Face Challenges Confidently

155 McMillan v. Dooley

Thursday, September 3rd, 2015

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
The case of McMillan v. Dooley, 144 S.W.3d 159 (Tex. App.–Eastland 2004, pet. filed), deals with a common problem associated with the exercise of a preferential right to purchase a portion of the properties in a package sale. This case follows a typical fact pattern of an exchange of letters or communications between the seller/potential buyer and the holder of the preferential right involving: notice of the sale, presentment of the terms, exercise of the right, and then a controversy over whether the right was validly and timely exercised. In this particular case, the seller failed to give the required notice of sale to the holder of the preferential right, Dooley, and seller closed with the buyer, McMillan. Dooley found out about the sale almost immediately and telephoned the buyer McMillan. McMillan made an oral offer during this conversation to sell the entire package to Dooley, but Dooley declined the package because he wanted only the Dooley lease. Dooley did not file suit until several years later.
“Notice” that a sale has occurred does not necessarily mean that the notice required by the preferential right has been given, nor does it necessarily define the terms of sale. The court must construe the language creating the preferential right to purchase to determine the rights of the parties. Most of the opinion is devoted to an analysis of the adequacy of a presentment in the context of a package sale and under the specific facts of this sale, whether or not the rightholder was obligated to purchase the entire package to claim the limited interest subject to the right, and the obligation to exercise the right or lose it.
The court did not expend any analysis on the original failure to give notice. Instead, the court simply cites existing authority for the general principles that when there is a failure to give notice, the buyer takes subject to the rightholder’s option. When the rightholder learns of the conveyance the rightholder has the opportunity to accept or reject within the specified time frame, just as if the notice was then properly given. The continuing option is not perpetual. The rightholder must choose between exercising the right or acquiescing in the transfer. Therefore, late notice, when given, starts the clock. This preferential right provision reserved to Dooley the right to purchase the Dooley lease, required notice of the highest bona fide price offered, and then Dooley had ten days to accept or lose the right.
As to the presentment itself, absent some other express contractual provision, the seller has an initial duty to make a reasonable disclosure of the offer’s terms, and the rightholder has a subsequent duty to undertake a reasonable investigation of any terms unclear to him, but the rightholder has no duty to act in order to exercise his preferential right unless and until he receives a reasonable disclosure of the terms of the contemplated conveyance. A sufficient presentment may be made, from a mechanical perspective, if there is a reasonable disclosure of the terms. The court found in the facts of the case that a reasonable disclosure of the terms of the conveyance was made to Dooley. Therefore, Dooley knew the terms of sale, and the clock was running.
The court rejected Dooley’s claim that Dooley’s reservation restricted the seller’s right to make his best deal (a package sale). The court confirmed the general proposition that the seller is free to strike its best deal and to require the rightholder to match that bargain, subject only to any restrictions found in the reservation of the right. The seller is free to impose conditions on the sale “as long as those conditions are commercially reasonable, imposed in good faith, and not specifically designed to defeat the [preferential purchase] rights. Where the owner meets these three standards, the holder of the [preferential purchase right] lacks grounds to remove specific conditions from the contract, or to extract other concessions as part of the agreement.” These factors relate to the right to object to sale conditions not expressly prohibited by the preferential purchase provision and to the manner in which the rightholder may respond in order to exercise the right. Dooley’s preferential right applied to the Dooley lease only, and the seller could not force Dooley to take more than the Dooley lease.
Although the purchaser of property subject to a preferential purchase right takes the property subject to that right and the holder of that right can enforce its option to acquire the property, the holder must do so within the specified time frame, in accordance with the terms of the right. The rightholder’s duty to act is an affirmative duty and the failure to act is tantamount to a rejection of the opportunity to exercise the right. The court held that Dooley, although not required to accept the package including the other leases, was required to timely act. In fact, Dooley timely rejected the package deal and then did nothing until the time to act had expired. The court suggested that the proper response should have been an exercise of the right, subject to objections to disputed terms. Because Dooley responded in the specified time period that he wished to decline the offer, he had no right thereafter to exercise that option.
Each preferential right will be construed in accordance with its specific terms. The significance of this case is the general recital of the process to exercise that right, in the absence of other terms in the document creating the right. In the context of a package sale, to preserve the right, the holder (who has been given notice and informed of the terms of sale) must clearly exercise the right, subject only to objections to disputed terms.