Rights of First Refusal

New York Real Estate Journal recently published an article written by Olshan Real Estate partner Thomas Kearns entitled “Rights of First Refusal.” “Rights of first refusal (ROFRs) in real estate transactions are common,” the authors write, “as is the litigation surrounding them. One of the reasons for the frequency of litigation is that, if not thoughtfully and carefully drafted, ROFRs can be broader reaching than intended and can obstruct future deals.” The Clifton Land Company LLC v. Magic Car Wash LLC Third Department case illustrates the potential challenges that ROFRs can pose. Clifton Land, a company in the car wash business, negotiated a ROFR for property improved upon by a car wash which secured its right to purchase the property “on the same terms as set forth in the third party offer.” When the property owners tried to sell the property to a third party, the proposed transaction was made subject to a restriction on the use of the property, preventing its use as a car wash for a period of ten years. The court found Clifton Land’s ROFR enforceable and not subject to the use restriction as the restriction was designed to prevent Clifton Land from exercising its ROFR. Mr. Kearns and Mr. Anderson explain, “The owners and third party buyer had not tried to ignore the ROFR but, rather, had tried to work around it by making it undesirable to the ROFR beneficiary. More carefully drafted limitations on this ROFR right may have provided the owners with greater freedom to transact.” In another instance, a lender negotiated a ROFR with a borrower for a to-be-constructed building. When the borrower refinanced the loan with a new lender who wanted the ROFR removed, the borrower was made to pay additional consideration to obtain a release of the ROFR from the original lender: “Had the ROFR been limited in duration to the repayment of the financing or otherwise more carefully limited, the borrower may have had an easier time negotiating the refinancing.” “Both of these scenarios illustrate that ROFRs create deal friction for new deals,” the authors conclude, “but also illustrate the more subtle point that ROFRs are often not given their due attention and properly limited (whether temporally or substantively) at the time of original execution. Parties should think twice before readily agreeing to ROFR provisions, and take the time to carefully draft the provisions to avoid ambiguities and to avoid giving undue leverage to the ROFR beneficiary to obstruct future deals.”