Introduction
In a recent decision, the New Jersey Appellate Division decided whether a right of first refusal clause in a prior deed constituted a restriction on the alienability of a property such that it prevented marketable title from being delivered at closing. The parties who had the ability to exercise the option had agreed to a waiver—although not in a form acceptable to the buyers—for which the seller had found one underwriter willing to insure over. The Court ultimately relied on the unambiguous language of the contract to affirm the lower court's grant of summary judgment in the buyer's favor that marketable title could not be delivered while the option was of record. See 771 Allison Court LLC v. Sirianni, No. A-1566-22, 2024 N.J. Super. Nupur. LEXIS 897 (N.J. App. Div. May 17, 2024).
Background
Harvey Berk owned 771 Allison Court, a residential home in Moorestown (the "Property"). On October 13, 2010, Berk executed and recorded a deed with a right of first refusal in it, requiring notice and an offer to purchase shall first be given to Berk's children upon any future conveyance of the Property (the "ROFR"). The deed further provided that the ROFR "shall only be extinguished by the death of [Berk's children]".
In 2019, Berk sold the Property to a developer, Jeffrey Schneider, for $760,000. Schneider then formed Allison Court LLC ("Allison Court") and spent $1 million in renovations on the Property in order to sell it as a "luxury home." During this transaction, Schneider learned of the ROFR and that it created "difficulties" in selling the Property. Instead of extinguishing the ROFR, Schneider simply acknowledged in his sales contract that he was aware of it.
Allison Court listed the Property for $2.3 million in February of 2021 but did not disclose the ROFR. On February 5, 2021, it entered a contract (the "Contract") to sell the Property to defendants, Nicholas and Brett Sirianni (the "Siriannis"). Allison Court did not give notice of the sale to Berk's children or make them an offer on the Property. Nor did it disclose the ROFR to the Siriannis.
Section 11 of the Contract required title to the Property to be "free from all claims or rights of others," and that it be good, marketable, and insurable at regular rates. Failure to transfer title would allow the Siriannis to void the Contract under Section 11.
On March 9, 2021, the Siriannis hired a title search company to conduct a title survey—which disclosed the ROFR. Unable to secure title insurance because of the ROFR, the Siriannis demanded its removal from the deed before closing. In response, Allison Court sought to obtain a waiver of the ROFR from Berk's children. The first effort was an unnotarized waiver of rights signed by an unnamed representative of Berk & Berk Trust and "44" on behalf of Haley Ann Berk. Berk's son, Dan, did not sign the waiver. Allison Court eventually produced a notarized waiver signed by both Berk children but not a release of the ROFR. With the waiver, however, the title search company found one underwriter who agreed to insure over the ROFR for an additional $50 fee. But the Siriannis would not accept the waiver and refused to close on the Property.
On April 13, 2021, the Siriannis served a notice of termination, asserting a breach of contract for Allison Court's inability to convey marketable title "free and clear from the rights of others." Four months later, Allison Court sold the Property after disclosing the ROFR for $1,950,000.
Thereafter, Allison Court filed a single count complaint alleging breach of contract against the Siriannis for their failure to close on the Property and for the termination of the Contract. The Siriannis filed an answer, including a counterclaim for breach of contract and affirmative defenses.
After discovery, the parties filed cross-motions for summary judgment. Allison Court argued that the ROFR was not a restriction on use, thus falling outside of the Contract's Section 11. Conversely, the Siriannis asserted that Allison Court failed to convey title free from "all claims or rights of others," which entitled them to void the Contract.
On January 6, 2023, the motion judge granted the Siriannis' cross-motion for summary judgment, holding that the ROFR constituted a restriction on the alienability of the Property. The trial court held first that Allison Court had an obligation to disclose the ROFR before entering into the Contract. The Court then reasoned that Allison Court was not able to convey marketable title "free and clear from the rights of others" and that the availability of title insurance coverage at a higher cost did not change that indisputable fact.
Appeal
On appeal, Allison Court argued that the trial court erred in: (1) holding that title was required to be "free from all claims or rights of others;" (2) not finding the ROFR to be an exempted "restriction" under the Contract; and (3) authorizing the Siriannis' "illegal" cancellation of the Contract despite finding the ROFR did not substantially interfere with the use of the property for residential purposes. Moreover, Allison Court argued that the trial judge failed to find that the $50 additional fee to insure the ROFR did not raise the available title insurance above regular rates.
The Appellate Division affirmed the lower court's grant of summary judgment in the Siriannis' favor, reasoning that unambiguous contracts are enforced as written. Like the trial judge, the Court found that: (1) Section 11's express terms required that Allison Court convey property that would be free from "all claims or rights of others" at the time of closing and (2) a right of first refusal restricts the right of a seller to "dispose freely of [the] property by compelling [the seller] to offer it first to the party who had the first right to buy." The ROFR impacted any future conveyance of the Property until the death of Berk's children. Since Allison Court did not provide notice to Berk's children of the intention to sell the Property and did not obtain a release of the ROFR, Allison Court was thus unable to deliver good, marketable, and insurable title. This relieved the Siriannis of the obligation to close on the Property pursuant to Section 11 of the Contract. Finally, because Allison Court was unable to deliver marketable title, it was immaterial whether an additional $50 fee to insure the ROFR was above regular rates.
Takeaway
This case first confirms the obvious: a right of first refusal is a restriction on the alienability of property, rendering a contract requiring marketable title void. Thus, any seller of real estate should also do the obvious and disclose a right of first refusal before entering into any real estate contract, and not rely on curative measures before closing. Simply put, taking shortcuts because a restriction makes a property difficult to sell can lead to disaster or a loss of $400,000, as in the case here.
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