Rights of First Refusal / The Discovery Rule

Rights of First Refusal / The Discovery Rule

The Texas Supreme Court has recently ruled that the holder of a right of first refusal or a preferential right to purchase has no duty to examine the public records to determine if a sale has occurred without providing the holder of such a right with notice and the opportunity to exercise the right and that the discovery rule tolls the statute of limitations until the holder has actual notice.

The case is Archer v. Tregellas, 2018 WL 6005071 (Tex. 2018). In June 12, 2013 the owners of a tract of land in Hansford County, conveyed the surface only to the trustees of the Archer Trust. The sellers retained the minerals but granted the Trustees a right of first refusal (ROFR) on the minerals. This ROFR was recorded in the deed records. The ROFR required notice to be given to the Trustees of any proposed sale of the minerals and the Trustees had 60 days within which to exercise their right.

On March 28, 2007, the mineral owners conveyed their mineral interest to Tregellas. The Trustees did not learn of this conveyance until May of 2011, and filed suit immediately seeking specific performance of the ROFR and monetary damages.

The issue before the Court was the application of the statute of limitations and the discovery rule. First, the Court held that a purchaser of property with actual or constructive notice of a ROFR takes such property subject to the right. Since the ROFR was recorded, the Tregellas’ took the property subject to the ROFR.

The Court next held that a right of first refusal is breached when the property subject to such right is sold without providing notice to the holder of the right. In other words, the cause of action accrued in March of 2007, more than four years before suit was brought.

That left the Court with the question of the application of the discovery rule. The Curt noted that it applied the rule “when the nature of the injury is inherently undiscoverable and the evidence of injury is objectively verifiable.” There was no issue with the injury being objectively verifiable. The issue was whether or not the injury was inherently undiscoverable.

In its analysis, the Court noted that application of the rule is made on a categorical basis and not based on the facts of an individual case. Thus, the issue, the Court noted, was whether or not the Trustees injury was of a type that could not be discovered through the exercise of reasonable diligence.

In this regard, the Court noted that the discovery rule had been applied to a property owner’s fraudulent-lien claims even though such a lien was filed in the public records since the owned “had no reason to believe that any adverse claim has been made on his property, and no reason to be checking regularly to see whether such a filing has been made.”

Also, the Court noted that it had refused to apply the discovery rule to royalty owners’ claims of underpayment where “readily accessible and publicly available information” would have revealed the underpayments. The Tregellas’ argued that since the sale was filed of record the discovery rule did not apply.

The Court then held that “the nature of the first-refusal right and balancing the appropriate policy considerations” caused the Court to conclude that the discovery rule applies. Specifically, the Court stated:

“In light of the grantor’s duty to provide notice of an offer, the corresponding absence of the rightholder’s duty to act before receipt of said notice, and the fact that a purchaser takes property subject to a recorded first-refusal right, we agree with the Trustee that a right holder who has been given no notice of the grantor’s intent to sell or the existence of a third-party offer generally has no reason to believe that his interest may have been impaired.”

Thus, the Court held that the conveyance of property subject to a right of first refusal where the holder is given no notice of the sale, is inherently undiscoverable.