An El Paso Court of Appeals case, Mr. W Fireworks, Inc. v. NRZ Investment Group, LLC, offers important information for anyone seeking to exercise a right of first refusal. [Read opinion here.]
(If you’ve been here for a while, you may remember this is not Mr. W’s first case this year involving problems with a right of first refusal. Click here to read about a case in the Panhandle from last year.)
This case involves a lease between landowner, Nathan Lee, and Mr. W Fireworks, Inc. (“Mr. W”) and a land sales contract between Lee and NRZ Investment Group, LLC (“NRZ”).
In 2012, Lee entered into a 2-year lease with Mr. W for a 100′ x 100′ area of frontage of a 49-acre tract of land in Travis County. The lease was drafted by Mr. W and gave Mr. W the right to operate a seasonal fireworks stand with the exclusive right to sell fireworks on the property during the lease term. The lease also included an “option period” which said that if Mr. W paid Lee $1,350 by June 20 every year, the lease would be considered “optioned” for that year. Additionally, the lease contained a right of first refusal clause that read:
Lessors agree as an independent restriction that survives the lease not to sell or lease any part of said property including any adjoining or contiguous property to any persons or corporation for the purpose of selling fireworks in competition to Lessee during the term of this lease including all options, and for a period of ten years after the lease is terminated. Lessor will give Lessee the first right of refusal should the Lessor decide to sell.
The Memorandum of Lease was recorded in the county records in February 2012 noting the existing lease and the right of first refusal in favor of Mr. W. (There was a subsequent lease entered into by the parties, but it was not at issue in this litigation.)
On March 8, 2021, Lee entered into a contract to sell the 49-acre tract for $1.69 million to NRZ with a closing date of April 15, 2021, which was 37 days after execution of the contract. As part of the title search for this contract, the title company discovered the Memorandum filed by Mr. W in 2012 reflecting his right of first refusal.
In light of this, Lee sent an email to Mr. W on March 23, 2021 that read: “I want to notify you that my property…which you lease is under sale contract. If you are interested in buying, please contact my agent Eve Cameron. I would like to terminate our contract as of June 30, 2021.”
On March 31, 2021, Mr. W’s attorney advised Lee that Mr. W was exercising its right of first refusal and intended to purchase the property on the same terms as the NRZ contract but demanded a later closing date. Specifically, Mr. W demanded the same length of time between contract and closing–37 days–as was offered to NRZ. On April 6, Lee executed a sales contract with Mr. W to purchase the 49-acre tract for the same purchase price with the closing date demanded by Mr. W of May 13, 2021.
Lee then informed NRZ he was unable to comply with the NRZ contract due to Mr. W asserting its right of first refusal.
NRZ filed a lawsuit against Lee and Mr. W. in April 2021 seeking a declaratory judgment that Mr. W’s right of first refusal was void or, alternatively, that Mr. W did not properly exercise the right of first refusal. NRZ sought specific performance of the NRZ contract and sought damages alleging that Mr. W tortiously interfered with the NRZ contract. In response, Mr. W brought a claim against Lee for breach of contract for their alleged refusal to sell the property to Mr. W and sought specific performance of its right of first refusal allowing it to purchase the property for “the same price and the same terms and conditions” as the NRZ contract. Mr. W also brought a counterclaim against NRZ, in the alternative, seeking damages for NRZ’s alleged tortious interference with its right of first refusal. In response, Lee initially asked the trial court to deny both NRZ’s and Mr. W’s claims for specific performance claiming that neither party had tendered full consideration to purchase the property.
The parties filed competing summary judgment motions. The trial court sided with NRZ holding that Mr. W’s claims under the lease, including the right of first refusal, were null and void. It granted NRZ’s motion for specific performance of its sales contract with Lee. Mr. W appealed.
Appellate Court Opinion
The El Paso Court of Appeals affirmed but modified the judgment language. In its analysis, the court broke the issues into five categories.
Insufficient time for discovery
Mr. W claimed the court granted summary judgment without allowing adequate time for discovery. The court rejected this argument because Mr. W failed to file the required affidavit or motion for continuance to seek additional time for discovery. Further, Mr. W never explained why additional discovery was necessary or what material evidence Mr. W hoped to find. Thus, Mr. W failed to preserve this question on appeal and this issue was overruled.
Mr. W breach of contract claim against Lee
The court next found summary judgment in favor of Lee was proper on the breach of contract claim.
The law regarding rights of first refusal provides that once the landowner communicates the terms of a third party’s offer to the holder, the right of first refusal “ripens into an enforceable option.” The terms of the option are created are based on the provisions in the right of first refusal and the terms and conditions of the third-party offer. The holder may then elect to purchase the property according to the terms of the option or decline to purchase and allow the landowner to sell to the third party. Importantly, the right holder does not have the ability to negotiate with the seller regarding the terms of the third-party offer. Acceptance of an option may be achieved only by strict compliance with the terms of the contract. Any performance less than strict compliance is generally considered to be a rejection of the option. Thus, any buyer who proposes a new demand, condition, or modification on the terms is treated as having rejected the offer. At that point, the landowner may sell to the third party.
