By Ariana L. Johnson
A prospective real-estate buyer could exercise her right-of-first-refusal on a given property — even though the contract that gave her that option may have had a lack of consideration, the Supreme Judicial Court has decided.
In so ruling, however, the court found that in future cases consideration would be required for option contracts.
Chief Justice Margaret H. Marshall wrote on behalf of the court: "[We] conclude that no sound legal justification exists for maintaining the common-law fiction that an option contract executed under seal conclusively imports consideration."
The court, however, declined to apply the new rule retroactively. Marshall explained that to "disturb the contract rights and expectations of a potentially sizeable class of parties who have bound themselves under the previous law would potentially result in hardship."
The 20-page decision is Knott v. Racicot, Lawyers Weekly No. 10-145-04.
Landmark Decision
Boston attorney Samuel B. Moskowitz, counsel for the defendant seller, stated that "the court has reversed a common law rule that has been in effect for centuries."
He explained that, under the common law, if a document was signed under seal, a court did not look to see if a promise was made or whether there was consideration supporting the promise.
But "from now on, whether they are under seal or not, [the contracts] have to be under consideration," Moskowitz noted.
He said that the case is likely to have implications beyond option contracts and that it is important for practitioners to keep this in mind.
"Although the court struck down the common law rule, it was reluctant to apply it to the facts of this case and did not apply [the new rule] retroactively. The court recognized that there are people who relied on the common law rule until the day before the SJC's ruling."
However, Moskowitz warned that the court may not be troubled in the future by applying the rule retroactively for other types of contracts, which was hinted at in a footnote.
Brian J. Buckley of Boston, attorney for the plaintiff, agreed that in the future parties may no longer rely upon a seal to substitute for consideration in an option contract.
"Any future contract should closely follow the court's opinion, and specifically should meet the criteria set out in the Restatement," he remarked.
Buckley said the property was conveyed to his client, however, and that she was was relieved to find out that her right-of-first-refusal was upheld.
"There was always a cloud over her title in the event that the SJC reversed the trial court's finding," he explained.
Attempted Purchase
Louis S. Racicot owned the Linwood Mill, a commercial property located in Northbridge and Uxbridge.
In June 1997, Maiden Merchant International Inc. entered into a written lease with Linwood Mill Realty Inc. for office space on the property.
Racicot signed the lease as president of Linwood Mill Realty, Inc., and defendant Deborah Kay Neumann signed as chair, CEO and founder of Maiden Merchant.
Neither Maiden Merchant nor Neumann ever paid rent for the leased space.
However, Neumann provided services to Racicot without payment, including negotiating with other tenants, running errands, and permitting the plaintiff's decedent to use her phone and fax machine.
On June 12, 1998, Racicot and Neumann executed a one-line document purporting to give Neumann a right-of-first-refusal to purchase the property.
The Worcester County Registry of Deeds refused to record the document.
Racicot and Neumann then asked an attorney to prepare a right-of-first-refusal in a form the registry would record.
The attorney sent Racicot and Neumann a generic right-of-first-refusal that he had printed from a legal forms software program and into which he had inserted their names and addresses.
The preprinted portion of this second document recited that it was executed "under seal" and "for good and valuable consideration, the receipt whereof is hereby acknowledged."
Under the terms of this document, Racicot agreed not to sell the property prior to Jan. 1, 2004, to a third party without first notifying Neumann of the third party's acceptable bona fide offer to purchase, and offering Neumann the opportunity to purchase the property on the terms recited in the bona fide offer.
Further, Neumann was required to purchase the property within 90 days of notifying Racicot of her intention to do so
The document also provided for conveyance of the property with good and marketable title, subject only to the encumbrances referenced in the bona fide offer.
On Dec. 22, 1998, the document, signed by Racicot and Neumann and notarized, was filed at the Worcester County Registry of Deeds and recorded.
Some time thereafter, Racicot received an acceptable bona fide offer from Riverdale Mills Corp., an entity owned and controlled by the plaintiff, James Knott, to purchase the property for $350,000.
Through counsel, Racicot notified Neumann of the offer on Jan. 18, 2001 "in accordance with" the right-of-first-refusal.
Two days later, Knott and Racicot entered into a purchase-and-sale agreement.
The P&S agreement specifically referenced Neumann's right-of-first-refusal; it appended the document as an exhibit.
On Jan. 25, 2001, Racicot and Knott amended the purchase-and-sale agreement to provide that Racicot would grant Knott a mortgage on the property if Knott advanced certain funds to prevent foreclosure and made certain property repairs.
Subsequently, Knott paid approximately $174,000 in taxes and expenses for the property.
On Jan. 26, 2001, Neumann hand-delivered written notice to Racicot's attorney that she intended to exercise her right-of-first-refusal pursuant to the terms of Knott's offer.
On Jan. 30, 2001, Racicot died.
On March 30, 2001, Knott commenced a civil action against Racicot's estate for specific performance of the P&S.
Joan Racicot, Racicot's widow and executrix, moved to add Neumann as a party defendant. Various counterclaims and cross-claims followed.
Neumann filed a verified cross-claim and counterclaim for specific performance of the right-of-first-refusal, and Knott asserted as an affirmative defense that the right was void for want of consideration.
On April 26, 2001, Knott delivered to Henry Lane, an attorney representing both the estate and the executrix, a check made payable to the estate for the agreed purchase price of the property minus Knott's $50,000 down payment and sums advanced under the amendment.
Lane deposited the check into his client escrow account.
That same day, Neumann's attorney, Mark L. Donahue, met Lane at the Worcester County Registry of Deeds, and on behalf of his client tendered a check for $350,000 payable to the estate and drawn on the account of Donahue's law firm.
Because a mortgage on the property prevented Lane from delivering a good and sufficient quitclaim deed to Neumann, as both the right-of-first-refusal and the purchase-and-sale agreement required, Donahue did not leave his client's check with Lane. Instead, he had Lane sign the check stub acknowledging the date and place that the check had been tendered, then left the registry with check in hand.
Trial was held on June 28, 2001. The Probate & Family Court judge found that "consideration is presumed in an agreement under seal" and ordered the estate to convey the property to Neumann pursuant to the right-of-first-refusal.
The Appeals Court affirmed and Knott appealed.
Doctrine Has Eroded
Marshall wrote that contracts under seal "have conclusively been held to import consideration."
However, she acknowledged that the sealed contract doctrine has "eroded considerably" in Massachusetts and that the SJC abolished the common law sealed contract doctrine 30 years ago with respect to contracts executed on behalf of an undisclosed principal.
Marshall noted that options contracts are an important part of business and the reasons for upholding the common law sealed contract doctrine seem far less apparent today.
The judge declared that the SJC would adopt the Restatement (Second) of Contracts, which states that "[a]n offer is binding as an option contract if it is (a) in writing and signed by the offeror, recites a purported consideration for the making of the offer, and proposes an exchange of fair terms within a reasonable time; or (b) is made irrevocable by statute."
Despite this, however, the court would not invalidate the defendant's right-of-first-refusal for lack of consideration, she said.
First, Marshall remarked that "retroactivity generally is not appropriate where is would alter rights in Massachusetts contract and properly law where issues of reliance might impose hardship on unsuspecting parties."
Second, "the sealed right-of-first-refusal in this case meets the criteria set out in the Restatement," the judge wrote.
Marshall rejected the plaintiff's appeal from post-trial orders and his claim that Racicot's signature on the right-of-first-refusal was forged.
The court also rejected the plaintiff's post-trial motion claiming that the judge who ordered the executrix to convey the property to Neumann erred in not conducting an evidentiary hearing.
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August 16, 2004
