Alexander v. Estate of Hobart: ROFRs Conditioned on USFS Permit Issuance Are Enforceable; Market/Arbitration-Based ROFRs Are Not Unreasonable Restraints

Court: Supreme Court of South Dakota

Citation: 2025 S.D. 39 (Nos. #30807, #30827)

Date: July 23, 2025

Opinion by: DeVaney, J. (Jensen, C.J., and Kern, Salter, and Myren, JJ., concurring)

Introduction

This decision resolves two recurring questions at the intersection of contract and property law in ranching contexts governed by federal permits: (1) When does a right of first refusal (ROFR) referencing a transfer of a United States Forest Service (USFS) grazing permit become void for impossibility or for an unlawful object? and (2) When does a ROFR operate as an unreasonable restraint on alienation?

Rodney Alexander and rancher Steve Hobart executed a written ROFR in 2003, later clarified by a 2005 addendum to bind Steve’s son, Nick. The ROFR covered the purchase of up to 45 head of cattle associated with the Gillette Prairie Allotment and contemplated the “transfer” of the related USFS grazing permit to Alexander. In 2021, Nick sold the cattle and allowed the permit to be moved to a third party without first allowing Alexander to exercise the ROFR. Alexander sued for breach and fraud. The circuit court granted judgment on the pleadings, holding the ROFR void for impossibility because federal regulations do not allow a permit holder to “transfer” a USFS permit. Nick also sought a ruling that the ROFR was an unreasonable restraint on alienation under South Dakota law.

The Supreme Court reversed the judgment on the pleadings, holding that—properly construed—the ROFR made the issuance of a new permit by the USFS a condition precedent, not an obligation on the Hobarts to perform an illegal or impossible act. The Court also affirmed the circuit court’s separate ruling that the ROFR is not an unreasonable restraint on alienation because its price is tethered to market and subject to arbitration, its duration—though descendible—was freely bargained for a legitimate purpose (securing a debt), and the restraint only activates if the owner decides to sell.

Summary of the Opinion

Disposition: Reversed the judgment on the pleadings that declared the ROFR void for impossibility or illegality; affirmed the ruling that the ROFR is not an unreasonable restraint on alienation; remanded for further proceedings.
Key holdings:
- Impossibility/Unlawful Object: Where contract language places “transfer” of a USFS permit in the passive voice and ties performance to USFS action, the “transfer” is a condition precedent—not a party obligation. Such a contingency does not render the agreement void for impossibility (SDCL 53-5-3) or illegality. See ¶¶ 22–25.
- Reasonableness of ROFR: A ROFR with market-referenced pricing and an arbitration backstop is not a fixed-price restraint; its descendible duration is not per se unreasonable; and a purpose of securing a debt supports reasonableness. The ROFR is triggered “if and when” the owner decides to sell. See ¶¶ 26–35.

Detailed Analysis

Precedents and Authorities Cited and Their Role

SDCL 53-5-3 (Void contracts): Provides that a contract is void if it has a single object that is unlawful or wholly impossible of performance. The Court applies this statute to reject the impossibility/unlawful object arguments given the presence of a condition precedent rather than an illegal obligation (¶¶ 18, 22–25).
Detmers v. Costner, 2023 S.D. 40, ¶ 24, 994 N.W.2d 445 (condition precedent) and Weitzel v. Sioux Valley Heart Partners, 2006 S.D. 45, ¶ 38, 714 N.W.2d 884: Used to explain that a condition precedent limits contractual obligations until the condition occurs; it does not itself impose a duty (¶ 24).
Hage v. United States, 35 Fed. Cl. 147 (Fed. Cl. 1996): Cited by the defendants to argue a grazing permit is non-transferable and akin to a license. The Court distinguishes Hage, noting that while permittees cannot assign the permit, federal regulations provide for waiver and issuance of a new permit to a purchaser—confirming the role of USFS, not parties—to effect a change (¶¶ 20–21).
USFS Regulations (36 C.F.R. §§ 222.1(b), 222.3(a), 222.3(c)(1), (c)(1)(ii), (c)(1)(iv)): Establish that USFS issues grazing permits, a permittee may waive the term permit to the United States, and a new permit may be issued to a purchaser who is eligible. The Court recognizes this mechanism as consistent with a ROFR that conditions performance on USFS action (¶¶ 19, 21 & n.5).
Laska v. Barr (Laska II), 2018 S.D. 6, 907 N.W.2d 47: Supplies the framework for evaluating whether a ROFR is an unreasonable restraint on alienation, focusing on purpose, price, intent, duration, and the Restatement factors (¶¶ 26–35). The Court distinguishes Laska II, emphasizing market-based pricing with arbitration, a legitimate bargained-for purpose (securing debt), and seller-controlled trigger.
Restatement (Third) of Property: Servitudes § 3.4 cmt. c: Provides the standard: restraints must be reasonable in light of a property owner’s freedom to transfer at market price; stronger purposes are needed as interference increases (¶¶ 27, 29).
Urquhart v. Teller, 958 P.2d 714 (Mont. 1998), and Edgar v. Hunt, 706 P.2d 120 (Mont. 1985): Support weighing whether a restraint was freely entered as a normal incident of an equal bargaining relationship (¶ 27).
Standards of Review: Judgment on the pleadings is reviewed de novo; courts accept the complaint’s facts and draw reasonable inferences in the nonmovant’s favor. See Slota v. Imhoff & Assocs., P.C., 2020 S.D. 55; Sturzenbecher v. Sioux Cnty. Ranch, LLC, 2025 S.D. 24 (¶¶ 16–17).

