Court Opinion

ID: 9352022
Source: CourtListenerOpinion
Date Created: 2023-01-04 16:08:39.128668+00
Date Added: 2024-06-11T16:57:44.593885
License: Public Domain

THE STATE OF SOUTH CAROLINA
                In The Supreme Court

   Barry Clarke, Petitioner,

   v.

   Fine Housing, Inc. and RRJR, L.L.C., Defendants,

   of which Fine Housing, Inc. is the Respondent.

   Appellate Case No. 2020-001371

ON WRIT OF CERTIORARI TO THE COURT OF APPEALS

               Appeal from Charleston County
            J.C. Nicholson Jr., Circuit Court Judge

                     Opinion No. 28126
         Heard April 5, 2022 – Filed January 4, 2023

                         AFFIRMED

   Thomas R. Goldstein, of Belk, Cobb, Infinger &
   Goldstein, P.A., of North Charleston, and Ashley G.
   Andrews, of LaFond Law Group, P.A., of Charleston, for
   Petitioner.

   W. Cliff Moore III and Kirby D. Shealy III, both of Adams
   and Reese, LLP, of Columbia, for Respondent.
JUSTICE JAMES: Barry Clarke brought this action for specific performance of a
right of first refusal. The trial court ruled for Clarke and ordered Fine Housing, Inc.
to convey certain real property to Clarke. The court of appeals reversed, holding the
right of first refusal is unenforceable. Clarke v. Fine Housing, Inc., Op. No. 2020-
UP-238 (S.C. Ct. App. filed Aug. 12, 2020). We affirm.
                                          I.

      Clarke owned a strip club at 2015 Pittsburgh Avenue in Charleston. Group
Investment Company, Inc., whose shareholders were John Robinson and Robin
Robinson, owned a strip club across the street at 2028 Pittsburgh Avenue (the
Subject Property). The Subject Property includes buildings, a parking lot, and other
land. In 1999, Clarke and Group Investment entered into a recorded lease (the
Lease) that allowed Clarke to use half of the parking spaces located on the Subject
Property.
       Pertinent Lease provisions include Section 1.1, which states, "Lessee hereby
leases from Lessor the property generally described in Exhibit 'A' attached hereto."
Section 2.1 provides, "The premises is unimproved property to be used as a parking
lot by both the Lessor and the Lessee." The parties agree the "unimproved property"
is the parking spaces. Section 7.1 provides, "The Lessee and Lessor shall be entitled
to use of one half (1/2) of the spaces contained in the parking lot [which
encumbrances all of the property described in Exhibit A]." Clarke agrees he was not
entitled to use any portion of the Subject Property other than the parking spaces
during the term of the Lease. Clarke argues Section 5.2 of the Lease provides him a
right of first refusal (the Right) to buy the entire Subject Property; however, the
entirety of Section 5.2 states, "Right of First Refusal: Lessor grants the Lessee the
right of first refusal should it wish to sell." Section 5.2 does not state what
property—the leased parking spaces or all of the Subject Property—is encumbered
by the Right. Also, there are no provisions in Section 5.2 or elsewhere in the Lease
stating either how the purchase price would be set when the time came for Clarke to
exercise the Right or what procedures would govern Clarke's exercise of the Right.

       In 2007, Group Investment conveyed the Subject Property to RRJR, LLC for
the stated consideration of $5.00. John Robinson and Robin Robinson were
members of RRJR. Clarke testified he "probably" knew Group Investment
transferred the Subject Property to RRJR, but Clarke claimed he did not seek to
exercise the Right at that time because Group Investment and RRJR were "the same
people."
       In 2013, RRJR conveyed the Subject Property to Fine Housing for
$150,000.00. 1 Fine Housing's closing attorney did not take note of the Lease or the
Right prior to the closing, but Fine Housing concedes it had record notice of both
the Lease and the Right. Neither Fine Housing nor RRJR notified Clarke of the sale
of the Subject Property.

       Clarke learned of the sale to Fine Housing in March 2014, and in May 2015,
Clarke initiated this action for specific performance against Fine Housing and RRJR.
RRJR did not answer and is in default. After a bench trial, the trial court ruled the
Right is enforceable as to the entire Subject Property and ordered Fine Housing to
convey title to the Subject Property to Clarke upon his payment of $350,000.00. The
court of appeals reversed, holding the Right is an unreasonable restraint on alienation
and is therefore unenforceable.

