Smith v. Mitchell

• Decision Date: 15 August 1980
• Docket Number: No. 127,127
• Citation: 269 S.E.2d 608,301 N.C. 58
• Parties: W. Osmond SMITH, III v. Jack MITCHELL and wife, Laura Mitchell, and Thomas G. Barber and wife, Sandra M. Barber.
• Court: North Carolina Supreme Court

Page 608

269 S.E.2d 608

301 N.C. 58

W. Osmond SMITH, III v. Jack MITCHELL and wife, Laura Mitchell, and Thomas G. Barber and wife, Sandra M. Barber.

No. 127.

Supreme Court of North Carolina.

Aug. 15, 1980.

W. Osmond Smith III, Yanceyville, pro se, and Ramsey, Hubbard & Galloway by Mark Galloway, Roxboro, for plaintiff-appellant.

Latham, Wood & Balog by B. F. Wood and Steve A. Balog, Graham, for defendants-appellees.

CARLTON, Justice.

I.

The record reveals that in 1967 W. O. Smith, Jr., and his wife Roberta K. Smith placed certain restrictive covenants expressly running with the land on a plat of real property they owned in Caswell County. In addition to the usual covenants limiting development on the plat to residential dwellings of a certain size and environmental soundness, the Smiths' duly recorded restrictive covenants included Article XIV. which provided:

If any future owner of lands herein described shall desire to sell the lands owned by him, he shall offer the parties of the first part the option to repurchase said property at a price no higher than the lowest price he is willing to accept from any other purchaser. Parties of the first part agree to exercise said option or to reject same in writing within 14 days of said offer. This covenant shall be binding on the parties of the first part and their heirs, successors, administrators, and executors or assigns for as long as W. Osmond Smith, Jr. shall live and for 20 years from the date of his death unless sooner rescinded.

In 1973, plaintiff, W. Osmond Smith III, succeeded W. O. Smith, Jr. and Roberta K. Smith in interest to the land as their heir, successor and assignee. Plaintiff deeded Lot No. 16 in the plat to defendants Mitchell on 26 September 1974. The Mitchells' deed was made subject to all recorded restrictive covenants, including Article XIV., quoted above. In July 1975, defendants Mitchell deeded Lot No. 16 to defendants Barber without first offering the land to plaintiff as they were required to do under the terms of Article XIV. Defendants Mitchell did this despite plaintiff's notification to them that he stood ready, willing, and able to purchase the lot.

Plaintiff thereafter sued for specific performance, or, in the alternative, for damages of some $2,500.00 for breach of the restrictive covenant. Defendant families each counter-claimed for damages in excess of $5,000.00 alleging breach of certain warranties in their deeds and also alleging that plaintiff's lawsuit had clouded their title.

Both sides moved for summary judgment. The trial court granted summary judgment for defendants, stating that Article XIV. was an unlawful restraint on the right to freely alienate property, was against public policy and was therefore void. Plaintiff appealed to the Court of Appeals. That court affirmed the trial court.

We granted plaintiff's petition for discretionary review 4 January 1980.

The Court of Appeals held "squarely" that "any restriction on a landowner's right to freely alienate his property, even though limited as to time and certain as to price, is void as an invalid restraint on alienation." (Emphasis in original.) 44 N.C.App. at 476, 261 S.E.2d at 233. We disagree. Certain such restrictions on alienability, if defined as preemptive rights and if carefully limited in duration and price, are not void per se and will be enforced if reasonable. Moreover, we find the specific restrictive covenant before us here to be a reasonable preemptive right which is not void. We therefore reverse the Court of Appeals.

II.

A preemptive right "requires that, before the property conveyed may be sold to another party, it must first be offered to the conveyor or his heirs, or to some specially designated person." 6 American Law of Property § 26.64 at 506-07 (1952). See also Restatement of the Law of Property § 413; L. Simes & A. Smith, The Law of Future Interests § 1154 (2d ed. 1956); 6 R. Powell, The Law of Real Property § 842 at 12-13 (Rohan ed. 1979); Christopher, Options to Purchase Real Property in North Carolina, 44 N.C.L.Rev. 63, 66 (1965). Sometimes termed a "right of first refusal," Christopher, supra, preemptive provisions, while analogous to options, are technically distinguishable. An option creates in its holder the power to compel sale of land, 6 American Law of Property, supra at § 26.64; Simes & Smith, supra at § 1154, n. 44. A preemptive provision, on the other hand, creates in its holder only the right to buy land before other parties if the seller decides to convey it. 6 American Law of Property, supra at § 26.64; Simes & Smith, supra at § 1154, n. 44. Preemptive provisions may be contained in leases, see, e. g., R. J. Reynolds Realty Company v. Logan, 216 N.C. 26, 3 S.E.2d 280 (1939), in contracts, see, e. g., Bennett Veneer Factors, Inc. v. Brewer, 73 Wash.2d 849, 853-54, 441 P.2d 128, 132 (1968) or, as is the case here, in restrictive covenants contained in deeds or recorded in chains of title.

