Ben
Jarvis and Calvin Smith jointly owned a 12-acre parcel in Smith County, Texas.
Jarvis owned 2/3rds; Smith owned 1/3rd. In Texas law this
made them ‘cotenants.’
In 1998 the parties negotiated a partition
of the property, with the added requirement that Jarvis would receive an option
to buy Smith’s parcel should he elect to sell it. Jarvis and Smith exchanged
deeds to divide the property into 8-acre and 4-acre tracts. And Smith signed a
notarized document granting to Jarvis an option to buy Smith’s parcel.
The document provided that if Smith
decided to sell it and received an acceptable offer, Smith would submit the
offer to Jarvis who had 30 days to accept it and then purchase the property on
the same terms. Someone – presumably
Jarvis – had the foresight to record it in the Smith County Deed Records.
In December 2007 Smith entered into
a contract to sell his 4-acre piece to Robert Peltier for $80,000. Smith signed
a Deed to Peltier the following month when the deal closed. The title commitment
issued to Peltier prior to closing provided that the parcel was burdened by the
instrument that Smith had signed.
So clearly Robert Peltier knew (or
should have known) of the pre-existing rights of Jarvis. But Peltier bought it
anyway.
It took two more years for Jarvis to
learn that the parcel had been sold. Immediately on discovery, he sent both
Smith and Peltier a letter attempting to exercise his option. In his letter he
asked for a copy of the Closing Statement, cancelled check and title policy “.
. . before declining or accepting any offer.” That statement followed the one
in which he wrote “At this time, I would like to exercise the option.”
Yes those two statements seem
inconsistent. But stay tuned and you’ll find out what Jarvis was really trying
to say.
When neither Smith nor Peltier sent
Jarvis the intel he requested, Jarvis filed suit against both of them. The
trial court granted judgment for Smith and Peltier. Jarvis appealed.
The Court of Appeals looked hard at
the document Smith signed. Jarvis contended that it gave him a right of first
refusal, meaning, if Smith decided to
sell the property then Smith was required to allow Jarvis the opportunity to
buy it on the same terms as offered by the purchaser. In other words, a
preemptive right. We know it as a “ROFR.”
Peltier and Smith argued, however,
that Jarvis was furnished an option, being a privilege that the owner grants to
another to buy the piece at a fixed price and at a definite time. And that
Jarvis failed to properly and timely exercise his option because he did not
send unconditional notice of the exercise within 30 days after he learned of
the sale.
Jarvis responded that he did
everything he could to find out the purchase price within the 30-day period,
but neither Peltier nor Smith would give him the data he needed to make the
final decision and remove the condition. Ultimately, Jarvis said, he was able
to learn the purchase price only by filing a lawsuit and conducting discovery.
The
Court of Appeals evaluated the differences between a ROFR and an option and
concluded that Jarvis was the beneficiary of a lawful ROFR. Jarvis was not
required to unconditionally exercise the ROFR when the purchase price was
neither apparent nor forthcoming. The Court of Appeals concluded that the trial
court erroneously granted judgment for Peltier and Smith.
The
judgment for Peltier and Smith was reversed. Jarvis had an enforceable ROFR. Ben
Jarvis wins. Robert Peltier and Calvin Smith lose.
See Jarvis v. Peltier; No 12-12-00180-CV;
Texas 12th Court of Appeals, April 24, 2013.
Lessons
learned:
1. It
can be difficult to draft an enforceable ROFR, ROFO (right of first option) and
other similar agreements. Look here if you want more info on the differences
between the two: http://en.wikipedia.org/wiki/Right_of_first_refusal.
We use those concepts in both leasing and contracting for the purchase and sale
of property.
2. It
can also be challenging to properly preserve and exercise a ROFR or ROFO.
3. Jarvis
was smart to record his ROFR in the Smith County Deed Records. In doing so, he
preserved recourse against future buyers and lenders of Calvin Smith.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
