In Re EGBERT R SMITH TRUST

Michigan Supreme Court
Lansing, Michigan
Chief Justice: Justices:

Opinion Clifford W. Taylor Michael F. Cavanagh
Elizabeth A. Weaver
Marilyn Kelly
Maura D. Corrigan
Robert P. Young, Jr.
Stephen J. Markman

FILED MARCH 19, 2008

In re EGBERT R SMITH TRUST
_________________________________
GLEN PHILLIPS and DALE PHILLIPS,

Petitioners-Appellees,

v No. 133462

BETTY HOMER, Successor Trustee,

Respondent-Appellant.

BEFORE THE ENTIRE BENCH

WEAVER, J.

We granted leave to appeal to consider whether a right of first refusal is

revocable once the holder of the right receives notice of a third party’s offer and

whether the petitioners-tenants are entitled to summary disposition and specific

performance of the right of first refusal.

We affirm the judgment of the Court of Appeals and hold that, under the

lease agreement in this case, the petitioners had an irrevocable option to buy the

leased property after the respondent presented to the petitioners a bona fide

purchase offer from a third party (giving the petitioners the right of first refusal)
and that the respondent breached the lease agreement by failing to honor the

option. Furthermore, because real property is unique, and the petitioners timely

exercised their option to purchase the property, specific performance is the proper

remedy in this case.

I. FACTS AND PROCEDURAL HISTORY

This case arises out of a residential lease agreement for a 75-acre tract of

land between the respondent-successor trustee and the petitioners-tenants. In the

early 1980s, Egbert Smith died owning a 75-acre tract of farmland. By the terms

of his will, the property became an asset of Smith’s testamentary trust. In May

1982, Donna Sutton qualified as the trustee of Smith’s trust.

As trustee, Sutton entered into a lease agreement with Glen and Dale

Phillips, the petitioners. The lease was for a period of five years, with an option to

renew under the same terms for an additional five years. The petitioners timely

renewed the lease for a second term. On March 27, 2001, the petitioners and

Sutton executed an additional five-year extension of the lease. As extended, the

lease was to expire by its terms in 2005.

Paragraph 15 of the lease contained the following right of first refusal:

Landlord hereby grants to Tenant the option to purchase the
leased premises upon the following terms:

Tenant shall have the right of first refusal to match any bona
fida [sic] offer to purchase made with regard to the subject property.
In the event Tenant fails to exercise his option within 30 days

following presentment of said bona fida [sic] offer to purchase the
option herein granted shall terminate.

This option to purchase shall continue through the primary
term of this lease and any extensions thereof. Upon Tenant
notifying Landlord in writing of his intent to exercise his option to
purchase closing for said purchase shall be scheduled at a reasonable
time mutually agreeable to the parties.

Upon Tenant’s exercising his offer to purchase, Tenant shall
pay to Landlord in cash the purchase price less the deposit herein
specified and less any and all rental payments made during the lease
term.

The respondent, Betty Homer, was appointed successor trustee of the

Egbert R. Smith Trust in 2001. In 2004, the respondent received an offer to

purchase the property for $225,000. She asserts that she never accepted the offer.

However, on July 28, 2004, the respondent’s attorney sent a letter to the

petitioners stating in pertinent part:

Pursuant to the Lease, it is required that you have the right to
match any bona fide offer presented. This letter is to inform you that
Ms. Homer has a signed purchase agreement with the offer of
$225,000 for the farm. You must notify our office of your decision
to exercise your option within 30 days. The thirty days will expire
on August 30, 2004. Your offer will be referred to Ms. Homer for
her review and final decision. Upon the expiration of that time
period, Ms. Homer will be selling the farm.

On August 9, 2004, the respondent’s counsel wrote to the petitioners stating

that Ms. Homer had declined the original offer and was not selling the farm at that

time.

On August 13, 2004, within the 30-day period set forth in the lease and the

July 24, 2004, letter, but after the August 9, 2004, letter informing the petitioners

that the offer to sell had been rejected, the petitioners gave written notice that they

were exercising their option to purchase the property.

The respondent refused to sell the property to the petitioners. The

petitioners filed a petition in the Sanilac County Probate Court, seeking to compel

the sale of the land pursuant to the lease agreement. The probate court heard oral

argument on the parties’ cross-motions for summary disposition on December 16,

2005, and granted the respondent’s motion for summary disposition. The probate

court ruled that the respondent’s July 28, 2004, letter triggered the petitioners’

opportunity to exercise their option to purchase the property. However, the court

determined that the respondent’s August 9, 2004, letter had countermanded the

July 28 notice before the petitioners exercised their right of first refusal and

therefore precluded the petitioners from exercising their right of first refusal. As a

result, the probate court held that no enforceable agreement existed. The probate

court entered an order to that effect on January 12, 2006.

