A right of first refusal or option to purchase is a
contractual provision that some tenants may choose to bargain for in a
lease. Both are legally enforceable
agreements that generally allow the tenant to purchase the rental property at a
later date. The distinction is the event that triggers that right to purchase.
As discussed more fully below, the courts look to the
express language of the contract to effectuate the intent of the parties. So,
it is important to understand and include key language.
A RIGHT OF FIRST REFUSAL arises when and only when the
landlord conveys or sells the subject property.
The tenant can not force the landlord to sell. The tenant's rights only kick-in when the
landlord made the independent decision to sell. Also, the landlord can never force the
tenant to buy.
The landlord must first obtain
an offer to purchase. The landlord can decline offers from third parties and in
doing so is not obligated to make any offer to the lessee. However, the
landlord cannot accept an offer from a third party without first giving an option to purchase to
the lessee. The terms of a lease that provide for a first right of refusal may
provide for a purchase price based on a fixed amount,
the then fair market value, or on the same terms as an acceptable offer from
some third party.
AN OPTION TO PURCHASE typically
is more of an absolute right, in that it is not conditional on the landlord's
willingness to sell. While the event
that triggers the option can be anything the parties wish to express, the terms
and the price must be set forth with sufficient definiteness and certainty for
the option to be valid and enforceable.
In either case, for this right to be legally enforceable it
must be in writing and you must pay or give something in exchange. It is best
to include a statement in the express terms of contract to memorialize the
consideration given for this right.
Why would you want to include an option to purchase or right
of first refusal in your lease? As a
tenant, you may want to purchase a property:
·
and at the same time you are just not able to
afford the cost to purchase it outright;
·
or you may be hesitant to purchase because the
property has several problems that you may have to fix and you are unsure of
the costs;
·
or you may be uncertain if you will remain in
the area for an extended period of time;
·
or the landlord may not be certain if she wants
to sell the property.
So, a possible solution is that you offer to lease the
property from the landlord, and include such a clause.
What do I need to know if I do bargain for an option to
purchase or a right of first refusal?
An option to purchase is straightforward. To avoid confusion
or loss of the benefit of your bargain, be sure to use straightforward language
in the option clause.
Problems typically arise with rights of first refusal.
Occasionally, the tenant will bargain for this right and then the landlord will
transfer ownership of the property, and the tenant will not be able to use
their right to purchase as they thought they could.
This is because there are several ways that you can 'convey'
ownership of property by law. Typically,
the right of first refusal comes into play when there is a 'sale' by the landlord.
But what if the landlord gives the property away as a gift, or puts it into a
trust?
The fact is that an unscrupulous landlord can take advantage
of the unassuming lessee.
In the case of Lehn's Court Mgmt. LLC v. My Mouna Inc.,
the Pennsylvania Superior Court summarized the law in this area. 2003 PA Super
439, 837 A.2d 504, 507-08 (Pa. Ct.
Remember, if you want to put a right of first refusal in
your lease, be sure to include broad language: the tenant has the right to
purchase in the event that landlord "conveys, gifts, or sells the
property." If you choose an option to purchase, use specific language to
establish 1) when the option arises, and 2) the purchase price.
