Smith v. Mitchell
301 N.C. 58, 1980 N.C. LEXIS 1147, 269 S.E.2d 608 (1980)
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Rule of Law:
A preemptive right (right of first refusal) is not a void restraint on alienation if it is reasonable in both duration and price. A duration limited to the period of the rule against perpetuities and a price set at the market rate or an amount the owner is willing to accept from a third party are considered reasonable.
Facts:
- In 1967, W.O. Smith, Jr. and his wife placed restrictive covenants on a tract of land they owned.
- Article XIV of the covenants granted the Smiths a preemptive right (right of first refusal) to repurchase any lot if a future owner desired to sell.
- The price was stipulated to be 'no higher than the lowest price [the owner] is willing to accept from any other purchaser.'
- The right was to last for the life of W. Osmond Smith, Jr. plus 20 years.
- In 1973, W. Osmond Smith III (plaintiff) succeeded his parents' interest.
- In 1974, plaintiff Smith sold Lot 16 to the Mitchells, with the deed subject to the recorded covenants.
- In 1975, the Mitchells sold Lot 16 to the Barbers without first offering it to plaintiff Smith, despite Smith's notification that he was ready and willing to purchase it.
Procedural Posture:
- Plaintiff W. Osmond Smith III sued defendants Mitchell and Barber in the trial court, seeking specific performance or damages for breach of a restrictive covenant.
- Defendants counterclaimed for damages.
- Both parties moved for summary judgment in the trial court.
- The trial court granted summary judgment for the defendants, holding that the covenant was an unlawful restraint on alienation and therefore void.
- Plaintiff appealed to the North Carolina Court of Appeals, where he was the appellant.
- The Court of Appeals affirmed the trial court's judgment.
- Plaintiff petitioned the Supreme Court of North Carolina for discretionary review, which the court granted.
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Issue:
Does a restrictive covenant that creates a preemptive right to repurchase property for a period within the rule against perpetuities and at a price the owner is willing to accept from a third party constitute an unreasonable restraint on alienation and is therefore void?
Opinions:
Majority - Carlton, Justice
No. A preemptive right that is reasonable in duration and price is a valid condition on the conveyance of property and does not constitute an impermissible restraint on alienation. The court reasoned that the common law prohibition against restraints on alienation is not absolute and must be balanced against an owner's right to impose conditions on a conveyance. Unlike disabling restraints, which are per se invalid, preemptive rights are a minimal interference with alienability, as they are triggered only when the owner decides to sell and merely provide a specific person the first opportunity to buy. The court distinguished the precedent of Hardy v. Galloway, explaining that the provision in Hardy was unreasonable because it lacked any terms for duration or price determination. Here, the preemptive right is reasonable because its duration (life in being plus 20 years) is within the Rule Against Perpetuities and its price is tied to fair market value by matching a third-party offer. Therefore, such a carefully limited preemptive right is an enforceable covenant.
Analysis:
This decision formally establishes the validity of reasonable preemptive rights in North Carolina, clarifying that they are not void per se as restraints on alienation. By rejecting a rigid application of precedent, the court aligned North Carolina with the modern majority view that recognizes such rights as useful tools for planned development and commercial transactions. The case provides a clear two-part test (duration and price) for assessing the reasonableness of a preemptive right, offering predictability for drafters of real estate documents. This holding strengthens the ability of developers and original landowners to maintain a degree of control over the future ownership of property within a community.
