Case Study: First Offer Clause in University of Southern California School of Theology (“SCST”) v. Claremont Graduate University (“Claremont”)
University of Southern California School of Theology (“SCST”) v. Claremont Graduate University (“Claremont”) involved a real property dispute between SCST and Claremont. The dispute stemmed from a 1957 agreement (“Agreement”) between SCST and Claremont whereby Claremont transferred the subject property (“Property”) to SCST via a grant deed (“Deed”) subject to two conditions subsequent: 1) a conditional use requirement that SCST would operate as an educational institution (“Educational Use Clause”), and 2) that SCST was required to offer to sell the property back to Claremont on agreed upon terms (“First Offer Clause”). Specifically, the First Offer Clause required SCST to sell the property back to Claremont upon a number of conditions occurring such as SCST selling or transferring the property, ceasing to exist, or ceasing using the property as SCST’s principal place of business. The Agreement included a negotiated formula (“Formula”) to determine the sell-back price.
In 2015, SCST approached Claremont and inquired if Claremont was interested in purchasing or leasing the Property. The parties were unable to come to an agreement so SCST filed a complaint for quiet title. Claremont, in turn, filed a Cross-Complaint alleging that SCST breached the Deed. The trial court found that the Educational Use Clause and First Offer Clause expired in 1988, but that both were enforceable as equitable servitudes. The trial court additionally found that the First Offer Clause was inequitable and constituted a forfeiture under the Marketable Record Title Act (“MRTA”). Further, the trial court changed the First Offer Clause to a first right of refusal (“ROFR”). Specifically, the trial court compared the purchase price calculation determined by the Formula (approximately $4 million) against the current fair market value (approximately $40 million) and determined that SCST would suffer a forfeiture due to the large $36 million difference. Claremont appealed the trial court’s use of forfeiture doctrine under the MRTA as grounds to decline to enforce the First Offer Clause.
The Court of Appeals agreed with the trial court that the First Offer Clause constituted an equitable servitude. The Court of Appeals read the text of the MRTA to only limit the enforcement of an equitable servitude to the terms the parties negotiated. Further, the Courtof Appeals found that the MRTA did not extinguish a deed restriction if the restriction is an equitable servitude enforceable by injunction.
However, the Court of Appeals overturned the trial court’s decision to apply the forfeiture doctrine. Specifically, the Court of Appeals found that the trial court failed to conclude that conditions had changed sufficient to decline the First Offer Clause. To that end, the Court of Appeals cited Robertson v. Nichols, which stated that increases in property values alone do not constitute changed conditions to invalidate an otherwise enforceable agreement. Then, the Court looked at the Agreement. Instead of finding a forfeiture, the Court found that the Formula constituted a valid allocation of risk instead of a forfeiture. Accordingly, the Court found the Agreement enforceable and determined Claremont would receive the benefit of their bargain.
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