September 14, 2018
Author: Erik Piazza
Organization: PHELPS DUNBAR LLP
Louisiana Civil Code article 2620 governs option contracts involving the sale of immovable property.
This article provides:
An option to buy, or an option to sell, is a contract whereby a party gives to another the right to accept an offer to sell, or to buy, a thing within a stipulated time.
An option must set forth the thing and the price, and meet the formal requirements of the sale it contemplates. Acts 1993, No. 841, § 1, eff. Jan. 1, 1995.
Revision Comments – 1993
• This Article is a particularized application, for the contract of sale, of the definition of option found in Civil Code Art. 1933 (Rev. 1984). It changes the law insofar as it eliminates the requirement of a “consideration” contained in Article 2462 of the Louisiana Civil Code of 1870.
• An option to buy differs from an irrevocable offer to buy in that, while the latter is a mere pollicitation, the option is a contract. See C.C. Art. 1933 (Rev. 1984).
• Under this Article, an option for a perpetual or indefinite term is null. See Crawford v. Deshotels et al., 359 So.2d 118 (La.1978); Becker and Assoc., Inc. v. Lou-Ark Equipment Rentals, Inc., 331 So.2d 474 (La.976); Bristo v. Christine Oil & Gas Co., 139 La. 312, 71 So. 521 (1916).
• Under this Article, an extension of the time stipulated in an option to buy immovable property must be in writing. Hoth v. Schmidt et al., 220 La. 249, 56 So.2d 412 (La.1951).
• Upon the optionee’s exercise of the option, the option is transformed into a contract to sell. McMikle v. O’Neal, 207 So.2d 922 (La.App. 2d Cir.1968).
• In this Article, the requirement of a clearly stipulated time within which the option may be exercised helps to distinguish the option from an irrevocable offer, see C.C. Art. 1928 (Rev.1984).
• Under this Article, an option must satisfy the requirements for perfection of the contact of sale as set forth in Civil Code Article 2439, supra, as well as the formal requirements as provided in Civil Code Article 1839 (Rev.1984).
• Under this Article, the consent of the party to whom the option is given, which is not yet an acceptance of the offer to sell or buy contained in the option, may be signified by his giving something in return for the right of option or by his express or tacit acceptance of such right. The requirement of “consideration” contained in Article 2462 of the Louisiana Civil Code of 1870 is eliminated since it is inconsistent with the Louisiana System.
Nevertheless, parties may agree that the grantee of the option will give the grantor, besides his consent, a corporeal or incorporeal thing of the kind that, at common law, would be regarded as a “consideration”, but that at civil law, is a counter-performance that makes a contract onerous. See 2 Litvinoff, Obligations 193-198 (1975).
• Under this Article, an option is heritable and may be assigned, unless the parties have intended the contrary, or the circumstances clearly show that such was the parties’ intent. See C.C. Arts. 1765-66 (Rev.1984).
The basic option contract grants one person the right to acquire property, within a stipulated time for a stipulated (agreed upon) price. The seller cannot withdraw from the contract before the expiration of the option contract. All essential elements of a contract must be present, including the payment of consideration or some other cause (such as the payment of rent). The option payment typically becomes the property of the seller upon execution of the contract, although the option payment may be applied against the purchase price at closing.
An option must be exercised within a stipulated time period; an open ended option is unenforceable as a matter of public policy. Further, unless the option is granted at the as part of a lease, the maximum option period is ten years. See Civil Code article 2628.
Louisiana Civil Code article 2625 governs a right of first refusal. This article provides:
A party may agree that he will not sell a certain thing without first offering it to a certain person. The right given to the latter in such a case is a right of first refusal that may be enforced by specific performance.
Revision Comments – 1993
i. This Article is new. It does not change the law, however. It gives legislative formulation to a kind of agreement long recognized by Louisiana jurisprudence. See Ebrecht v. Pontchatoula Farm Bureau Association, Inc. et al., 498 So.2d 55 (La.App. 1st Cir.1986); Crawford v. Deshotels et al., 359 So.2d 118 (La.1978); Price v. Town of Ruston, 171 La. 985, 132 So. 653 (1931).
ii. An agreement of first refusal may be attached to another contract, such as a sale or a lease. See C.C. Art. 2627.
iii. The grantor of a right of first refusal is conditionally bound; he need only offer the thing for sale to the promise if he – the promisor – should decide to make a certain transaction. See 2 Litvinoff, Obligations 188 (1975); Litvinoff, “Consent Revisited”, 97 La.L.Rev., 699, at 753-54 (1987).
iv. Under this Article, since an offer to sell made pursuant to a right of first refusal need not be irrevocable, it may be revoked before it is accepted by the holder of the right of first refusal, in which case the grantor of the right remains bound not to sell to another without first making another offer to the promisee. Litvinoff, “Consent Revisited”, 47 La.L.Rev., 699, at 754 (1987).
v. Under this Article, a right of first refusal is heritable and assignable, unless the parties provide otherwise. See C .C. Art. 1765 (Rev.1984).
R.S. 9:3196 et seq.
A right of first refusal resembles an option, in that both allow one party to purchase a particular thing from another party at some point in the future, and both are unilateral promises. A key characteristic of an option is a continuing obligation to sell if the option-holder accepts within the stipulated time. In a right of first refusal, however, the owner of the property is under no obligation whatsoever to offer the property to the holder of the right. Indeed, the property owner may decide never to sell the property. A right of first refusal does not confer on the holder the power to compel an unwilling owner to sell, while an option does grant such power to the optionee. A right of first refusal, like an option, must be exercised within 10 years, unless the option is granted during the term of a contract that requires periodic performance, such as a lease.
