Is a property owner who leases a property to a tenant who holds a right of first refusal required to notify the tenant and allow them to purchase the property on terms agreed to with a buyer?

J&A Mash & Barrel, LLC v. Superior Court (Tower Theater Properties)

Facts: An owner of a property leased to a tenant chooses to sell the property prior to expiration of the lease. The tenant holds a right of first refusal to purchase the property. The owner agrees to sell the property to a third-party buyer. The owner notifies the tenant the sale of the property will close with the third-party buyer in three days but does not provide the terms for the sales transaction. The tenant attempts to exercise their pre-emptive right to purchase the property, but the owner demands the tenant pay a sales price exceeding the price agreed to with the third-party buyer. The tenant files a lawsuit and records a lis pendens and seeks to acquire the property on the terms agreed to with the third-party buyer.

Claim: The tenant claims they are entitled to purchase the property under their right of first refusal since the owner did not offer them with a valid offer and demanded a price greater than the price agreed to with the third-party buyer.

Counterclaim: The owner claims they offered the tenant with a valid offer since they notified the tenant of the pending sale and provided a purchase price which the tenant refused to accept.

Holding: A California appeals court holds the tenant is entitled to purchase the property under their right of first refusal on the price and terms agreed to between the owner and the third-party buyer since the owner did not provide the tenant with a valid offer by demanding the tenant pay a greater price than agreed to with the third party. [J&A Mash & Barrel, LLC v. Superior Court (Tower Theater Properties) (2022) 74 CA5th 1]

Editor’s note – A leasing agent or prospective tenant uses the Right of First Refusal to Buy form published by RPI (Realty Publications, Inc.) when negotiating a rental or lease agreement. It allows the individual to provide, in an addendum, the landlord’s grant to the tenant of a right of first refusal to purchase the leased premises. [See RPI Form 579]

Read how to properly provide for and exercise a Right of First Refusal to Buy in your practice.

Read J&A Mash & Barrel, LLC v. Superior Court (Tower Theater Properties) here.

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Chapter 6: Options and the right of first refusal to buy