The petitioners appealed. On February 15, 2007, the Court of Appeals

issued an opinion reversing the judgment of the probate court.1 The Court of

Appeals reasoned that after petitioners received notice of the original offer on the

property from the respondent, the right of first refusal became an option contract

that was not revocable by the respondent during the 30-day period specified in the

lease.

1
In re Egbert R Smith Trust, 274 Mich App 283; 731 NW2d 810 (2007).

The respondent filed an application for leave to appeal in this Court. This

Court granted leave to appeal and ordered the parties to brief, among other issues,

(1) whether a right of first refusal is revocable once the holder of the right receives

notice of a third party’s offer and (2) whether the petitioners are entitled to

summary disposition and specific performance of the right of first refusal.2

II. STANDARD OF REVIEW

This Court reviews de novo rulings on summary disposition motions,

viewing the evidence in the light most favorable to the nonmoving party.3

Additionally, this case involves an issue concerning the proper interpretation of

contracts, which is a question of law that is subject to review de novo by this

Court.4

III. ANALYSIS

The resolution of this case involves interpretation of the contractual lease

agreement between the petitioners and the respondent. In interpreting a contract, it

is a court’s obligation to determine the intent of the parties by examining the

2
In re Smith Trust (Phillips v Homer), 479 Mich 853 (2007).
3
Wilson v Alpena Co Rd Comm, 474 Mich 161, 166; 713 NW2d 717
(2006).
4
Archambo v Lawyers Title Ins Corp, 466 Mich 402, 408; 646 NW2d 170
(2002).

language of the contract according to its plain and ordinary meaning.5 If the

contractual language is unambiguous, courts must interpret and enforce the

contract as written because an unambiguous contract reflects the parties’ intent as

a matter of law.6 However, if the contractual language is ambiguous, extrinsic

evidence can be presented to determine the intent of the parties.7

In this case, the plain language of the parties’ lease agreement characterized

the petitioners’ right of first refusal as an option. The lease agreement stated:

Landlord hereby grants to Tenant the option to purchase the
leased premises upon the following terms:

Tenant shall have the right of first refusal to match any bona
fida [sic] offer to purchase made with regard to the subject property.
In the event Tenant fails to exercise his option within 30 days
following presentment of said bona fida [sic] offer to purchase the
option herein granted shall terminate.

5
Frankenmuth Mut Ins Co v Masters, 460 Mich 105, 112; 595 NW2d 832
(1999).
6
Id. at 111.
7
New Amsterdam Cas Co v Sokolowski, 374 Mich 340, 342; 132 NW2d 66
(1965).

This section of the lease agreement expressly granted the petitioners an option to

purchase the leased premises in the event that the respondent decided to sell the

land. The plain language of the lease agreement demonstrates that the parties

intended that when a third party made a bona fide offer to purchase the property

and the respondent presented the offer to the petitioners, the petitioners had the

irrevocable option to purchase the property for the purchase price within 30 days

of the notice.

“An option is basically an agreement by which the owner of the property

agrees with another that he shall have a right to buy the property at a fixed price

within a specified time.”8 As stated in 17 CJS, Contracts, § 55, p 502:

An option contract is an enforceable promise not to revoke an
offer. It is a continuing offer or agreement to keep an offer open and
irrevocable for a specified period. It is a contract right, and the
optionor must keep the offer open. Until an option is exercised, the
optionor has the duty not to revoke the offer during the life of the
option.

An option is an enforceable promise not to revoke an offer for a specified time, in

this case 30 days.

The respondent’s July 28, 2004, letter triggered the petitioners’ right to

exercise their option under the lease agreement to purchase the property. The

letter expressly stated that the respondent had received a bona fide offer for the

8
Oshtemo Twp v City of Kalamazoo, 77 Mich App 33, 37; 257 NW2d 260
(1977).

property and would be selling the property at the expiration of the petitioners’

option period. Furthermore, the letter informed the petitioners that they “must

notify [the office of the respondent’s attorney] of your decision to exercise your

option within 30 days” and that the “thirty days will expire on August 30, 2004.”

Once the respondent notified the petitioners of a third party’s offer to

purchase the property, the option in the lease agreement became operative. As a

result, the respondent did not have the right to revoke her offer to sell the property

to petitioners until after the option period expired on August 30, 2004.