Sample Option to Purchase Clause from a Commercial Lease:
At any time during the Term, Tenant shall have an option to purchase the Premises for the price of One Hundred Thousand and No/100 Dollars ($100,000). Upon request, Tenant shall subordinate its option to purchase to any mortgage placed on such property by Landlord’s lender. If the option is exercised, the sale must be completed on or before sixty days after the exercise of the option to purchase but no later than the expiration of the Term. Property taxes shall be prorated at the act of sale. The sale shall be an “AS-IS” sale with Tenant waiving all redhibitory rights in Louisiana Civil Code Articles 2520 et seq. The consideration for this option are the obligations contained in the Lease.
Sample Right of First Refusal Clause from a Commercial Lease:
If at any time during the Term of this Lease Landlord (i) desires to sell for value all or any part of the Leased Premises pursuant to a bona fide offer from a third party; or (ii) desires to transfer, exchange, distribute or donate all or any part of the Leased Premises for value, no value or otherwise; which Landlord signs and accepts expressly subject to the provisions of this Article, Tenant shall have a right of first refusal to purchase the Leased Premises on the same terms and conditions as offered by such third party.
Landlord shall ensure that any third party offer shall specifically refer to Tenant’ s right of first refusal hereunder, and shall cause any such offer to include a provision making such offer expressly subject to Tenant’s right of first refusal hereunder. Landlord shall provide Tenant with a copy of such third party's offer, together with such other information as Tenant reasonably may request in connection with its evaluation of such offer. Within five (5) days after Tenant receives a copy of such offer Tenant may, by written notice to Landlord, elect to purchase the Leased Premises upon the same terms and conditions as offered by such third party. If Tenant does not give the notice referred to herein or fails to do so timely, then Landlord shall be free to execute and to conclude the sale of the Leased Premises to the third party in strict accordance with the terms and conditions of the third party offer. However, if the sale of the Leased Premises to such third party is not consummated for any reason, then Tenant’s right of first refusal shall thereafter apply to any new offer received by Landlord. Additionally, if Tenant declines to exercise its right of first refusal on the same terms and conditions as offered by such third party, but Landlord and such third party thereafter vary the terms and conditions of the original offer, then Tenant’s right of first refusal shall apply to such varied offer.
1. Option to Purchase
Patel v. Liebermensch, 86 Cal. Rptr.3d 366 (Cal. 2008)
Patel leased a condominium unit from Liebermensch pursuant to a lease which contained an option to purchase. The Option to Purchase set the purchase price but did not contain any other terms. Patel exercised the option to purchase in writing and Liebermensch demanded that (i) Patel purchase the property “as is”; (ii) Patel pay a 10% deposit ($29,000); and (iii) Patel allow Liebermensch up to 120 days to close so that Liebermensch could find suitable property for a 1031 exchange. Although Patel agreed to purchase “as is”, he was only willing to pay a $5,000 deposit and Patel’s lender would not lock-in his interest rate for 120 days. Although Patel ultimately gave in to the Liebermensch’s demand, Liebermensch refused to sell the property and Patel sued for specific performance. The court enforced the option to purchase under Liebermensch’s terms that were agreed to by Patel.
Discussion: Options to Purchase should always include the terms of purchase. Although Civil Code Article 2620 requires that an option must include “the thing and price, and meet the formal requirements of the sale it contemplates”, it does not require that all terms of the sale be specified. The Option to Purchase should include other essential terms such as (1) whether the property will be sold with or without warranty; (2) whether the property is being sold “as is” or with warranty of condition; (3) the time period in which the act of sale must take place; and (4) whether the purchaser has an additional period to inspect the property and title. In the event that the parties do not specify these essential terms, it is likely that a court will require the parties to close according to usual and customary practices.
2. Right of First Refusal
Schroeder v. Duenke, 265 S.W.3d. 843
Duenke purchased property in August, 1980. In the act of sale, the sellers reserved a right of first refusal which would allow them to repurchase the property for an amount equal to a “bona fide offer”. In 1996, Duenke sold the property to his son for $85,000 and an appraisal at that time valued the property at $125,000. $60,000 of the $85,000 purchase price was financed. Several years later, the Duenke’s son listed the property for sale for $250,000 and one of the original sellers discovered the conveyance from Duenke to his son. The sellers sued for specific performance and contended that they would have purchased the property on the same terms as the Duenke’s son. The Trial Court held that the right of first refusal did not apply to the sale to Duenke’s son because it was not a “bona fide offer” but was merely a inter-family gift. The court justified its ruling by stating that the property was sold below fair market value and was not listed for sale on the open market. The Court of Appeals first noted that under Missouri law, a transfer if property by gift from one family member to another does not trigger a right of first refusal; however, a gift assumes that no consideration or compensation is given. The Court of Appeals held that the transfer was not a gift because the son paid a purchase price of $85,000 and also financed $60,000 of the purchase price. Although the Court of Appeals ultimately remanded the case to the Trial Court because there was a genuine issue of fact whether the son’s offer to pay $85,000 was a “bona fide offer” since “bona fide offers” must be based upon fair market value.
Discussion: A right of first refusal should be drafted to include all potential transfers that could be deemed “bona fide offers”, such as exchanges and gifts/donations. When drafting the right of first refusal, the drafter should be sure that the right does not apply to offers in excess of fair market value which could cause the party to either exercise the right of first refusal or forfeit it.