                                           II.
        South Carolina law prohibits the enforcement of unreasonable restraints on
alienation of real property. Wise v. Poston, 281 S.C. 574, 579, 316 S.E.2d 412, 415
(Ct. App. 1984) ("Under South Carolina common law, any unreasonable limitation
upon the power of alienation is against public policy and must be construed as having
no force and effect."). In general, a right of first refusal requires the property owner,
when and if he decides to sell, to first offer the property to the holder of the right of
first refusal. See Webb v. Reames, 326 S.C. 444, 446, 485 S.E.2d 384, 385 (Ct. App.
1997). Accordingly, a right of first refusal restrains an owner's power of alienation
to a degree by requiring the owner to offer the property first to the holder of the right.
See Cnty. of Jackson v. Nichols, 623 S.E.2d 277, 280 (N.C. Ct. App. 2005).

       The question of whether a right of first refusal is enforceable turns upon
whether the right unreasonably restrains alienation. See Wise, 281 S.C. at 579, 316
S.E.2d at 415. The Restatement (Third) of Property provides, "A servitude that
imposes a direct restraint on alienation of the burdened estate is invalid if the
restraint is unreasonable. Reasonableness is determined by weighing the utility of
the restraint against the injurious consequences of enforcing the restraint."
Restatement (Third) of Property: Servitudes § 3.4 (Am. L. Inst. 2000). Comment f
to section 3.4 of the Restatement addresses rights of first refusal: "Whether a right

1
  Clarke discusses the lead-up to the sale of the Subject Property to Fine Housing at
length in his brief. Clarke argues Fine Housing employed "predatory" tactics to
exploit RRJR and obtain title to the Subject Property. Because resolution of this
appeal turns solely on the validity of the Right, Fine Housing's conduct is irrelevant.
of first refusal is valid depends on the legitimacy of the purpose, the price at which
the holder may purchase the land, and the procedures for exercising the right."

       Many state courts apply the Restatement factors to determine—in a case-by-
case fashion—whether a right of first refusal unreasonably restrains alienation. See,
e.g., SKI, Ltd. v. Mountainside Props., Inc., 114 A.3d 1169, 1178 (Vt. 2015)
(analyzing the purpose of the right, the price, and the clarity of the procedures for
exercising the right to determine its impact on alienability); MS Real Est. Holdings,
LLC v. Donald P. Fox Fam. Tr., 864 N.W.2d 83, 91-93 (Wis. 2015) (same); Low v.
Spellman, 629 A.2d 57, 59 (Me. 1993) (same); Wildenstein & Co., Inc. v. Wallis,
595 N.E.2d 828, 832 (N.Y. 1992) (same); Hartnett v. Jones, 629 P.2d 1357, 1363
(Wyo. 1981) (same). We agree with the Restatement approach and hold the factors
to be considered in assessing whether a right of first refusal unreasonably restrains
alienation include (1) the legitimacy of the purpose of the right, (2) the price at which
the right may be exercised, and (3) the procedures for exercising the right. These
factors are not exclusive, and in this case, we will address another point raised by
Fine Housing—the lack of clarity as to what real property the Right encumbers.2

                                           III.

       Clarke argues the court of appeals erred in holding the Right is an
unreasonable restraint on alienation and contends the Right contains clear provisions
respecting the property encumbered by the Right and the price he would pay to
acquire the Subject Property. He argues it was not necessary for the Right to spell
out the procedures governing his exercise of the Right. Specifically, Clarke claims
(1) the Lease provides the Right applies to all of the Subject Property, (2) the Right
leaves the price to be determined by the seller, and (3) South Carolina law requires
the Right to be exercised within a reasonable time. 3 Because Clarke's action for
specific performance is one in equity, we apply a de novo standard of review to the
question whether the Right is an unreasonable restraint on alienation. See Campbell
v. Carr, 361 S.C. 258, 262-63, 603 S.E.2d 625, 627 (Ct. App. 2004).

2
    Fine Housing does not challenge the legitimacy of the purpose of the Right.
3
  Clarke also argues the court of appeals "erred in drawing inferences from John and
Robin Robinson's absence from trial." This argument was not in Clarke's petition
for rehearing to the court of appeals or his petition for a writ of certiorari; therefore,
it is unpreserved. Rule 242(d)(2), SCACR; Sloan v. Dep't of Transp., 365 S.C. 299,
307-08, 618 S.E.2d 876, 880 (2005) (noting an issue not raised in a petition for
rehearing and petition for writ of certiorari is unpreserved for review).
    A. What real property is encumbered by the Right?

       Typically, the identity of the property encumbered by a right of first refusal is
obvious from a plain reading of the instrument. Here, however, the Right is buried
in a lease of parking spaces, and the Lease contains Exhibit A—the description of
the Subject Property, which includes the buildings, the leased parking spaces, other
parking spaces, and other land. The Restatement does not address whether a lack of
clarity as to the real property encumbered by a right of first refusal is a factor to
consider in determining whether a right of first refusal is an unreasonable restraint
on alienation. We hold it is a valid consideration in this case.