Respondent’s argument that her July 28, 2004, letter was nothing more than an

offer to sell that could be withdrawn at any time before acceptance is incorrect.

Given that the respondent breached the lease agreement by not honoring the

petitioners’ option, we next consider the appropriate remedy for the breach. Land

is presumed to have a unique and peculiar value, and contracts involving the sale

of land are generally subject to specific performance.9 In this case, the petitioners

seek specific performance of their option to purchase the property after the

respondent claimed to have revoked her tender of the third-party offer after she

rejected it. However, since the respondent could not revoke the option in the lease

once she presented the bona fide offer to the petitioners, the respondent was

contractually obligated to schedule a closing date to convey the property to the

9
Kent v Bell, 374 Mich 646, 651; 132 NW2d 601 (1965).

petitioners. Because real property is unique, and the petitioners timely exercised

their option to purchase the property, specific performance is the proper remedy.

IV. CONCLUSION

We conclude that, under the lease agreement, the petitioners had an

irrevocable option to buy the leased property after the respondent presented to the

petitioners a bona fide purchase offer from a third party and that the respondent

breached the lease agreement by failing to honor the option. Furthermore, since

real property is unique, and the petitioners timely exercised their option to

purchase the property, specific performance is the proper remedy in this case.

Accordingly, we affirm the Court of Appeals judgment.

Elizabeth A. Weaver
Clifford W. Taylor
Michael F. Cavanagh
Marilyn Kelly
Maura D. Corrigan
Robert P. Young, Jr.
Stephen J. Markman

STATE OF MICHIGAN

SUPREME COURT

In re EGBERT R SMITH TRUST

GLEN PHILLIPS and DALE PHILLIPS,

Petitioners-Appellees,

v No. 133462

BETTY HOMER, Successor Trustee,

Respondent-Appellant.

CORRIGAN, J. (concurring).

I concur in the majority’s result on the basis of the language of the parties’

lease agreement. The agreement characterizes petitioners’ right to purchase as an

“option” that would be triggered by a notice from respondent that she had received

a bona fide third-party offer to buy the property. Therefore, the lower courts did

not err in holding that the right became an irrevocable option to buy once

respondent notified petitioners that she intended to accept a third party’s offer. I

write separately to clarify that a right of first refusal does not always become an

irrevocable option once triggered by a third-party offer. Rather, in any given case,

the contract terms establishing a right of first refusal will control whether the right

either becomes an irrevocable option once triggered or, instead, may be revoked

by the owner if he in good faith changes his mind—and withdraws his offer to

sell—before the right is exercised.
This Court has long recognized that rights of first refusal and options to

purchase are governed by the contract terms established by the parties.1

Therefore, as the majority observes, ante at 5-6, the plain language of the contract

determines the nature of those rights in a given case.2 Accordingly, the Court of

Appeals erred to the extent that it relied on a general proposition that, when an

owner notifies the holder of a right of first refusal of a third party’s bona fide offer

to purchase, the right of first refusal automatically “transmute[s]” into an

irrevocable option. In re Egbert R Smith Trust, 274 Mich App 283, 287-288; 731

NW2d 810 (2007), citing 17 CJS, Contracts, § 56, p 503.

Generally, the owner’s willingness to sell to anyone is a condition

precedent that must be present for a right of first refusal to mature into a present

option to buy. 17 CJS, Contracts, § 56, p 503 (“A right of first refusal is a

conditional option which is dependent upon the decision to sell the property by its

owner.”).3 Parties may agree that, if the owner notifies the holder of the right of

1
See, e.g, Ridinger v Ryskamp, 369 Mich 15; 118 NW2d 689 (1962);
LeBaron Homes, Inc v Pontiac Housing Fund, Inc, 319 Mich 310, 313; 29 NW2d
704 (1947).
2
Quality Products & Concepts Co v Nagel Precision, Inc, 469 Mich 362,
375; 666 NW2d 251 (2003).
3
See also Miller v LeSea Broadcasting, Inc, 87 F3d 224, 226 (CA 7, 1996)
(“All [a right of first refusal] entitles the holder to do is to match an offer from a
third party should the grantor of the option be minded to accept that offer.”);
Chapman v Mut Life Ins Co of New York, 800 P2d 1147, 1150 (Wyo, 1990)
(“[W]hen the condition precedent of the owner’s intention to sell is met the right
of first refusal ‘ripens’ into an option . . . .”); Riley v Campeau Homes (Texas),
(continued…)

the owner’s intention to accept a bona fide purchase offer, the right matures into

an option to purchase that the owner may not revoke during the acceptance period.

