Wednesday, March 16, 2011

The Supreme Court of Virginia and Rights of First Refusal: Fairfax v. Riekse

Many a real estate lawyer's day has taken a turn to the interesting when a title examination reveals a right of first refusal (or "ROFR" in electronic shorthand) in the chain of title. 

Although rights of first refusal can (and do) vary in their particulars, the basic idea is that a person or entity obtains the right to purchase property before it can be transferred to a third party. The ROFR is often recorded in the County Clerk's Office, which puts potential purchasers on constructive notice of its existence.


In its recent opinion in Fairfax Redevelopment & Housing Authority v. Riekse (March 4, 2011), the Supreme Court of Virginia examined the particular issue of whether a right of first refusal is enforceable by specific performance, against the original ROFR-grantor, when the property has changed hands not by sale but by foreclosure. You can read Justice Mims's opinion in Riekse, here.


When the Fairfax Redevelopment & Housing Authority conveyed property to a married couple in 1989, the deed of conveyance included a 30-year right of first refusal to repurchase the property if the couple died or "determined to sell the land."

The property was subsequently transferred to a new owner by foreclosing trustees, and the Housing Authority argued that its ROFR should still be enforceable against the original owners, since it was a covenant running with the land.  The new third party owner, not surprisingly, objected to the Housing Authority's position.

In its decision, the Supreme Court held that the Housing Authority could not obtain specific performance against the original owners, because the original owners no longer owned the property. However, the Court did leave open the possibility -- which had been suggested by the Fairfax trial court -- that the Housing Authority could bring an action of ejectment against the current owner.


The result in Riekse strikes this observer as fair to the current owner.  That said, the Housing Authority may have a valid complaint that "constructive notice" (via the recorded chain of title) is not worth much unless the rights granted to prior owners can be enforced in court.  For that reason, it will be intersting to see whether the Housing Authority pursues (and utlimately prevails on) a claim for ejectment.