Florida Appellate Court Rejects Challenge by Original Buyer to Tenant’s Exercise of Right of First Refusal
A right of first refusal in the context of real estate means that a person has the right to step into a transaction as the buyer if some third-party makes an offer that the then-current owner wants to accept. Such a right of first refusal is commonly seen in the context of commercial property leases. For example, a company leasing a significant amount of space in a shopping center may negotiate a first right of refusal into its lease, which will allow the company to purchase the shopping center on the same terms that might be offered by some other person.
To properly exercise a right of first refusal, the holder of the right generally needs to provide timely notice of its exercise. That concept is somewhat obvious. Less obvious is that the holder of the right of refusal, in order to effectively exercise its right, generally needs to precisely match the terms and conditions of the original buyer’s offer. Not obvious and perhaps counterintuitive: the holder of the right of refusal and the seller are free to negotiate different terms and conditions after the holder timely and properly exercises its right, according to Florida’s Second District Court of Appeal. See Acquisition Trust Company, LLC v. Laurel Pinebrook, LLC, — So.3d —, Case No. 2D18-4979, 45 Fla. L. Weekly D767a, 2020 WL 1542054 (Fla. 2d DCA Apr. 1, 2020).
In this case, the owner of a shopping center received an offer to purchase from a third-party buyer. One of the tenants in the shopping center had a right of first refusal in its lease. The owner accepted the third-party’s offer and went under contract with the third-party, subject to the tenant’s right of first refusal. The tenant reviewed the offer, decided to exercise its right of first refusal, and delivered notice to the owner that it was exercising its right “pursuant to the lease agreement and upon the same business terms and conditions contained in the letter of intent.” However, thereafter, the owner and the tenant continued to negotiate the terms and conditions of the deal in ways that differed from the third-party buyer’s original offer. The third-party buyer objected and initiated litigation, claiming among other things that the tenant did not effectively exercise its right of first refusal because the terms and conditions of the deal changed.
The majority opinion rejected the original buyer’s challenge and concluded that the tenant’s exercise of the right of first refusal essentially terminated the original buyer’s purchase contract and freed the tenant and the seller to change the terms if they so desired. The majority opinion acknowledged the general concept applicable to exercising rights of first refusal, which requires the holder of the right to match the existing offer, but held that this general concept applies only to the exercise of the right in the first instance; the general concept does not preclude the further negotiation of terms and conditions after the holder of the right properly exercises it. “Once a right of first refusal is exercised, the owner and the lessee are free to modify the terms of their agreement and the third party does not have standing to object.” Id. at *4. The majority opinion explained and held:
Applying this reasoning to the instant case, once [the holder of the first right of refusal] properly exercised its [right of first refusal], [the third-party buyer’s] rights to the property were extinguished. Therefore, [the third-party buyer] does not have standing to challenge the performance of the contract between Laurel and [the holder of the first right of refusal] that resulted from [the holder of the first right of refusal’s] exercise of the [right of first refusal]. Moreover, after the [right of first refusal] had been properly exercised, [the holder of the first right of refusal] and [the owner] were free to modify their agreement. Indeed, there was a provision in both contracts stating that the parties could mutually agree to modify the terms. [The owner] certainly could have held [the holder of the first right of refusal] to the identical terms and conditions of the [the third-party buyer’s] Agreement but chose not to do so. Despite [the third-party buyer’s] allegations of impropriety, there was nothing inequitable or fraudulent in [the owner] and [the holder of the first right of refusal] further negotiating their contract once the [right of first refusal] had been properly exercised.
Id. at *4.
The dissenting opinion disagreed with this holding because the third-party buyer “had standing to seek specific performance of its own sales agreement with [the owner], to which [the owner’s] defense was that [the holder of the first right of refusal] had properly exercised its right of first refusal.” Id. at *5. And, “because [the holder of the first right of refusal] did not match the terms and conditions of [the third-party buyer’s] offer to [the owner], [the owner’s] performance obligations under the sales contract it had entered into with [the third-party buyer] remained in effect.” Id. The dissent further argued: “The majority cites no case law, from Florida or elsewhere, to the effect that a right of first refusal is properly exercised when its holder has announced an intention to exercise but agrees with the owner to purchase the property on terms materially different than the third party’s sales contract.” Id. at *6.
The motto of this story: a disappointed third-party buyer may lack standing to challenge a tenant’s exercise of its right of first refusal that ultimately results in a contract between the tenant and owner that contains terms and conditions at variance with the original contract between the third-party buyer and the owner. This could open the door to gamesmanship by the owner and/or tenant, of course, but any such cases would need to be evaluated on their specific facts.