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Current Developments in the Commercial Divisions of the
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Posted: January 10, 2015

Exercise of Right of First Refusal Must Be Unqualified to be Binding

On December 19, 2014, Justice Ramos of the New York County Commercial Division issued a decision in Bond & Broadway, LLC v. Funding Exchange, Inc., 2014 NY Slip Op. 33359(U), examining the effectiveness of a qualified exercise of a right of first refusal.

In Bond & Broadway, LLC, the plaintiff brought an action seeking specific performance of a contract for sale of real property and one of the defendants, Froggy Associates, LLC (Froggy), argued that it had the right to buy the property under a contractual right of first refusal. Both the plaintiff and Froggy moved for summary judgment. The court denied both motions, explaining:

The only issue here is whether Froggy timely exercised its right of first refusal or, by its failure to do so, forfeited its rights in the Unit. The right of first refusal, as described in § 7.3 of the By-laws grants certain of the other unit owners of the building an option to step into the shoes of a prospective buyer and, to substitute the buyer: “The sending of the notice [of the Sale or Lease Agreement] . . . shall constitute an offer by the Offeree Unit Owner to sell its Unit, together with its Appurtenant Interests . . . to each Contiguous Owner . . . upon the same terms and conditions as are contained in such Sale or Lease Agreement . . . .”.

The holder of the right of first refusal is holder of an option to purchase the real property if and when the owner decides to sell to a third party at an agreed price.

Before a Unit owner fully executes a sale agreement to convey its property to a third party, notice must be given to the other owners in the condominium. As described in § 7.3(B) of the By-laws, the sending of the notice shall constitute an offer by the Offeree Unit Owner to sell its Unit, together with its appurtenant interest to each contiguous Owner and the Condominium Board upon the same terms and conditions as are contained in such Sale or Lease Agreement. Therefore, the election to purchase the property by one of the holders of the right of first refusal would constitute an acceptance of the offer (created by sending the notice).

It is a fundamental principle of contract law that a valid acceptance must comply with the terms of the offer and, if qualified with conditions it is equivalent to a rejection and
counteroffer
. In exercising its right of first refusal, the option holder steps into the shoes of the prospective buyer and has an obligation to strictly comply with the contract provisions.

The holder of an option, by placing a requirement that a building be vacant at the time of transfer, as a condition to his exercise of the option to purchase the building has accomplished
nothing more than making a counteroffer, which the current owner is free to accept or reject. In this case, the Contract between B&B and FE contained certain specific provisions. By exercising its right of first refusal, Froggy stepped into the shoes of B&B. As a consequence, it takes the Contract as it is and has to comply with all its terms.

(Internal citations and quotations omitted) (emphasis added). Because there was evidence that Froggy later made an unqualified offer to purchase, the court held that there were factual issues regarding whether it could exercise the right of first refusal.

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