"Right-of-First Refusal” in Farm Lease Not Valid

 

A “right of first refusal” to purchase farmland by a tenant under a farm lease agreement is typically enforceable if the farm lease is properly drafted and a correct legal description of the land is set out in the written lease agreement.  But, care must be taken to make sure the wording of the right is clear.  This case demonstrates the need for the parties to an ag lease to seek the help of an attorney in drafting farm lease agreements containing such a provision.

In this Michigan state court case, the lessees (cash-rent farmers) entered into one-year written lease agreements over a period of time with each of the lessors (siblings who owned undivided interests in the land).  The last of these agreements was for the 2007 calendar year, and provided the lessees “the opportunity to purchase the property” in the event the lessors decided to sell.  The words “right of first refusal” were not used.  Instead, the lease provided that “if the lessor decides to sell the property, the lessee will be given an opportunity to purchase the property.” The lease agreements also protected the lessees’ right to plant and harvest crops in the final year of each lease agreement, in the event that a sale occurred before the end of the lease.

In March of 2007, the lessors informed the lessees of their intent to sell the property and gave the lessees the option to buy the farmland at the asking price of $2,850 per acre. At that time, the lessees informed the lessors that they could not afford the current asking price. Again, in August of 2007, the lessees noticed a “for sale” sign on the property and inquired about the status of the farmland. At this point, the land was not yet sold and the lessees expressed an interest in buying the farmland and obtained financing to do so. In the meantime, the farm was sold to another party. When the lessees were informed that the land had been sold, they brought suit against the lessors and the new owner.

At trial, the lessees asked for specific performance and damages, citing the language in the lease agreement that they had the “right of first refusal” to the property. The lessees also claimed that the farm lease had been improperly terminated, even though this was a one-year lease and they were allowed to harvest their crops. The trial court ruled in favor of the lessors and the purchaser, because they deemed the “right of first refusal” in the lease to be invalid. The trial court found that the lease merely gave the lessees “the opportunity” to purchase, rather than a right of first refusal, and the lease agreements failed to satisfy the statute of frauds requirements in Michigan.

On appeal, the court discussed what constitutes a properly drafted “right of first refusal” in a farm lease. According to the court, a properly drafted “right of first refusal” is valid in the state of Michigan, but such rights are to be “narrowly construed” by the courts- meaning that the written language in the lease agreement must precisely confer on the lessee(s) a preferential right to purchase the property.  Here, the court looked at the plain language of the lease agreements and found some ambiguity.  Because, the court noted, farm lease agreements are essentially contracts between the parties, the language and the parties’ intent must be clear. However, the lease agreements did not contain the words “right of first refusal.”  Thus, the lease agreement only conferred to the lessees a mere “opportunity” to purchase the land.  Given the plain meaning behind the word “opportunity” and the fact that the lessees were put on notice, several times, of the impending sale of the farmland, the court determined that they had sufficient opportunity to purchase the land.

The appellate court also determined that the lessees’ claims would have failed anyway for a “lack of definiteness” in the lease agreement. This finding stemmed from a lack of a complete legal description in the lease agreement. The agreements only specified that quantity of the acreage, not the precise legal location of the property. Thus, the lessees, when drafting the lease agreements, failed to adequately disclose the location of the land.  Indeed, court the court stated that the “descriptions of the farmland were grossly deficient.”

The appellate court also addressed the lessees’ legal arguments against the purchaser of the property. The lessees claimed that the purchaser was not a bona-fide purchaser under the Michigan “race-notice statute” and that he failed to honor the remainder of the lessees’ lease term.  However, the court disagreed.  The court noted that a purchaser is still a bona-fide purchaser if land is purchased without notice of defect in the seller’s title.  That means that the purchaser assumed he had clear title to the property based on the lessors’ assurances.  Also, the court determined that the lessees were not entitled to damages for the termination of the lease. That’s because the lease stated that, “if the lessor should sell the property after the crop is planted, the new owner may not take possession until the crop is harvested.” The purchaser and the lessors allowed the lessees to harvest their crops and appropriately complied with the lease.  Gerstenberger Farms, Inc. v. Grimes, 2010 Mich. App. LEXIS 726 (Mich. Ct. App., Apr. 22, 2010.)

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