A right of first refusal in a lease gives a tenant a right to purchase the leased property if the landlord receives a bona fide offer to sell the property that the landlord wants to accept. A right of first refusal gives the tenant the right to purchase the property on the same terms and conditions as the bona fide offer from the third party. A recent California case determined that this right of first refusal lapses and is no longer valid if the tenant is a holdover tenant (meaning that the tenant continues to lease the property even though the lease has expired).
In the 2019 case of Smyth v. Berman (31 Cal.App.5th 183), the parties entered into a lease in 2011 in which Smyth leased a building from Berman to run Smyth’s audio business. The lease expired on December 15, 2012, and Smyth had an option to renew the lease for three years. The lease had a holdover provision which stated: “If the Tenant remains in possession after the lease ends, the continuing tenancy will be from month to month.” The lease also stated that Smyth had a right of first refusal to purchase the property if Berman elected to sell it.
In June 2016 (after the lease term and renewal term had expired), Berman received an offer from a third party (Santa Maria) to purchase the property. Smyth found out about the purchase offer and informed Berman that he wanted to buy the property on the same terms and conditions. Despite discussions between their respective attorneys, Berman sold the property to Santa Maria. Smyth then sued Berman for specific performance of the right of first refusal, breach of contract, intentional misrepresentation, and fraud.
Both the trial court and the appellate court ruled that Smyth’s right of first refusal expired when the term of the lease (including the renewal option) had expired. The court stated that only “essential” or “integral” lease terms remained in effect during the holdover period, such as the rental amount and timing of rent payments. The court determined that the right of first refusal was not an essential term for several reasons. First, it is a conditional option, meaning that it only becomes effective if the landlord decides to sell the property and receives an offer that the landlord is ready to accept. Second, the holdover provision of the 2011 lease did not make any mention of the right of first refusal. In other words, it was not essential because it had no bearing on the tenant’s continued use of, and rent payments for, the property.
This case highlights the importance of having comprehensive and accurate lease agreements, which includes addressing those lease terms that apply to a holdover tenancy.
Reach out to our Monterey real estate attorneys with any questions or to schedule your case evaluation.
This article is written by Patrick Casey, who is a business attorney with the JRG Attorneys At Law firm in Monterey. You may reach the author at (831) 269-7114 or at patrick@jrgattorneys.com.
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