Iowa Supreme Court Says Statute of Limitations Not a Bar to Claim for Breach of Right of First Refusal

On June 12, 2020, the Iowa Supreme Court issued an opinion concerning the right of first refusal to purchase farmland. The plaintiffs did not seek specific performance, but instead sought monetary damages for an alleged breach of contract. The Court found that the statute of limitations for real estate transactions did not apply and no other grounds warranted granting summary judgment on the issue.  

Background

The plaintiffs are a married couple that sold a piece of farmland to the husband’s sister and her husband. The deed conveying the farmland granted the plaintiffs a right of first refusal to purchase the land. It was recorded in 1973.   

In 2015, after the sister and her husband had both passed away, the sister’s estate sold the property to a third party. The estate did not notify the plaintiffs of the sale or give them an opportunity to purchase the farmland. The plaintiffs learned of the sale when they saw the new owner removing a fence near the property. They then filed a lawsuit alleging that the estate breached the “contract, covenant and restriction granting [them] a right of first refusal with respect to the . . . real estate.”  They sought monetary damages in the amount of $195,000, plus interest at the statutory rate. They claimed they were ready, willing, and able to purchase the property.

Procedural History

The executor disallowed the claim stating it was barred by Iowa law and moved for summary judgment.

After July 1, 1992, an action shall not be maintained in a court, either at law or in equity, in order to recover or establish an interest in or claim to real estate if all the following conditions are satisfied:

1. The action is based upon a claim arising more than ten years earlier or existing for more than ten years.
2. The action is against the holder of the record title to the real estate in possession.
3. The holder of the record title to the real estate in possession and the holder’s immediate or remote grantors are shown by the record to have held chain of title to the real estate for more than ten years

Iowa Code § 614.17A. In general, the statute “bars actions to recover or establish interests in or claims to real estate in two situations: if the claim arose more than ten years previously, or if a ten-year extension period expired without the claimant filing a statement triggering an additional ten-year extension.” In re Estate of Hord, 836 N.W.2d 1, 5 (Iowa 2013). The estate argued the law barred the plaintiffs’ claim because it was an action to establish an interest in real estate. The plaintiffs disagreed claiming this was a breach of contract dispute for damages.

The district court granted the motion for summary judgment finding there to be no distinction between an interest or claim in real estate and an action for damages. The court relied on West Lakes Properties, L.C. v. Greenspon Property Management, Inc. which found a right of first refusal to be an interest in real estate. See 2017 WL 4317297 (Iowa App. Sept. 27, 2017). Concluding that the statute of limitations barred the plaintiffs’ claim, the court granted the motion for summary judgment.

The plaintiffs appealed and the case was transferred to the Court of Appeals. Relying on West Lakes as well, the Court of Appeals affirmed finding that Iowa Code § 614.17A made the contracted right of first refusal unenforceable. The plaintiffs once again appealed. The Iowa Supreme Court granted further review.

Supreme Court Decision

Statute of Limitations

The Court first considered whether Iowa Code § 614.17A barred an action for damages. The Court found that the district court and Court of Appeals incorrectly relied on West Lakes. West Lakes involved a claim for an interest in real estate against the current owner of the property. While the statute clearly prohibits actions establishing an interest or claim in real estate under certain circumstances, this does not include a contractual claim of damages. The plaintiffs in this case sought monetary damages for a real estate agreement, not ownership or interest in the property. The Court found that the statute did not apply.

Alternative Grounds for Dismissal

The estate argued that the Court should have affirmed the lower court’s decision based on four alternative factors.

First, the estate claimed that the plaintiffs’ contractual claim merged into the deed and therefore the plaintiffs’ claim failed. Under the merger doctrine, the contract for the sale of property merges into the deed. Any collateral agreements not in the deed are extinguished. The Court ruled that the merger doctrine did not bar the plaintiffs’ claim because they did not seek to enforce a collateral agreement, but one that was expressly stated in the deed.

The estate next claimed that the plaintiffs’ claim was barred by the statute of frauds. Evidence of the creation or transfer of any interest in land is improper unless it is in writing and signed by the parties. See Iowa Code § 622.32(3). The estate argued that because the sister had not signed the deed, the contract claim failed. However, the Court ruled that the statute does not apply when “the vendee, with the actual or implied consent of the vendor, has taken and held possession of the premises under and by virtue of the contract….” The Court found that the statute of frauds did not apply here because the deed named both the sister and her husband as owners, with the sister taking possession of the property as the vendee.

The estate next argued that Iowa Code § 614.17A indirectly barred the plaintiffs’ claim because it prohibited them from establishing a claim in real estate. The estate reasoned that the plaintiffs could not prove a breach in contract without showing a claim in real estate. The Court rejected this argument, finding that nothing in the statute extinguished the right of first refusal or otherwise barred a plaintiff from establishing that such a right existed. While the plaintiffs did need to establish their right of first refusal, the statute only barred certain types of actions seeking to enforce an interest in real estate. The right of first refusal was contained in the deed. The statute did not extinguish the underlying right itself.  

Finally, the estate argued that the plaintiffs’ claim was barred by the statute of limitations set forth in Iowa Code § 614.1(5), which creates a ten-year statute of limitations for written contract claims. The estate claimed that the statute of limitations began to run in 2005 when the sister conveyed the property to herself and her then-husband. The Court disagreed, finding that the claim in the current appeal was whether the estate breached the right of first refusal when it sold the property to a third party in 2016.

Summary

The Court ruled that Iowa Code § 614.17A did not apply to a claim for monetary damages, even though that claim arose from a right of first refusal to purchase real estate. The Court vacated the court of appeals’ decision, reversed the lower court’s ruling granting summary judgment, and remanded for further proceedings.