Require Identical Contract Terms to Exercise Right of First Refusal

June 30, 2004

If you have a tenant with a right of first refusal to buy your building, make sure that the lease specifically says that the tenant can't exercise that right unless it gives you a signed contract with terms that are identical to those contained in any offer you've gotten from a third party, says New York attorney Stuart J. Frank. Otherwise, a tenant might try to exercise its right of first refusal by giving you a contract with one or more terms that are different from—and possibly much less desirable than—those in an offer from a third party, he says.

If you have a tenant with a right of first refusal to buy your building, make sure that the lease specifically says that the tenant can't exercise that right unless it gives you a signed contract with terms that are identical to those contained in any offer you've gotten from a third party, says New York attorney Stuart J. Frank. Otherwise, a tenant might try to exercise its right of first refusal by giving you a contract with one or more terms that are different from—and possibly much less desirable than—those in an offer from a third party, he says. And you could have a tough time stopping the sale, he warns.

But by having the lease require that the tenant's contract contain terms that are identical to those contained in an offer from a third party, you can protect yourself. Look at how this worked for one Georgia owner: The lease said that to exercise its right of first refusal, the tenant's contract had to be “identical to that which was presented to [the owner].” When a third party made an offer for the building, the owner notified the tenant. The tenant told the owner that it was exercising its right of first refusal. The tenant gave the owner its contract, but the contract contained eight terms that were different from the third party's offer. So the owner refused to accept the contract. The tenant asked the court to decide if it had properly exercised its right of first refusal.

A Georgia appeals court ruled that the tenant hadn't properly exercised its right of first refusal. According to the lease, the tenant had to give the owner a contract with terms “identical” to the third party's offer. Because the tenant didn't do that, the court found, it was okay for the owner to refuse to accept the tenant's contract [Interfinancial Properties, Inc. v. Mary T. Cristal Trust].

CLLI Sources

Stuart J. Frank, Esq.: Special Counsel, Hinman, Howard & Kattell, LLP, 224 Harrison St., Ste. 500, Syracuse, NY 13202; (315) 473-9414; sfrank@HHK.com.

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