Practical Pointers: The (Disappearing) Right of First Refusal and Other Potential Trouble

In 1957, the Music Man, written by Meredith Willson, a native Iowan, opened on Broadway. One of the most popular songs in the musical is titled “Ya Got Trouble.” In the song, the protagonist tries to convince the citizens of River City, a fictional town in Iowa, that the presence of the game of pool will produce a chain of consequences that will lead to many undesirable outcomes. Now, over 60 years later, legal practitioners in Iowa have found themselves singing a similar tune following a decision without published opinion by the Iowa Court of Appeals in West Lakes Properties, L.C. v. Greenspon Property Management, Inc., 908 N.W.2d 883 (Iowa Ct. App. 2017). Although the subject matter is different, the sentiment expressed is the same—worry that one decision will lead to another decision and will result in consequences not anticipated by the first decision. A summary of the West Lakes decision and its effect follows.

In 1997, Greenspon Property Management, Inc. (Greenspon) entered into an agreement to purchase an undeveloped parcel of land in Iowa from West Lakes Properties, L.C. (West Lakes). The purchase agreement also provided Greenspon with a right of first refusal to purchase a portion of a lot adjacent to the undeveloped parcel. Greenspon recorded notice of both the sale and the right of first refusal. In 2016, nearly 20 years after granting Greenspon the right of first refusal, West Lakes filed a petition in equity to quiet title to the adjacent lot and asked the district court to declare Greenspon’s right of first refusal void because Greenspon had not filed a verified claim under Iowa Code § 614.17A.

Section 614.17A is a part of Iowa’s marketable title act and bars an action to recover or establish “an interest in or claim to real estate” if: (1) the claim arose or existed for more than 10 years; (2) the action is against the record titleholder in possession of the real estate; and (3) the record titleholder and its immediate or remote grantors have held title for over ten years. Id. § 614.17A(1). The statute allows a claimant to extend the time for bringing an action by filing a verified claim within ten years of the date the claim arose or first existed and by filing an extension every ten years thereafter. Id. § 614.17A(2). The district court granted West Lakes’s motion for summary judgment and barred Greenspon from claiming any right or interest in the adjacent lot. Greenspon appealed and argued that the statute does not void a contractual right of first refusal because the statute applies only to “an interest” in real estate, and a right of first refusal does not fall within that meaning.

The Iowa Court of Appeals disagreed with Greenspon and affirmed the ruling of the district court. In its decision, the Court of Appeals concluded that Greenspon’s right of first refusal is an “interest in” real estate under Iowa Code § 614.17A and such right lapsed because Greenspon did not preserve it by filing an extension within ten years of the original 1997 recording.

The West Lakes decision, and the Iowa Supreme Court’s subsequent decline for further review, caught many legal practitioners in Iowa by surprise. The Court of Appeals applies Iowa Code § 614.17A in a novel way. It holds that a right of first refusal is an “interest in” real estate because it is a servitude that restrains alienation of an interest in land. Before the West Lakes decision, courts used the statute largely to bar an action by a third party with a claim to possession conflicting with the record titleholder actual possession. A court in Iowa had never defined an “interest in” real estate under the statute to include all servitudes in the land, nor had a court used the statute to cut off contractual rights granted by a person who still held possession.

After the West Lakes decision, to preserve a right of first refusal in any real estate contract, lease, deed, will, or even trust agreement, the holder must file “a written statement which is duly acknowledged and definitely describes the real estate involved, the nature and extent of the right of interest claimed, and the facts upon which the claim is based” with a county recorder “within ten years of the date the claim arose or first existed.” Id. § 614.17A(2)(a). To preserve a claim beyond the initial filing, a claimant must file an extension every ten years thereafter. Id. § 614.17A(2)(b).In practice, this means that an Iowa attorney who drafts a right of first refusal must notify her client that a verified claim will need to be filed within ten years, and the attorney should calendar the date as a reminder. In addition, if an attorney is aware of an existing document or agreement that contains a right of first refusal and such right has not been timely preserved, the document should be amended and recorded, and the right preserved with an extension every ten years after.

The reach of the West Lakes decision also has the potential to extend beyond rights of first refusal to other nonpossessory interests or claims. Although the Court of Appeals examined only a right of first refusal, the language in Iowa Code § 614.17A is broad, and the West Lakes decision opens the door for a case-by-case application of the statute to additional types of interests. For example, the decision may apply to easements, licenses, liens, or covenants. If this occurs, the same verified-claim filing and extension process would be required.

Recently, in Matter of Estate of Franken, 944 N.W.2d 853 (Iowa 2020), the Iowa Supreme Court issued a decision that many practitioners hoped would clarify the reach of West Lakes. Like West Lakes, Estate of Franken involves the application of Iowa Code § 614.17A to an action brought by a holder of a right of first refusal against the record titleholder in possession. Instead of clarifying, the Franken court simply affirms that the statute bars an action seeking to recover or establish “an interest in or claim to real estate” and goes on to hold that the statute does not bar a claim for monetary damages against the grantor of a right of first refusal who has sold the property to a third party in violation of the right. Unfortunately, the uncertainty created by the West Lakes and Franken decisions will not be resolved without an appellate court decision that actually clarifies the statutory reach or state legislation that amends the language in Iowa Code § 614.17A. Until that time, if you find yourself working with local counsel in Iowa, don’t be surprised if you overhear them humming that familiar Meredith Willson song about trouble in River City.