Cengage Advantage Books: Fundamentals of Business Law 9th Edition by Roger LeRoy Miller

Exercise 20

Malone v. Flattery
Court of Appeals of Iowa, 797 N.W.2d 624 (2011).
www.iowacourts.gov/CourLof_Appeals/Opinions
FACTS Leo and Grace Flattery sold their farm to Stanek Cattle Company. The Flatterys, however, kept the acre of land on which their home was located. The contract gave Stanek an easement-which is a right to cross a piece of land-that was "binding on the Sellers' and Buyer's personal representatives, distributees, heirs, successors, transferees and assigns." Stanek also "shall have a right of first refusal to acquire the one-acre tract. In the event that the Sellers intend to sell the one-acre tract, the Sellers will notify the Buyer," who could then exercise the right to buy it. A year later, Stanek sold the farm to William and Sharon Malone. Seven years later, without notice to the Malones, the Flatterys transferred their interest in the acre to Timothy and Deann Crall. The Malones filed a suit in an Iowa state court against the Flatterys to rescind (cancel) the transfer to the Cralls and enforce the right of first refusal. The court issued a judgment in the Flatterys' favor. The Malones appealed.
ISSUE Was the right of first refusal granted by the Flatterys to Stanek assignable to a third party?
DECISION No. A state intermediate appellate court affirmed the lower court's judgment in favor of the Flatterys. Stanek's right of first refusal was personal and not assignable. Stanek did not exercise the right before selling the property to the Malones, and the right terminated with that sale.
REASON There is a presumption that a right of first refusal is personal and not assignable. This can be overcome by language in a contract that makes the right assignable or refers to the "successors" or "assigns" of the party to whom the right is transferred (as stated in the easement clause). The reason for this presumption is that a right of first refusal is a restraint on the transfer of land ownership that "can impede the marketability of real estate." Construing the right narrowly limits its duration. In this case, the contract between the Flatterys and Stanek did not state that the right was assignable, and the clause that granted it did not mention the buyer's "successors" or "assigns." Thus, Stanek's right of first refusal was personal and not assignable (to the Malones).
FOR CRITICAL ANALYSIS-Economic Consideration What underlies the policy against assignments of rights of first refusal and other restraints on the transfer of land ownership?