The defendants and the Court of Appeals relied on Hardy v. Galloway, 111 N.C. 519, 15 S.E. 890 (1892) as authority for the proposition that any preemptive right is an impermissible restraint on alienation in North Carolina. We believe defendants and the Court of Appeals have misapplied Hardy v. Galloway for the following reasons.

First, the policy considerations behind the common law prohibition of restraints on alienation have never absolutely forbidden all such restraints. Thus the law has long allowed such indirect restraints as conveying a fee subject to a possibility of reverter or to a condition subsequent. Furthermore, while the rationale underlying the common law prohibition of direct restraints on alienation has been traced to the necessity of maintaining a society controlled primarily by its living members and the desirability of facilitating the utilization of wealth, 4 Restatement of the Law of Property, Introductory Note to Part II at p. 2379 (1944), the policy absolutely favoring alienability has always conflicted with another common law tenet that one who has property should be able to convey it subject to whatever condition he or she may desire to impose on the conveyance. Id. at p. 2380. See also J. Webster, Real Estate Law in North Carolina § 344 at 432 (1971).

Faced with this tension, the law has evolved in such a way that some direct restraints on alienation are permissible where the goal justifies the limit on the freedom to alienate, 4 Restatement on the Law of Property, Introductory Note, supra at p. 2380, or where the interference with alienation in a particular case is so negligible that the major policies furthered by freedom of alienation are not materially hampered, Id. Thus the general rule is that a restraint on alienation which provides that the property cannot be alienated, a disabling restraint, Simes & Smith, supra at § 1131, Restatement of the Law of Property § 404, is per se invalid, Simes & Smith, supra at § 1137; Restatement of the Law of Property § 406, while restraints which provide only that someone's estate may be forfeited or be terminated if he alienates, or that provides damages must be paid if he alienates, may be upheld if reasonable. Restatement of the Law of Property § 406.

As applied in other jurisdictions, these principles have frequently led courts to uphold preemptive rights when those rights were reasonable. See, e. g., Annot., 40 A.L.R.3d 920 (1971 & Supp. 1979) and cases cited therein. Their reasoning appears grounded upon the conviction that any interference of a preemptive right with freedom of alienation is so negligible that the major policies of utilization of wealth and economy of land control are not hampered. Indeed, some courts have gone so far as to state that the preemptive right does not limit alienability but enhances it, as the seller is provided two buyers instead of one. Watergate Corporation v. Reagan, 321 So.2d 133, 136 (Fla.App.1975). Other courts have reasoned that the primary purpose of a preemptive right is not to prevent an owner from alienating property but to enable a grantor to reacquire it. See, e. g., Lantis v. Cook, 342 Mich. 347, 69 N.W.2d 849 (1955); Simes & Smith, supra at § 1154 at 61. It seems clear, then, that the minimal interference with alienability presented by a preemptive right does little violence to the primary reason for prohibiting restraints on alienation in the first place, and should not be per se void.

Secondly, the reasons courts uphold the nearest analog to preemptive rights, the option, are equally applicable to preemptive provisions. Options have long been upheld as accepted commercial devices to aid in the disposition of property. Cf. American Law of Property, supra, § 26.66 at p. 509 (Option is "useful and necessary device" which becomes obnoxious to public policy only when unlimited in time). In Pure Oil Company v. Baars, 224 N.C. 612, 31 S.E.2d 854 (1944), the grantor deeded land to defendants but retained an option to repurchase. Defendants asserted the option was void. The Court upheld the option and refused to void it because it was "an integral part of the transaction and it would be inequitable to allow the defendants to claim the property under deed . . . and at the same time annul the essential terms of its acquisition. If the option is to go out, so must the deed which induced it." Id. at 615, 31 S.E.2d at 856. By analogy here, the preemptive provision in the deed is an integral part of the bargained-for consideration in the sale of the land to defendants. Just as the commercial device of the option is upheld, if it is reasonable, so too the provisions of a preemptive right should be upheld if reasonable, particularly here where the preemptive right appears to be part of a commercial exchange, bargained for at arm's length.

Thirdly, the preemptive right is a useful tool for creating planned and orderly development, again analogous to similar devices upheld by courts of this State. As plaintiff's...