Recently, in Clarke v. Fine Housing, Inc., 2023 WL 29046 (S.C. Jan. 4, 2023), the Supreme Court of South Carolina adopted the approach set forth in Restatement of the Law Third, Property (Servitudes) § 3.4 in determining whether a right of first refusal was an unreasonable restraint on alienation.
In that case, a business owner who had entered into a lease agreement for the use of an adjacent property’s parking spaces sought specific performance against the lessor’s successor in title and against the current owner of the property after learning of the property’s sale to the current owner, alleging that a right of first refusal contained in the lease provided him with the right to purchase the entire property, not just the leased parking spaces. After a bench trial, the trial court found that the lessee’s right of first refusal was enforceable as to the entire property, and ordered the current owner to convey the property to the lessee upon his payment of $350,000. The court of appeals reversed, holding that the lessee’s right of first refusal was unenforceable because it was an unreasonable restraint on alienation.
The Supreme Court of South Carolina affirmed the court of appeals’ decision, holding that the lessee’s right of first refusal was an unreasonable restraint on alienation and therefore unenforceable. In making its decision, the court looked to Restatement of the Law Third, Property (Servitudes) § 3.4, which provided that “[a] servitude that imposes a direct restraint on alienation of the burdened estate is invalid if the restraint is unreasonable. Reasonableness is determined by weighing the utility of the restraint against the injurious consequences of enforcing the restraint.” The court relied on the factors set forth in § 3.4, Comment f, agreeing with the Restatement’s approach that “[w]hether 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”; in this case, the court also considered the lack of clarity as to what property the right purported to encumber, noting that the Restatement’s factors were not exclusive.
The court observed that the lease was unclear as to whether the right encumbered the entire property or only the leased parking spaces, which supported a finding that the right was an unreasonable restraint on alienation. The court found further support through its application of the factors in § 3.4, Comment f, reasoning that the lessee’s right of first refusal did not contain any price provision or any provision governing the exercise of the right, such as a limitation on the time within which the lessee could exercise the right after being notified of the lessor’s intent to sell. Noting that the right did not contain any procedure whatsoever, the court pointed out, quoting § 3.4, Comment f, that “provisions governing exercise of the right of first refusal are important in determining its impact on alienability” and a “[l]ack of clarity may cause substantial harm.” The court rejected the lessee’s argument that “a court [could] simply imply a reasonable time requirement in which a right of first refusal must be exercised.” The court explained that implying a reasonable time would be contrary to the Restatement’s approach and would restrain alienation through ligation over what was a reasonable time.
The concurring opinion agreed with the court’s result and with the Restatement, but argued that it was not necessary to reach the question of whether the instrument purporting to provide the lessee with a right of first refusal was an unreasonable restraint on alienation, because it was not a restraint on alienation. The concurring opinion explained that the instrument did not grant the lessee any right, because “[a]n instrument that simply recites the descriptive term without the underlying detailed explanation of the rights conveyed is meaningless,” and concluded that “[t]he instrument says nothing, does nothing, restrains nothing.”