Bronx Personal Injury & Real Estate Blog

Tuesday, August 9, 2016

Real Estate Law: Understanding the 'Right of First Refusal' Clause (and its exceptions)

A ‘Right of First Refusal’ (ROFR) is a somewhat common real estate contract provision that places certain duties on a property owner with regard to selling or transferring ownership rights. Most often, a ROFR clause is included in an agreement between individuals in a joint venture, as it insulates the group from one member selling his or her interest to any third-party who happens to make an offer. More specifically, if a joint owner is looking to sell his or her property interest, that individual must offer the interest to the remaining owners first, before offering the interest for sale in the marketplace. Of course, this arrangement works to protect the remaining joint owners from the abrupt intrusion of a third-part buyer, as well has helps to ensure the property is maintained by the original ownership group. However, there are several scenarios that work to override a ROFR clause, including those known as “involuntary sales,” discussed further below.

Exceptions to a Right of First Refusal

Sometimes, an individual with a property interest is required to sell or transfer that interest involuntarily. One of the most oft-litigated issues in this real property realm involves a property sale in foreclosure, or a deed-in-lieu of foreclosure, both of which occur when an entity holding an encumbrance on the property asserts that the owners are in default of their payment terms. Naturally, if one owner is in default of a lien on the property, the remaining owners may have a very strong interest in asserting their rights of first refusal. However, the New York courts have held more than once that a foreclosure proceeding does not trigger a ROFR clause, holding that a forced foreclosure is not the same as an “offer” from a third-party to purchase the property. Further, the court stated that “long-standing principles relating to rights of first refusal contemplate a willing seller who desires to part with the property, which was a circumstance clearly not present in this situation.”

Another common scenario giving rise to a possible exception to a ROFR clause involves the portfolio sale of a number of real estate holdings owned by a common landlord or real estate company. In this situation, a commercial tenant may be in agreement with the landlord that a right of first refusal would apply should the landlord receive an offer to purchase the property. However, the same is not necessarily true in the event the landlord bundles his or her property holdings, selling all at once to an interested buyer. In some cases, it may behoove a landlord to include a clause in the ROFR language to cover a sale of the property bundled with “material other assets.” Likewise, a commercial tenant may be best advised to require a specific definition of “portfolio sale,” including a set number of properties that must be involved in the sale in order to trigger the exception.

Questions about commercial real estate? Call us today!

If you are involved in commercial real estate and would like to speak to a knowledgeable New York law firm about your situation, call Ryan Goldstein Law today: 718-239-0239.

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