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Rights of First Refusal In California Contracts – What Triggers it, and When The Right Holder’s Offer Can Vary

A right of first refusal is a preemptive right which gives the right-holder a contract right to buy the asset or real property if the owner decides to sell. It is different than an option because, under an option, the optionee/buyer can require the optionor/seller to sell the property. But the right of first refusal only gives the buyer a chance if the owner decides to sell. Occasionally the distinction is not no clear, and parties need to consult with experienced Sacramento, Yolo, and San Joaquin real estate attorneys.

The right of first refusal is commonly granted to a tenant in a commercial lease. The Right is part of the consideration for the tenant’s covenants under the lease. The Right is triggered when the events stated in the contract occur. Usually, the contract requires that the seller receive a bona fide offer from a third party. It also usually requires the holder of the Right to buy on the exact same terms and conditions offered by a third party. In the usual transaction, this can be done and must be enforced. However, the third party offer may include terms that the holder of the right could never satisfy; in this case the courts take a closer look at the offers.

In C. Robert Nattress & Associates v. Cidco the third party offer provided the seller with $270,000 cash from escrow. The tenant’s right of first refusal was to be “on the same terms and conditions so offered.” The tenant’s offer was a combination of cash plus credit against the seller’s note. While not on identical terms, the tenant’s offer provided that the seller “…was to receive the same amount from [buyers] as would have been received if the property were sold to plaintiffs.

yard_sale.jpgThe court noted that If the literal matching of terms were required, a triggering offeror could be offering some unique consideration such as existing trust deed notes, a bag of diamonds or a herd of Arabian horses, effectively defeating the lessee’s right of first refusal. How would the holder of the right of first refusal in such a case make an offer to exercise the right of first refusal on the same terms and conditions as in the triggering offer? The court concluded that, given the net cash to seller was the same, the right of first refusal was effectively exercised by the tenant “on the same terms and conditions” set forth in the agreement.

The key here is that, in granting the Right, the owner wanted to obtain the best net result. If the third party offer is impossible to duplicate, the Right holder should have the opportunity to structure the offer in a way that gives the owner the same net result, at least in terms of dollar value. To find otherwise would require a mechanical reading of the Right, and not satisfy the parties’ original intent.