       Clarke relies on Section 1.1 of the Lease to support his argument that the Right
unambiguously applies to all of the Subject Property. Section 1.1 states, "Lessee
hereby leases from Lessor the property generally described in Exhibit 'A' attached
hereto." Fine Housing argues Exhibit A "merely identified the location of the leased
parking spaces" and "[t]he remaining language of the Lease does not provide the
clarity needed to identify the property intended to be encumbered by the Right."
Fine Housing argues the uncertainty about the property the Right encumbers
supports the conclusion that the Right is an unreasonable restraint on alienation.

        We agree with Fine Housing. The Lease is unclear as to whether the Right
encumbers all of the Subject Property or only the leased parking spaces. Section 5.2
states in its entirety, "Right of First Refusal: Lessor grants the Lessee the right of
first refusal should it wish to sell." This begs the obvious question, Sell what?
Section 1.1 and Exhibit A do not support the conclusion that the Right applies to all
of the Subject Property. Other provisions in the Lease strongly indicate the Right
encumbers only the leased parking spaces. Section 2.1 provides, "The premises is
unimproved property to be used as a parking lot by both the Lessor and the Lessee."
Section 7.1 provides, "The Lessee and Lessor shall be entitled to use of one half
(1/2) of the spaces contained in the parking lot [which encumbrances all of the
property described in Exhibit A]." Section 7.1 establishes Exhibit A serves solely
to identify the location of the parking lot and the parking spaces leased by Clarke.

      As noted above, the Restatement does not address the effect on alienation
when a right of first refusal is not clear as to the property it encumbers, and we have
found no published decisions discussing this precise issue. 4 Nevertheless, it is

4
 The Iowa Court of Appeals issued an unpublished decision in which the court
partially based its holding that a right was unenforceable on the lack of clarity
readily apparent that a right of first refusal that does not identify the property it
encumbers can substantially restrain alienation of real property. We hold, under the
facts of this case, the uncertainty as to what property is encumbered by the Right
supports the conclusion that the Right is an unreasonable restraint on alienation.

   B. Price
        In general, provisions governing the price at which a right of first refusal may
be exercised are important in assessing the impact on alienation. For example, a
right of first refusal that may be exercised at a fixed price can substantially restrain
alienation. See Selig v. State Highway Admin., 861 A.2d 710, 719 (Md. 2004)
(explaining that a right of first refusal allowing the holder to purchase the property
at a fixed price inhibits alienability because with the passage of time, the fixed price
may bear no relationship to market value). However, where the holder of the right
may match the offer of a third party, the restraint on alienation may be lessened. See
Shiver v. Benton, 304 S.E.2d 903, 905 (Ga. 1983) ("If the holder of the preemption
right is merely entitled to meet the offer of an open market purchaser, there is little
clog on alienability.").

      Clarke emphasizes that the Right does not provide a fixed price at which he
could purchase the Subject Property. Clarke first contends the Right left the sales
price to be determined entirely by RRJR and simply required him to "match
whatever offer [RRJR] received" from a third party. Clarke alternatively contends
the exercise of the Right would have, to the benefit of RRJR, "touched off a bidding
competition for the property." Fine Housing argues the Right's failure to provide
any method for determining the price at which Clarke could exercise the Right
creates an unreasonable restraint on alienation.
       We agree with Fine Housing. The Right contains no price provisions at all.
Although a right of first refusal that is silent as to price might not restrain alienation
to the same degree as a right of first refusal containing a fixed price, a right of first
refusal should contain some method for determining the price at which it may be
exercised. If the Right provided that Clarke could acquire the Subject Property by
matching the terms of a third-party offer, the restraint on RRJR's power of alienation
would perhaps have been minimal. See Bortolotti v. Hayden, 866 N.E.2d 882, 890
(Mass. 2007) (explaining a right of first refusal that allows the holder to match any
bona fide offer made by a third party "works a de minimis restraint on

regarding the property subject to the right. See Franklin v. Johnston, 899 N.W.2d
741, at *8 (Iowa Ct. App. 2017) (unpublished table decision).
the alienation of property"). Of course, in this case, the Right does not include such
a provision.

