The Lawletter Vol 40 No 7
Under the stranger-to-the-deed rule, a deed with a reservation or exception by the grantor in favor of a third party, a so-called stranger to the deed, does not create a valid interest in favor of that third party. For example, a reservation in a deed purporting to create a life estate in a third party (a stranger) may very well be ineffective. Many jurisdictions still adhere to some form of the stranger-to-the-deed rule.
What happens, though, when a grantor gives a deed containing a right of first refusal in favor of a third party or parties? In other words, the grantor did not create a right of first refusal in himself but in favor of a stranger to the transaction. The effect of a right of first refusal, also called a preemptive right, is to bind the selling party to not sell without first giving the person holding the right the opportunity to purchase the real property at the price specified. But does the stranger-to-the-deed rule invalidate a right of first refusal given to the third party/stranger?
Recently, a New York court, in Peters v. Smolian, No. 23606-14, 2015 WL 3936142 (N.Y. Sup. Ct. June 25, 2015), considered this exact issue. In Peters, the vendor/grantor attempted to give a right of first refusal to four family members in various deeds. These family members were not parties to the deeds—they were neither the grantor nor the grantees—and they could be accurately described as strangers to the deeds. However, the court refused to invalidate their right of first refusal even though they were strangers to the deeds. The court opined that "the right of first refusal, which is repeatedly set forth in the deeds in question, does not constitute an exception or reservation" within the meaning of the stranger-to-the-deed rule. Id. at *10. Rather, the court characterized the right of first refusal as a contractual, personal right as opposed to an exception or a reservation. "[T]he preemptive right [right of first refusal] is a personal right of the four individuals named in the deed, in an interest not created at that time, but only upon future action . . . . [T]he preemptive right is a contractual right." Id. at *8.