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Vermont Supreme Court Sets Precedent

On June 6, 2008 the Vermont Supreme Court decided that an exercise of a Right of First Refusal embedded in a conservation easement co-held by three Vermont conservation entities was triggered by an offer to purchase that included additional land or a “package deal.” The Court also held that the good faith exercise of the Right of First Refusal did not constitute “tortious interference with a contract.”

The Facts

The reargument period in this case expired on July 7, 2008 without further filings. A couple from Connecticut wanted to buy a Vermont farm conserved with the Vermont Land Trust, the Vermont Housing and Conservation Board and the Vermont Agency of Agriculture (the co-holders). The conservation easement also contained a Right of First Refusal that any of the co-holders could exercise after the owner received an arms length offer to purchase the conserved land. The conserved land was all of the open farm land (296 acres) but specifically excluded the barnyard, farm buildings and houses (10 acres). The Connecticut couple offered to buy the entire farm including all the buildings. The conservation easement’s purpose was to promote economically viable farming and to protect agricultural soils and other natural resources.

The co-holders received notice of the offer from the owners and considered it. On investigation, the co-holders found that the Connecticut purchasers were part-time farmers only and planned a small operation of Christmas trees, pumpkins and replacement heifers. Also during their investigation, the co-holders found that the next door farm had been renting the farmland for over 10 years as part of their large dairy operation and that the land was critical to them for proper manure disposal. The Agency of Agriculture also noted that under new farm management regulations that the neighboring farm would be in danger of losing their permit if they lost this land. The neighbor farm was a central feature of the farm community and its loss would ripple through the farm economy in the area. In addition, the neighboring farm was also conserved with the co-holders.

After a great deal of careful consideration, the Vermont Land Trust exercised the Right of First Refusal and assigned its right to purchase the farm to the owners of the neighboring farm who bought the farmland and the 10 acre exclusion. The neighboring farmer also bought all the buildings after first offering to the Connecticut couple to let them buy the land and buildings excluded from the conservation easement. The Connecticut couple declined the offer.

The Connecticut couple brought suit against the land owners, the neighboring farmer, the neighboring farmer’s lender, the realtor and the real estate agency, and the Vermont Land Trust alleging breach of contract against the landowners and tortious interference with contract against the other defendants. The Connecticut couple acknowledged in discovery that the Realtor had advised them verbally and in writing that the land was subject to a Right of First Refusal.

Lower Court Decisions

In the lower court summary judgment motions were granted in favor of all defendants except VLT and the Realtor. The VLT motion was denied due to an additional allegation by the Connecticut farmers that VLT staff had discriminated against them due to their age and had made an age related derogatory comment. Following additional discovery, VLT filed a second summary judgment motion addressing this issue which the Court granted. The Court also granted Realtor’s second motion to dismiss. The Court reasoned that good faith exercise of a Right of First Refusal did not constitute tortious interference and that the Right of First Refusal voided the purchase contract so that the sellers were not liable for breach of contract. The Connecticut couple appealed.

Supreme Court Decision

The Supreme Court affirmed all the trial court’s grants of summary judgment but on slightly different grounds. The Supreme Court further decided that package deals encompassing more land than encumbered in a Right of First Refusal will trigger operation of the Right of First Refusal.

The trial court held that the exercise of the Right of First Refusal voided the purchase contract. The Supreme Court held that the exercise a valid contract never formed because any contract was conditional on the waiver of the Right of First Refusal. VLT did not waive and so no contract was formed. The sellers, therefore, could not breach a contract that did not exist.

In another precedent setting decision for Vermont, the Court held that exercise of a valid contractual right, absent malice or ill will, could not tortiously interfere with a contract that didn’t exist. The Court found no evidence of bad faith or malicious exercise of the Right of First Refusal.

Then the Supreme Court addressed the precedent setting issue of whether the inclusion of additional land in the offer did not trigger the Right of First Refusal because it applied only to a smaller parcel of land. The Court rejected that theory. Citing numerous cases from other jurisdictions and a law review article surveying the topic, the Court found that central to all the cases was the determination to protect the interests of the holder of the Right of First Refusal. The Court held that because the Connecticut couple had actual notice of the Right of First Refusal and because it was properly exercised, that no contract to purchase the land formed, and that their offer to purchase triggered the Right of First Refusal because it included the land encumbered by it.

Lessons Learned

The Vermont Land Trust has co-held easements with the Vermont Housing and Conservation Board and the Vermont Agency of Agriculture, including a Right of First Refusal, for more than 20 years. When presented with a proposed farm sale, the co-holders engage in a careful evaluation of the prospective buyer’s plan for the farm using a well-established and objective process. Rick Peterson, VLT Project Counsel, noted that being subjected to a lawsuit has given a heightened awareness of the risks associated with exercising a pre-emptive right but that it will not deter future exercises in appropriate situations. “Certainly, it was a concern that a package deal might not trigger the Right of First Refusal.”

Rick notes that the plaintiffs in this case were very persistent and teamed with a premier law firm in Vermont with a reputation for aggressively pursuing difficult cases. Land trusts need to consider that persons who feel aggrieved by a land trust action may have the resources to push long and hard, and can usually find a law firm to assist them. Land trusts should calculate their legal defense costs on this type of scenario rather than the best case scenario. Land trusts should remember that even though a case has to have some merit to be filed, it doesn’t need much to hurdle that obstacle. People with a grievance are likely to be willing to invest in obtaining satisfaction through the courts.

This case caused VLT to examine the Right of First Refusal language and to revise some of its wording to be clearer that the Right covers package deals and imposes an obligation on the seller to allocate price in a package deal.

The distraction of the case to VLT was mostly limited to the in-house legal staff working in concert with retained outside counsel, so it was not too disruptive to the normal flow of conservation and stewardship work. For a small land trust without many staff (VLT has about 40 staff) litigation can be incredibly disruptive. Land trusts need to have a plan in place before litigation to deal with its effects or risk having conservation work shut down for the duration.

VLT paid for the defense of this case from its legal defense fund which it holds separately from its income generating stewardship endowment. Their outside counsel gave VLT a favorable rate and Rick suspects that he was generous with his time.

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