But a right of first refusal does not automatically grant the holder of the right the

power to force a sale if the owner in good faith removes the condition precedent

by deciding not to sell at all. As stated in 17 CJS, Contracts, § 63, p 520: “A right

of first refusal does not create an irrevocable right to purchase which survives after

a proposed third-party transaction has been abandoned.”4

(…continued)

Inc, 808 SW2d 184, 187 (Tex App, 1991) (“[A] right of first refusal does not give

the lessee the power to compel an unwilling owner to sell.”).

4
17 CJS, Contracts, § 63, p 520 n 58 cites Lin Broadcasting Corp v
Metromedia, Inc, 139 AD2d 124, 133; 531 NYS2d 514 (1988), aff’d 74 NY2d 54
(1989), which stated that “unless the language of the applicable contractual
provisions state otherwise by expressly creating an irrevocable right, there is
nothing to prohibit [an owner] from in good faith changing [his] mind about
selling at any time prior to the invocation of the right of first refusal.” The opinion
of the New York Court of Appeals affirming Lin Broadcasting also helpfully
observed that
there is nothing to prevent the contracting parties, if they choose,
from simply agreeing on a provision that a first refusal offer, once
made, must remain open for a specified time, making it an option.
Moreover, to read into a right of first refusal such an unspecified
additional provision would be contrary to the general rule at
common law that an offer may be withdrawn at any time before it is
accepted. [Lin Broadcasting Corp v Metromedia, Inc, 74 NY2d 54,
62; 544 NYS2d 316; 542 NE2d 629 (1989) (citation omitted).]

Here, petitioners and respondent generally agree that Lin Broadcasting and similar
authorities conflict with cases like Henderson v Nitschke, 470 SW2d 410 (Tex Civ
App, 1971), on which the Court of Appeals relied. Smith Trust, 274 Mich App at
289-290. I find Henderson unpersuasive to the extent that it, like the Court of
Appeals in this case, relied on a general proposition that, once an owner decides to
sell, a right of first refusal automatically becomes an irrevocable option that
(continued…)

In sum, the terms of the parties’ contract will govern whether, when an

owner expresses his intent to accept a third party’s bona fide offer, a right of first

refusal becomes an irrevocable option that allows the holder of the right to force a

sale during the contractual acceptance period even if the owner in good faith

changes his mind and decides not to sell the property to anyone. I encourage

parties to explicitly establish in the terms of their contracts whether such an

irrevocable option is created or, instead, whether the owner may withdraw his

(…continued)
prevents the owner from changing his mind. Henderson, 470 SW2d at 412-413.
Otherwise, Henderson and Lin Broadcasting are distinguishable on the basis of
their facts. In Henderson, as here, the contract referred to the lessee’s right to
exercise an “option” after the owner notified the lessee of its intent to accept a
third party’s offer. Id. at 411. In Lin Broadcasting, to the contrary, the right of
first refusal was premised on the owner’s continuing desire to sell. Lin
Broadcasting, 139 AD2d at 132-134.

Further, cases commonly cited for the general proposition that a seller may
not revoke a right to purchase after that right has matured into an option do not
involve a seller’s decision to simply retain his own property, as in Henderson and
Lin Broadcasting. Rather, these cases most often address (1) sales made to a third
party without ever notifying the holder of the right of first refusal or (2) an
owner’s attempt to cancel a sale to the holder of the right after the holder
exercised his option without the seller having attempted to withdraw his offer
before the holder did so. See, e.g., cases cited in 17 CJS, Contracts, § 56, p 503 nn
88 and 89, for the (overbroad) proposition that “[o]nce the holder of a right of first
refusal receives notice of a third party’s offer, the right of first refusal is
transmuted into an option”: Miller, 87 F3d at 226-227 (addressing how precisely
the holder of the right of first refusal must match the third party’s offer in order to
exercise his option and prevent a sale to the third party); Hyperbaric Oxygen
Therapy Sys, Inc v St Joseph Med Ctr of Fort Wayne, Inc, 683 NE2d 243, 251 (Ind
App, 1997) (holding that, once the holder of the right of first refusal fulfilled the
contractual requirements to exercise his option, the seller could not impose
additional requirements in order to justify the sale to the third party that it
preferred).

offer to sell at any time before the holder of a right of first refusal exercises that

right to purchase.

Maura D. Corrigan