       Where a right of first refusal provides no price terms, a dispute may arise as
to whether the holder of the right may purchase the property by matching a third-
party offer or only after participating in a bidding war with other prospective buyers.
That prospect hardly weighs in Clarke's favor. Under the facts of this case, the
complete absence of any method for determining price weighs in favor of a finding
that the Right is an unreasonable restraint on alienation.
   C. Procedures governing the exercise of the Right

      Clarke contends the Right provides satisfactory procedures governing the
exercise of the Right. We disagree because the Right contains no such procedures
whatsoever. Comment f to section 3.4 of the Restatement states:
      The provisions governing exercise of the right of first refusal are
      important in determining its impact on alienability. Lack of clarity may
      cause substantial harm by making it difficult to obtain financing and
      exposing potential buyers to threats of litigation. Lengthy periods for
      exercise of rights of first refusal will also substantially affect
      alienability of the property.
When applying this factor, courts often examine the time period within which the
right can be exercised after the owner decides to sell. See Hare v. McClellan, 662
A.2d 1242, 1249 (Conn. 1995). Alienation can be substantially restrained when the
holder of the right has an extended time to decide whether he will purchase the
property. MS Real Est. Holdings, 864 N.W.2d at 91. However, when the time
allowed for the exercise of the right is reasonable, the right will generally be
enforced. Lorentzen v. Smith, 5 P.3d 1082, 1086 (N.M. Ct. App. 2000).
       Clarke contends, contrary to the Restatement, that "a right of first refusal does
not require detailed instructions on how to exercise it to be valid." Clarke argues the
seller must only notify the holder of the right of his intent to sell to trigger the right
of first refusal. As for the time period in which the holder must exercise the right,
Clarke cites Hobgood v. Pennington for the proposition that "[w]hen the contract
does not include a provision that time is of the essence, the law implies that it is to
be done within a reasonable time[.]" 300 S.C. 309, 314, 387 S.E.2d 690, 693 (Ct.
App. 1989).
      Clarke does not dispute that the Right prescribes no limitation on the time
within which he could exercise the Right after being notified of RRJR's desire to
sell. Again, there are no provisions at all delineating the procedural requirements
Clarke must follow to exercise the Right. This deficiency supports the conclusion
that the Right is an unreasonable restraint on alienation. See Girard v. Myers, 694
P.2d 678, 683 (Wash. Ct. App. 1985) ("The preemptive right in this case states no
time limit within which the holder must act and sets forth no procedural requirements
that the holder must follow to exercise the right. Such a preemptive right permits
the holder to frustrate a sale to a third party simply by stalling and then threatening
litigation when a controversy develops."); MS Real Est. Holdings, 864 N.W.2d at
91-92 ("[W]here the . . . procedure for exercising the right is clear, and the time for
exercising the right when it arises is reasonably short, its practical effect on
alienation is de minimis.").
        Clarke's reliance on Hobgood and his suggestion that the law implies a
"reasonable time" within which he could exercise the Right are without merit. In
Hobgood, the court of appeals addressed the issue of whether a real estate purchase
and sale agreement expired after the closing date contained in the agreement. 300
S.C. at 313-14, 387 S.E.2d at 692-93. The Hobgood court held that because the
contract did not include a provision stating time was of the essence, the contract had
not expired: "When the contract does not include a provision that time is of the
essence, the law implies that it is to be done within a reasonable time; and the failure
to incorporate in the memorandum such a statement does not render it insufficient."
Id. at 314, 387 S.E.2d at 693.
       Hobgood lends Clarke no support for two reasons. First, Hobgood is factually
distinguishable because it had nothing to do with a right of first refusal. Second,
Clarke misses the point of the Restatement approach by arguing a court can simply
imply a reasonable time requirement in which a right of first refusal must be
exercised. The whole point of the Restatement is to predetermine a limited time
within which a right of first refusal must be exercised to protect the owner's power
of alienation. A judicially implied "reasonable time" requirement would do little to
protect the owner's power of alienation. Lengthy litigation over what is or is not a
reasonable time under the facts of any given case will necessarily restrain alienation.

                                     Conclusion
      The Right does not identify the property it encumbers, contain price
provisions, or contain procedures governing the exercise of the Right. We conclude
the Right is an unreasonable restraint on alienation. We therefore affirm the court
of appeals' holding that the Right is unenforceable.
AFFIRMED.

BEATTY, C.J., KITTREDGE and HEARN, JJ., concur. FEW, J., concurring
in result only in a separate opinion.
JUSTICE FEW: I concur in result. In my opinion, the instrument Clarke contends
grants him a right to purchase the property does not grant him any rights at all. The
phrase "first right of refusal" is a descriptive term used to summarize an instrument
that sets forth in detail the right of one person to purchase property the seller may
otherwise choose to sell to a third person. In this case, the instrument simply recites
the descriptive term as though the term means anything independent of the detailed
rights set forth in a legitimate first right of refusal. An instrument that simply recites
the descriptive term without the underlying detailed explanation of the rights
conveyed is meaningless. This instrument is meaningless; it is not, therefore, a "first
right of refusal." I do not disagree with the Restatement section the majority adopts.
However, I would not reach the question whether the instrument is an unreasonable
restraint on alienation because I would find the instrument at issue in this case is not
a restraint on alienation. The instrument says nothing, does nothing, restrains
nothing. I concur in result.