Legal Reasoning

1) Impossibility and Unlawful Object

The central defense was that the ROFR was void because it required the Hobarts to “transfer” a USFS grazing permit—a legal impossibility since only the USFS can issue or reissue a permit. The Supreme Court carefully parsed the instruments’ language and structure:

Passive voice and contingency: The ROFR consistently states that the permit is “transferred to Alexander,” and at one point expressly “by the USFS” (¶¶ 22–23). This is critical. The Court found no clause obligating the Hobarts to transfer the permit themselves. Instead, the contract contemplates that:
- The ROFR’s term “shall terminate only when said permit is successfully transferred to Alexander or Alexander has not exercised his right” (¶ 22).
- Alexander pays the cattle price “on the date the USFS permit is transferred” to him (¶ 22).
- Possession “shall transfer to Alexander on the date the permit is transferred to Alexander by the USFS” (¶ 23, emphasis added).
Condition precedent, not duty: The USFS’s discretionary action is a condition precedent to either side’s performance, not an obligation by the Hobarts. If the agency does not issue a permit to Alexander, neither payment nor delivery/possession is required (¶ 24). A third-party approval condition does not void a contract under SDCL 53-5-3.
Regulatory consistency: Federal regulations explicitly allow for waiver of an existing term permit and the issuance of a new permit to a purchaser who is otherwise eligible (36 C.F.R. § 222.3(c)(1)(iv)). The Court acknowledged that while “transfer” is shorthand, the legal mechanism is waiver plus USFS issuance (n.5 at ¶ 21; ¶ 22).
Unlawful object argument fails: Because the ROFR does not command an illegal act by the Hobarts, the “unlawful object” theory collapses with the impossibility theory (n.7 at ¶ 25).

2) Unreasonable Restraint on Alienation

Nick’s notice of review challenged the circuit court’s conclusion that the ROFR is not an unreasonable restraint. The Supreme Court affirmed, applying Laska II and the Restatement:

Purpose/intent favor enforcement: The ROFR was negotiated to secure and satisfy a pre-existing debt to Alexander; the cattle and grazing allotment served as collateral (¶¶ 3, 29–31, 34). This is a recognized legitimate purpose supporting reasonableness.
Price is market-based with arbitration: The livestock price is determined by comparing the market at the Belle Fourche and Philip sale barns as of notice and, if disputed, is resolved by binding arbitration (¶ 32). This avoids the distortion associated with a fixed price and preserves the ability to sell at market.
Additional $300/head term: Although this component is a fixed figure, the record did not establish that it is inherently unreasonable or dissociated from the parties’ debt-based bargain (¶ 33). Without factual development, it could not render the entire price term unreasonable at the pleadings stage.
Duration (descendible) not per se invalid: Even if the ROFR binds heirs, successors, and assigns, unlimited duration is not per se unreasonable under Laska II; the question is functional interference balanced against purpose (¶¶ 29–31). Here, the descendibility aligns with the security purpose.
Owner-controlled trigger: The ROFR is expressly triggered only “if and when [the Hobarts] ever decide[] to sell” (¶ 35). That owner-control significantly mitigates interference with alienation.

Impact and Practical Implications

A. Contracting around government approvals

This opinion provides clear guidance for contracts involving assets subject to regulatory approvals—USFS grazing permits, liquor licenses, cannabis licenses, taxi medallions, spectrum licenses, and similar interests:

Contracting parties may validly structure deals contingent on a regulator’s action without risking voidness for impossibility or illegality, so long as the parties do not obligate themselves to perform the legally nondelegable act.
Drafting that explicitly identifies agency action as a condition precedent, uses passive voice to describe the agency’s role, and links buyer/seller obligations to the occurrence of that action will be respected.