Mr. W argued that Lee breached the right of first refusal by waiting for 2 weeks to tell Mr. W about the NRZ contract, which hindered its ability to accept the April 15 closing date. The court rejected this argument. The right of first refusal contained no express term requiring Lee to notify Mr. W of a third-party sales contract within a certain timeframe. It merely required that Lee give Mr. W the first right of refusal should Lee decide to sell. Additionally relevant, Mr. W drafted the lease, which means any ambiguity regarding the timeframe should be construed against Mr. W. Because the record is clear Lee offered Mr. W the right to purchase the property as required by the right of first refusal, Lee did not breach the contract and summary judgment was proper.
Mr. W’s tortious interference claim against NRZ
The court also rejected Mr. W’s tortious interference claim against NRZ.
To prove tortious interference with a contract, a party must show: (1) an existing contract subject to interference; (2) a willful and intentional act of interference with the contract; (3) that proximately caused the plaintiff’s injury; and (4) caused actual damages or loss. Here, the court found the first element was not satisfied as Mr. W’s right of first refusal was not subject to interference by NRZ.
Simply put, all Mr. W’s right of first refusal did was give it the right to purchase the property if Lee decided to sell. It did not prohibit Lee from entering into a sales contract with a third party prior to notifying Mr. W. It did not prohibit NRZ from seeking to purchase the property. Thus, there was no contractual interference by NRZ with regard to the right of first refusal.
Mr. W’s proper exercise of right of first refusal
Next, the court found that Mr. W failed to properly exercise its right of first refusal. Assuming the right of first refusal was valid, it then ripened into an option contract when Lee entered into the sales contract with NRZ. It was that sales contract between Lee and NRZ that dictated the terms of Mr. W’s option. However, Mr. W demanded a different closing date in the contract when it sought to exercise its option, seeking to delay the closing by almost a month. Texas law is clear that the closing date is a material term of a contract.
Mr. W argued that it was Lee who breached the right of first refusal by delaying notification of the sales contract with NRZ. As the court previously noted, there was no requirement in the contract that Lee notify Mr. W within a set period of time. Lee complied with the terms of the right of first refusal by offering Mr. W the option to purchase. Although Mr. W claimed Lee and NRZ acted in bad faith, it offered no evidence to support this claim and failed to explain its argument why having 20 days to close the sale should be considered “commercially unreasonable” for this property.
The “no competition” restriction
Lastly, Mr. W claimed that the court erred in its judgment by finding all claims of Mr. W to the property to be null and void. Mr. W claims this granted NRZ and Lee more relief than they requested as they only sought to invalidate the right of first refusal, not any other lease provisions. The lease contained a clause prohibiting Lee from selling the property to competitors for 10 years after the lease terminated. The trial court’s order appears to deem this clause null and void, despite neither Lee nor NRZ seeking such relief.
NRZ and Lee argued it was irrelevant whether this clause remained because NRZ was a not a competitor of Mr. W. However, Mr. W noted that this clause regarded both selling and leasing to a competitor for a 10 year term, and the clause was to survive termination of the lease and run with the land, making it enforceable against subsequent buyers like NRZ.
The court did not express any opinion on the enforceability of the no competition restriction, but did agree with Mr. W that the trial court’s order was overly broad and should not have addressed the validity of the no compete clause as it was not properly challenged or raised by the parties. Because NRZ only sought to invalidate the right of first refusal, the court did not have the authority to invalidate the no competition restriction in this litigation.
In light of this, the appellate court affirmed the trial court’s order of specific performance of the NRZ sales contract and dismissing Mr. W’s claims against NRS and Lee. It struck the sentence declaring all claims or encumbrances from the property null and void and, instead, replaced it with language declaring only the right of first refusal to be null and void.
Do note that Mr. W has a motion to reconsider pending before the court of appeals, and could still seek review by the Texas Supreme Court as well.
This case is a great illustration of how rights of first refusal function and the importance of strict compliance with the terms when seeking to exercise this right.
First, note that any requirements or limitations a party want to have with regard to a right of first refusal should be included in the right of first refusal language. Here, for example, had the parties required notice be given to Lee within 24-hours of a third party offer to purchase the property, for example, that timeframe would likely have been enforceable. Because there was no such timeframe included in the right of first refusal signed by the parties, however, no such limitation existed.
Second, remember that to be enforceable, rights of first refusal should be recorded in the deed records. This case is a perfect example of why that is necessary. Lee entered into the contract with NRZ, it appears, without mentioning the right of first refusal. However, it was flagged by the title company because it was recorded in the deed records. That recording is what makes the right enforceable against third parties. (To see what happens when a right is not recorded, read about another Mr. W case here.) This also highlights the importance of doing a title search when purchasing property to ensure you are aware of any encumbrances, such as a right of first refusal.
Next, it is important to understand what happens when an offer to purchase is made on property where a right of first refusal exists. When the holder receives notice that an offer has been made, he then has the right to exercise the right of first refusal. This must be done with strict compliance to the terms of the right of first refusal and the third party contractual terms. Here, had Mr. W simply said it would exercise its right of first refusal and accepted the terms of the NRZ contract–including the closing date–it may have been entitled to purchase the property (assuming there were no other challenged to the validity of the right of first refusal raised). Because Mr. W sought to change even one term in the NRZ contract–the closing date–that functioned as rejecting the offer to purchase, thereby extinguishing the right of first refusal and allowing Lee to sell to NRZ.