Divided Iowa Supreme Court Issues Ruling in Appeal Regarding Rights of First Refusal in Real Estate Contracts

The Iowa Supreme Court recently affirmed a ruling of the Iowa District Court in and for Monroe County, where the District Court ruled a right of first refusal granted pursuant to a contract for the sale of real estate is personal to the grantee and is not freely assignable by the grantee to a third party, absent express language in the contract to the contrary. The case – Malone v. Flattery, Case No. 10-0904 (Iowa S. Ct. June 28, 2012) – affirmed the District Court ruling by operation of law pursuant to Iowa Code section 602.4107 because the justices were evenly split as to whether the district court ruling should be affirmed or reversed (three justices would have voted in favor of affirmance and three judges would have voted in favor of reversal; Justice Mansfield did not take part in the case).

Because the District Court ruling was affirmed by operation of law, we do not have the benefit of any legal analysis from the Iowa Supreme Court regarding this issue. However, before the case was heard by the Iowa Supreme Court, it was subjected to intermediate appellate review by the Iowa Court of Appeals. The Iowa Court of Appeals also affirmed the District Court ruling (in an unpublished ruling), and in doing so, provided insight as to the rationale for the rule that a right of first refusal in a real estate contract is presumed to be personal and not freely assignable. At the outset, the Iowa Court of Appeals acknowledged that this rule "is in direct contrast to the general rule regarding options, which may be assigned absent specific language to the contrary." Nevertheless, the Iowa Court of Appeals noted that a presumption against free assignability should apply to a right of first refusal because such rights "operate as a restraint on alienation, but unlike options, do so in an undefined and indefinite way." The court further noted that "[b]ecause their very indefiniteness can impede the marketability of real estate, it is logical to construe them narrowly." Finally, the court noted that "a right of first refusal, unlike an option, is not a vested right," and that "construing such rights as nonassignable can limit their duration and thus avoid issues under the Rule Against Perpetuities."

Under the "divided court" rule set forth in Iowa Code section 602.4107, an order of the Iowa Supreme Court affirming a lower court ruling by operation of law has no force or authority beyond the case itself. In other words, the ruling has little precedential value, and is not binding law. Nonetheless, it does provide helpful guidance both in terms of how this issue should be resolved if it arises in the future and how buyers and sellers of real estate should draft their contracts if they wish to ensure that a right of first refusal will be freely transferrable. Interestingly, Justice Mansfield did not take part in the case at the Iowa Supreme Court because he authored the Iowa Court of Appeals ruling. Should this issue come before these same seven justices in a future case, it is quite possible that a final, precedential ruling will be issued by the Court, with a 4-3 majority voting in favor of the notion that a right of first refusal granted pursuant to a contract for the sale of real estate is personal to the grantee and is not freely assignable by the grantee to a third party, absent express language in the contract to the contrary.

For more information please contact Attorney Kevin Papp at kpapp@bradleyriley.com.