11-6.9: The French Court of Cassation handed down a decision on 23 September 2009 concerning a Right of First Refusal clause in which the price of resale is predetermined

http://legifrance.gouv.fr/affichJuriJudi.do?idTexte=JURITEXT000021079793

Context and Summary

A township sold an empty lot zoned for development to a private party. The sale price of the property was much lower than market prices because the township had implemented a program to promote homeownership for people who would not have been able to become homeowners in a region of France subject to real-estate speculation. The sale contract contained a right of first refusal clause, which allowed the township to buy the property (land and house to be constructed on it) back at a price pre-determined in the contract, if the owners wished to sell the property within the next 20 years.

Three years after having bought it, the owners wished to sell the property and make a comfortable gain, by taking advantage of market prices and without being bound by the pre-determined price in the contract that was supposed to be honoured for 20 years. But, the township opposed the sale of the property to a third party, and wished to exercise its right of first refusal. The owners therefore took the affair to court, and argued that the contract was null and void, in that it invalidated their property rights, which imply being able to sell one’s property at market prices. The Court of Cassation rejected their appeal of the decision handed down by the Court of Appeal, which validated the right of first refusal clause. The Court of Cassation reiterates the Court of Appeal’s motives, which stated that the township’s right of first refusal for a pre-determined price was the consideration for the possibility granted to the plaintiff to buy the plot of land, that the magistrates precisely identify as being “protected from real estate speculation” by the contract, the decision highlighting that the contract intervenes “in a context marked by insufficient supply and the inability of households to keep up financially with the dramatic rise in real estate prices.”

Brief commentary

This decision is political in nature, because the Court of Cassation could have just as well have decided that the contract was prejudicial to property rights and the natural link of these rights to the market, which itself implies price fluctuation. The solution is justified by subjective and objective arguments. From a subjective point of view, the right of first refusal clause had a contractual consideration, which was the access to homeownership granted to the buyers, who would not have been able to afford the property had this market not been protected from real estate speculation. The judges emphasise that prices in this particular real estate market, located in a very desirable neighbourhood, were regulated in fact and in law by the township, and thereby market mechanisms were regulated to allow modest households to become homeowners for the first time. This contractual consideration justifies the aforementioned limitation on property rights. Nevertheless, the Court has deemed property rights to be a fundamental right in other decisions (Cass. First Civil Chamber. 13 December 2005. N° 04-13.772). Therefore, clearly, in the decision at hand, the Court is favourable to price regulation via a contract, which rules out market mechanisms, and thereby the right to freely dispose of one’s property.

From an objective point of view, the Court insists on the almost social function of the right of first refusal, which enables the protection of land from real estate speculation, which itself prevents most households from becoming homeowners. The contract, and especially the right of first refusal, is therefore presented as a pure instrument of price regulation (in this example, real-estate prices). This decision allows a lot of latitude to contracting parties, in a context where fundamental rights are increasingly reducing their leeway.