Opinion ID: 574016
Heading Depth: 2
Heading Rank: 3

Heading: Diminishment in the Right of First Refusal

Text: 41 Club alternatively has argued that its right of first refusal was diminished by the CCRI-First Union transaction. A right of first refusal is  '[a] preemptive right [which] merely sets a requirement that when the owner decides to sell the person holding the preemptive right must be offered the opportunity to buy.'  Hasty v. Health Serv. Centers, Inc., 258 Ga. 625, 373 S.E.2d 356, 357 (1988) (emphasis in original) (quoting Shiver v. Benton, 251 Ga. 284, 304 S.E.2d 903, 905 (1983)); see Hewatt v. Leppert, 259 Ga. 112, 376 S.E.2d 883, 884 (1989) (When a lease contains a right of first refusal clause the landlord 'is under a legal duty to [the tenant] not to sell to anybody at any price until after he has made an offer to sell to [the tenant] at that price and [the tenant] has failed to accept it.'  (emphasis in original) (quoting 1A Corbin on Contracts § 261 at 471 (1963)). Therefore, the value in a right of first refusal is in the priority that the holder is accorded, or the first opportunity to purchase. 42 Georgia courts have found the right of first refusal is violated when a sale occurs without honoring this preemptive right. See, e.g., Emery Air Freight Corp. v. Arogeti, 259 Ga. 839, 388 S.E.2d 517 (1990) (Conveyances of property without proper recognition of first refusal right were void regarding the rights and interests of the holder of the preemptive right.); Rollins v. Gault, 153 Ga.App. 781, 266 S.E.2d 560 (Ct.App.1980) (Party was deprived of its first refusal right when a contract for sale of a house was executed with a third party.); see also Systems Engineering Assocs. v. Peachtree Corners, Inc., 179 Ga.App. 48, 345 S.E.2d 136 (Ct.App.1986) (Despite finalized negotiations to sell a warehouse to another party, when the first refusal right was discovered during the title search, the holder of that preemptive right was given the opportunity to exercise the preemptive right, and elected to repurchase the property.). Additionally, the preemptive right of first refusal may not be defeated by the offer of a third party to purchase the land in question as part of a package transaction including one or more additional tracts, even if the purchase price is allocated among the several tracts. Hinson v. Roberts, 256 Ga. 396, 349 S.E.2d 454, 456 (1986). 43 In contrast to the breach or violation of a first refusal right by a sale without recognition of that preemptive right, the Georgia Supreme Court has explained that a first refusal right can be diminished by an option contract. Hewatt, 376 S.E.2d at 884-85. In Hewatt, a landlord accepted consideration from a corporation to keep an offer to purchase open for a specified time, during which the landlord could not offer to sell the property to any other party, and after which the party acquiring the option had no obligation to purchase the property. By making an irrevocable offer to sell, the landlord placed the power to buy completely with the option holder for a time certain. Effectively removing the property from the market until the option holder decided whether to purchase the property, the landlord substantially diminished the value of the right of first refusal by executing the option and thereby eliminating the possibility that he would receive an acceptable offer from a party other than [the option holder]. Id. at 885. The court noted that [t]he holder of an option can compel a sale by an unwilling owner. Id. Thus, the preemptioner's ability to make the same offer is lost, and [t]he essence of the ... right of first refusal [i]s the possibility of matching a third party's acceptable offer. Id. (emphasis in original). While the first refusal right is not triggered until the option holder decides to purchase, the preemptive right is destroyed temporarily during the option period. 44 The apparent diminished value in the preemptive first refusal right because of the existence of an option contract is not present in this case. CCRI did not convey an option to purchase to First Union; it hypothecated or pledged the Club note as collateral to First Union for CCRI's loan. This hypothecation does not violate Club's preemptive first refusal right, the purpose of which is to assure the preemptioner priority over any other purchaser when there is a decision to sell. See Shiver, 304 S.E.2d at 905. 45 If CCRI subsequently decides to sell the Club note and security deed, obtains a purchaser, and First Union consents to the sale, then CCRI would have to offer the note to Club first on the same terms. As we have explained, however, Club's preemptive right does not restrict the use of the note and security deed as collateral. Because we have determined that no option to purchase was accorded to First Union, we conclude that Club's right of first refusal remains intact and has not been diminished by CCRI's hypothecated loan transaction with First Union.