, and had created a partnership agreeing to continue operating a quarry while the operation was still “profitable.” Each brother could only sell his half interest if the other brother agreed. If consent was not given, the third-party sale could continue only after the non-selling brother was given a chance to buy out the first.

The Schneider court found that the agreement did not violate a state 30-year partition law, because the contract’s term was established by either the sale of the property or the death of one brother. No specific date or number of years was required.

The Wisconsin Realty Association filed an amicus brief in the matter, representing the interests of thousands of real estate agents around the state who every day enter into a variety of agreements with short- and long-term implications.

Their amicus brief placed a strong emphasis on the assertion that the agreement had been negotiated between two parties. Tidy View and the Foxes, according to the brief, both had an interest and were aware of their actions.

So allowing one side to terminate a right of first refusal when it determines that a “reasonable period of time has gone by or that the original consideration was too little undermines the confidence in jointly negotiated contract terms,” according to language in the amicus brief.

But the Foxes are adamant that there is no getting around the law’s obligation to have a specific date of termination, and that it be “ascertainable” to be enforceable. The Merriam-Webster dictionary definition of “ascertain” is “to know with certainty,” as stated in the Family Trust brief. There is no date of termination in the contract that can truly be “ascertained.”


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