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Options to Repurchase Property – A Cautionary Tale on Drafting

October 28, 2013Articles
A recent Ohio Court of Appeals decision highlights the importance of careful drafting in real estate documents and the need for due diligence in property transactions. Sellers of land sometimes intend to reserve a right to repurchase the property if certain conditions are not met. If a dispute occurs, the courts, not the parties, interpret that language.

The Seventh District Ohio Court of Appeals recently reviewed the language of one repurchase option and invalidated rights the sellers thought they had included in their deed. The court focused on the specific language of the deed in deciding Wells Fargo Bank, N.A., v. Michael, 2013-Ohio-2545 (2013). The court ruled the option to be ineffective because it found no evidence in the document that the parties meant for the option to bind subsequent owners.

James and Norma Fleagane sold their property in Bellaire, Ohio, in February 2002. They included in the deed an option to repurchase the property at any point for fifty years. The option in the deed said, “... [T]his right shall be enforceable by the Sellers, or their direct descendants, or assigns.” No similar language addressed whether the buyers’ descendants or assigns would be bound by their promise. The deed also included a right of first refusal for the Fleaganes if the buyers negotiated a sale of the property. Nine years later, the bank foreclosed on the property, and the Fleaganes attempted to exercise their option to repurchase and their right of first refusal to purchase the property.

The court rejected the attempts to exercise both the option and the right of first refusal. Key to the court’s decision is that a covenant contained in a deed can be enforced against future owners only if (1) the covenant “touches and concerns” the land, (2) the parties are in “privity” of contract, and (3) the parties intend for the covenant to “run with the land.” In this case, the option did not satisfy the third prong of the test. The court reasoned that the drafter knew how to express an intent for the covenant to transfer to future owners of the land because the deed did transfer the repurchase option to the descendants of the sellers. The court held that by not binding the buyers’ descendants, the drafters must have made an intentional choice. Additionally, the right of first refusal was not triggered because the language gave the Fleaganes the right to buy only if the buyers negotiated a sale, which they had not done when the bank foreclosed.

Other courts may reach different conclusions in similar circumstances, but the opinion highlights the fact that where language is ambiguous or unclear, a court – not the parties sitting at the negotiating table – may determine what the parties meant.

The case serves as a reminder to those involved in real estate transactions that language matters. Those drafting real estate documents, especially those including future rights, should be clear and specific, lest a court later interpret the language in ways other than how the parties anticipated. Purchasers or lenders should carefully review the original language to ensure they understand exactly what rights exist and how courts might interpret them.

When in doubt, consult with an experienced real estate attorney, who can draft clear language that will withstand court scrutiny and can advise on how courts might interpret documents.