In the context of the sale of real property, a “right of first refusal” refers to a contractual right that a property owner grants to another person or entity. In such a provision, if the owner later contracts to sell the property, the holder of the right has the option to assume the rights and obligations of the contract purchaser.  If the holder of the right elects to exercise it, the holder becomes the purchaser and the original contract purchaser’s contract is terminated.  However, a recent court decision holds that while a right of first refusal is binding upon the owner who granted it, the obligation may not always be binding upon the owner’s successor in interest, depending on the wording of the contract provision granting the right.

 

In Centech LLC v. Yippie Holdings, LLC, NYLJ 1202713882483 (Sup. Ct. N.Y. Co. Dec. 23, 2014), a property’s prior owner held a right of first refusal to reacquire the property from the current owner, if the latter entered into a contract to sell the property.  While the right of first refusal was in effect, the current owner defaulted on a mortgage. The lender foreclosed and the court appointed a referee to sell the property.  A dispute arose regarding whether the former owner was entitled to enforce its right of first refusal against the foreclosure referee.

 

The court held that it could not. The parties’ agreement granted the prior owner a right of first refusal allowing it to purchase the property in the event that the new owner entered into a contract to sell the property within fifteen years following the date of the agreement.  The agreement specifically provided that the right of first refusal would be held by the former owner as well as its successors and assigns, but the agreement stated that the obligation to recognize such right would be binding upon the current owner, without any reference to its successors and assigns.  Given this language, the referee was not obligated to recognize the prior owner’s right of first refusal, because this obligation bound only the named owner and not a successor to the owner, such as the referee.

 

The court cited upon a prior decision holding that a right of first refusal is not automatically terminated by judicial foreclosure sale, but may remain intact and binding upon successor owners if the agreement providing for the right contains language providing for such a result. The court stated that if the prior owner had intended for such right to extend to dispositions of the property by persons other than the named owner, such as a judicial foreclosure sale, then language covering this possibility could have been included in the underlying agreement.