Suppose that a landlord and tenant are about to enter into a lease for commercial property in Massachusetts. The tenant contemplates improving the premises. The landlord anticipates that it may want to sell the property in the future. The tenant may want to buy the property. The parties can negotiate an agreement so that if the landlord receives an offer from another prospective buyer, the tenant will have the right to match the offer and buy the property himself. In other words, the tenant will have a right of first refusal.
A right of first refusal is, “a potential buyer’s contractual right to meet the terms of a third party’s offer if the seller intends to accept that offer.” Black’s Law Dictionary 1325 (7th ed. 1999). “For example, if Beth has a right of first refusal on the purchase of Sam’s house, and if Sam intends to accept Terry’s offer to buy the house for $300,000, Beth can match this offer and prevent Terry from buying it.” Id.
“A right of first refusal is not an option to purchase property at a certain price, but a limitation on the owner’s ability to dispose of property without first offering the property to the holder of the right at the third party’s offering price.” Uno Restaurants, Inc. v. Boston Kenmore Realty Corp., 441 Mass 376, 382 (2004). “A right of first refusal necessarily implies a right to choose between purchasing and not purchasing the premises if the owner elects to sell them. An owner cannot truly elect to sell until he has an opportunity to do so, that is, until he has received a bona fide and enforceable offer to purchase. . . . Therefore, the right that a person with a right of first refusal has to choose either to purchase or not to purchase cannot be exercised before the owner has received a bona fide and enforceable (written) offer from a third party.” Roy v. George W. Greene, Inc., 404 Mass. 67, 69-70 (1989). “On notice of receipt of a bona fide offer from a third party, a right of first refusal ripens into an option to purchase according to its terms.” Greenfield Country Estates Tenants Ass’n, Inc. v. Deep, 423 Mass. 81, 89 (1996).
For the party that contemplates purchasing the real estate in the future, it may be preferable to negotiate an option, as opposed to a right of first refusal. Negotiating an option may be a better choice because an option allows the parties to specify the price for which the property may be bought. Accordingly, with an option, the person who anticipates buying the land in the future can lock in the price now. By contrast, with a right of first refusal, the person with the right has to match the offer of the third-party prospective buyer.
The Statutory First Refusal Option Under Chapter 61, 61A, and 61B
In addition to a right of first refusal which may be bargained for between private parties, in some instances a city or town may have a statutory right of first refusal when a landowner receives an offer to purchase his land.
Some landowners may qualify to have their land classified as forest land under General Laws Chapter 61, or as agricultural or horticultural land under General Laws Chapter 61A, or as recreational land under General Laws Chapter 61B. When eligible landowners take the proper steps to classify their properties this way, those lands will be taxed at a more favorable rate.
However, if the landowner intends to sell his land, the city or town shall have “a first refusal option to meet a bona fide offer to purchase the land.” See G. L. c. 61, § 8; c. 61A, § 14; c. 61B, § 9. The landowner will have to follow a defined process for presenting the bona fide offer to the city or town, and likewise a specified process governs the municipality’s exercise or nonexercise of its first refusal option.
About the author: Robert Nislick is a Massachusetts real estate and land use lawyer. He can be reached at (508) 405-1238, or by e-mail at firstname.lastname@example.org.