B. ROFR drafting and enforcement in South Dakota

Market/Arbitration price mechanics: ROFRs that peg price to market and employ arbitration to resolve disputes are far less likely to be deemed unreasonable—distinguishing them from fixed-price restraints criticized in Laska II.
Duration: Descendible ROFRs will not be invalidated solely for being indefinite. The Court will weigh purpose and bargaining context, especially where the ROFR secures a legitimate debt and was freely negotiated.
Trigger: Clear “if and when the owner decides to sell” language preserves the owner’s discretion and mitigates concerns about undue restraint.

C. Litigation posture: judgment on the pleadings

The decision underscores that courts must accept complaint allegations and draw inferences for the nonmovant when considering SDCL 15-6-12(c) motions. Where contract language is fairly susceptible to a contingency reading—and where third-party approval is involved—dismissal at the pleadings stage is disfavored. This will influence early dispositive motion strategy in contract disputes involving regulated property interests.

D. Sector-specific takeaways (Ranching and Natural Resources)

Ranchers, lenders, and buyers can use ROFRs tied to USFS grazing allotments to secure obligations, provided the agreement defers to USFS authority and treats permit issuance as a condition to closing.
Recording short-form ROFRs, as occurred here, may enhance notice and priority without altering regulatory dynamics.

Complex Concepts Simplified

Right of First Refusal (ROFR): A contractual right giving someone the first opportunity to buy property if, and only if, the owner decides to sell. It restrains alienation by requiring the owner to offer to the ROFR holder first, usually at a price determined by the contract.
Unreasonable Restraint on Alienation: A restriction that excessively interferes with an owner’s ability to sell. Courts balance factors like purpose, price method, duration, and whether the owner retains meaningful control to sell at market.
Condition Precedent: An event that must occur before a party has a duty to perform. If the event does not occur (e.g., a regulator does not approve), the duty never arises and failure to perform is not a breach.
Impossibility/Unlawful Object (SDCL 53-5-3): A contract is void only if it has a single object that is illegal or wholly impossible to perform. A contingency requiring a third party’s action is not “impossible”—it simply limits obligations until it occurs.
USFS Grazing Permit and Allotment: A permit authorizes grazing a set number of livestock on a defined “allotment.” Permits are not assigned by permittees; instead, permittees may waive a permit to the United States, and the USFS may issue a new permit to an eligible purchaser (36 C.F.R. § 222.3(c)(1)(iv)).
Judgment on the Pleadings: An early ruling on legal sufficiency that assumes the complaint’s facts are true. It is inappropriate if resolution requires factual development or reasonable inferences favor the nonmovant.

Contextualizing the Court’s Application of Laska II

South Dakota’s Laska II decision cautioned against ROFRs that materially depress marketability—especially those with fixed prices decoupled from market conditions and unjustified by purpose. Alexander clarifies how to structure ROFRs to survive scrutiny:

Price: Use contemporaneous market comparisons and provide an arbitration mechanism; avoid rigid, outdated fixed prices.
Purpose: Identify a legitimate transactional purpose (e.g., debt security) and document mutual consent in an equal bargaining context.
Duration: While duration can be long or descendible, ensure it aligns with purpose and counterbalances potential market constraints.
Trigger: Preserve the owner’s discretion to sell. Language such as “if and when the owner decides to sell” lessens restraint concerns.

What Remains for the Trial Court on Remand

Breach claims: Whether the defendants breached the ROFR by selling cattle and facilitating the permit’s move without notice or opportunity to Alexander.
Fraud claim: The Supreme Court did not reach the fraud claim because it reversed the voidness ruling; the claim remains for further proceedings.
Pricing/Arbitration mechanics and performance: Depending on findings, the court may need to address how the price should be set (market comparison date, arbitration invocation) and appropriate remedies.

Conclusion

Alexander v. Estate of Hobart establishes a pragmatic rule for contracts that intersect with regulatory regimes: a ROFR tied to a federal grazing permit is not void merely because only the government can issue the permit. When an agreement makes agency issuance a condition precedent—not a party obligation—neither impossibility nor illegality applies. The Court also provides an important refinement of Laska II by holding that a ROFR keyed to market, subject to arbitration, descendible, and triggered solely at the owner’s election—especially when negotiated to secure a debt—is not an unreasonable restraint on alienation.

Key takeaways:

Draft ROFRs to treat necessary government action as a condition precedent; avoid language that suggests a party is bound to do what only an agency can do.
Use objective, contemporary market benchmarks and provide arbitration to resolve price disputes.
Document legitimate purposes and the parties’ equal bargaining to support reasonableness—particularly for longer or descendible ROFRs.
Reserve the owner’s discretion to sell; ensure the ROFR triggers only if and when the owner chooses to sell.

In short, the decision offers a durable blueprint for enforceable ROFRs in regulated asset contexts and brings clarity to South Dakota law on impossibility, unlawful object, and restraints on alienation.