Rights of First Refusal in South Carolina

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The new year brought us a South Carolina Supreme Court opinion about restraints against alienation in Barry Clarke v. Fine Housing, Inc., Appellate Case No. 2020-001371. It also is a reminder that substance trumps form.

What are restraints against alienation? They are an encumbrance on real estate. They attempt to limit your ability to sell your property, either outright or subject to certain conditions. A right of first refusal is a restraint against alienation.

In South Carolina, restraints against alienation that are unreasonable are unenforceable. On one end of the spectrum, an absolute prohibition against selling land is unenforceable. On the other hand, certain restraints may be enforced if properly drafted.

In Clarke, the Supreme Court adopted factors promulgated by the American Law Institute’s Third Restatement. Specifically, “whether a right 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.”

The right of first refusal being examined in that case was a single sentence in a parking lot lease: "Right of First Refusal: Lessor grants the Lessee the right of first refusal should it wish to sell.”

Justice Few’s concurring opinion best described the Court’s treatment of this clause:

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 . . . 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.

The majority opinion examined the clause in detail finding that it failed to specifically identify the property subject to the right, failed to have price terms, and failed to have procedures by which the right could be exercised. Taken together, the claimed right of first refusal was unenforceable.

A takeaway from the Clarke opinion is that contractual rights should be written in a way that allows a court to serve as the interpreter of the agreement. The more it appears that a court is being asked to draft the agreement after the dispute arises, the less likely a claimed right is to be enforceable.

The attorneys at DuRant & DuRant, P.A. located at 2107 Farlow Street, Myrtle Beach, SC 29557 provide real estate legal services, including drafting purchase and sale agreements, to buyers and sellers in Myrtle Beach, South Carolina and the surrounding areas.