Black-letter propositions
- 01
An option contract is a promise to keep an offer open for a period, so the offeror cannot revoke it; it usually needs consideration, though a court may enforce it under promissory estoppel where the offeree relied.
- 02
An option gives the optionee the power to compel the owner to sell at the stated price whether or not the owner is willing, while a right of first refusal, or preemptive right, only requires the owner, when and if the owner decides to sell, to offer the property first to the holder at the stipulated price, and if the holder declines the owner may sell to anyone.
- 03
A majority of courts apply the rule against perpetuities to rights of first refusal, but the Washington Supreme Court in Robroy Land Co. v. Prather declined to and instead read an unlimited right to last for a reasonable time.
- 04
Statutes may limit how long a recorded option clouds title: under California Civil Code section 884.010, a recorded option to purchase expires of record six months after its expiration date, or six months after the instrument's recording if no date is ascertainable, unless an instrument giving notice of exercise or extension is recorded.
- 05
Under the doctrine of merger, the contract of sale is generally merged into the deed on delivery and acceptance, but the doctrine is not absolute: it applies the parol evidence and integration principles, and terms that are collateral to the conveyance or that the parties meant to survive are not merged.
- 06
Traditionally the buyer of land took the risk of its quality absent an express warranty, fraud or misrepresentation, but builders and sellers of new construction may be held to an implied warranty that the structure was designed and built in a reasonably workmanlike manner, with the buyer giving notice of breach within a reasonable time.
- 07
Statutory schemes for residential builders can replace the common-law warranty with defined construction standards, as California's Civil Code section 896 does for original construction intended to be sold as a dwelling unit, and California requires transferors of single-family homes to make statutory disclosures that cannot be waived.
Use this attack sequence under time
Frame the issue
Classify the right as an option or a right of first refusal by asking whether the holder can force a sale or only receive the first offer.
Resolve the next checkpoint
Test the right against the rule against perpetuities where the jurisdiction applies it, and against any statute limiting recorded options.
Resolve the next checkpoint
For claims after closing, ask whether the promise merged into the deed or is collateral and intended to survive.
Finish the conclusion
For a new home, consider an implied warranty of quality, notice of breach, and any statutory construction standards.
Common wrong turns
- A right of first refusal does not give the holder power to force a sale, so it is not triggered until the owner decides to sell.
- Delivery of a deed extinguishes contract terms about title but does not automatically extinguish promises collateral to the conveyance.
- An implied warranty of quality attaches to builders and sellers of new construction, not to the ordinary owner who resells a used home.
Worked example
A grantor gives a neighbor 'the first right of refusal to purchase' a parcel, with no time limit. Decades later, the grantor's heirs contract to sell the parcel to a third party without offering it to the neighbor's successor.
The right of first refusal was triggered when the heirs decided to sell, so they had to offer the parcel to the holder on the third party's terms. In a jurisdiction that applies the rule against perpetuities to such rights, the holder's right might be void, and in one that follows Robroy it lasts for a reasonable time, so the holder may be able to upset the sale.
Practice this topic
Options and rights of first refusal
Cornell's Wex entry says an option contract is a promise to keep an offer open for a period during which the offeror may not revoke. It ordinarily requires consideration, though a minority enforce a written option reciting consideration that was never paid, and a court may enforce an option under promissory estoppel where the offeree relied on it.
In Robroy Land Co. v. Prather, the Washington Supreme Court drew the distinction. An option creates in the optionee a power to compel the owner to sell at a stipulated price whether or not the owner is willing. A preemption does not give the holder a power to compel an unwilling owner to sell. It requires the owner, when and if the owner decides to sell, to offer the property first to the holder at the stipulated price, and if the holder declines, the owner may sell to anyone. The court noted that a majority of courts apply the rule against perpetuities to preemptive rights but declined to do so, holding that an agreement unlimited on its face is presumed to have been intended to last a reasonable time. California Civil Code section 884.010 adds a recording rule for options: a recorded option to purchase expires of record six months after its ascertainable expiration date, or six months after the instrument was recorded if it has no ascertainable date, unless an instrument giving notice of exercise or extension is recorded.
Merger by deed
Szabo v. Superior Court reviewed a trial court's ruling that a plaintiff could not sue on a warranty in the agreement of sale because provisions of the agreement merge into the deed on delivery. The California Court of Appeal said the rule that prior expressions are merged into the deed is not as broad and absolute as abbreviated statements suggest. A deed requires interpretation, the parties' intent controls, and merger by deed is an application of the integration principle that governs written contracts generally, so the question depends on whether the contract provision was intended to be superseded.
The court left the interpretation of the agreement, escrow instructions and deed for trial, where extrinsic evidence could be received. The practical point for the exam is that title covenants merge into the deed, while collateral promises the parties meant to survive closing may not.
Implied warranty of quality in new construction
Pollard v. Saxe & Yolles Development Co. explains that the sale of land and buildings has traditionally been governed by caveat emptor, with the buyer assuming the risk of quality absent an express warranty, fraud or misrepresentation, but that many chattel-sale principles have gradually been adopted in real property. The court concluded that builders and sellers of new construction should be held to what is impliedly represented, that the completed structure was designed and constructed in a reasonably workmanlike manner, and that notice of breach of warranty should be given within a reasonable time.
California Civil Code section 896 now provides statutory standards for residential construction defects, limiting a claimant's causes of action against a builder, and other listed defendants to violations of those standards, and section 1102 requires disclosures on transfers of single-family residential property that cannot be waived.
Frequently asked questions
What is the controlling rule for options, rights of first refusal, merger by deed, and implied warranties in new homes?+
Say whether the right is an option or a right of first refusal, identify when it can be exercised, test it against perpetuities and recording statutes, and address merger or an implied warranty when the facts involve a closing or a new home.
What is the difference between an option and a right of first refusal?+
An option lets the holder compel a sale at a set price, while a right of first refusal only requires the owner to offer the property first if the owner decides to sell, according to Robroy Land Co. v. Prather.
Does the rule against perpetuities apply to rights of first refusal?+
A majority of courts apply it, but Robroy declined to and read an unlimited right to last for a reasonable time.
When does a recorded option expire of record in California?+
Six months after its ascertainable expiration date, or after its recording if none is ascertainable, unless notice of exercise or extension is recorded, under Civil Code section 884.010.
Do all contract terms merge into the deed?+
No. Szabo v. Superior Court holds that the merger rule is not absolute, and intent to have a provision survive can preserve it.
Is there an implied warranty for new homes?+
Under Pollard v. Saxe & Yolles, builders and sellers of new construction are held to an implied warranty of reasonably workmanlike construction.