Idaho Real Estate & Development Law Update: Recent Case Highlights Vital Lessons for Holders of Rights of First Refusal

The Idaho Supreme Court provided important lessons to people who deal with rights of first refusal (ROFRs) on real property in its recent decision Mulberry v. Burns Concrete, Inc., No. 45184 (Idaho Feb. 21, 2019). A ROFR is a right, created by contract, to acquire real property later under the same terms that the property owner desires to accept from a third-party purchaser.

The first lesson in the case is that a ROFR is presumed personal, and hence not assignable by the person holding the right, unless the agreement creating the ROFR shows that the parties intended for the right to be assignable. The Court reached this conclusion despite the general rule that contract rights are assignable. In Mulberry, a buyer purchased a parcel of land and at the same time acquired a ROFR on another parcel owned by the same seller. The ROFR was created by a separate agreement that failed to say anything about the ROFR also being for the benefit of the buyer’s assigns. Not long after the purchase, the buyer turned around and resold the acquired parcel and assigned the ROFR to another entity. The Court ruled that, in those circumstances, the assignment of the ROFR was ineffective.

The second lesson is that an attempted, ineffective assignment of a ROFR does not extinguish the ROFR. The Court said that if the ROFR was otherwise valid, it would continue to benefit the original holder of the ROFR despite the attempted, ineffective assignment. In Mulberry, this was surely a painful lesson for the property owner because the property owner filed the lawsuit seeking a ruling that the property was free of the ROFR. After taking the case all the way up to the Idaho Supreme Court, however, the property remained subject to the ROFR.

The third lesson is that a gift of the real property that is subject to a ROFR will not trigger the ROFR, but the recipient of the gift will take the real property subject to the ROFR. In Mulberry, the couple who originally granted the ROFR later transferred the subject property to their wholly owned limited liability company (LLC). The Court said that the transfer to the LLC was essentially a gift and, although the ROFR was not triggered by the transfer to the LLC, the LLC would remain subject to the ROFR.

Finally, the Court quoted favorably from a recent Iowa appeals court opinion saying that, because the indefiniteness of ROFRs “can impede the marketability of real estate, it is logical to construe them narrowly.” Persons dealing in ROFRs should know that the law does not view them favorably. Very careful drafting is a must.