A right of first refusal gives the cotenant priority over other potential buyers when the other cotenant makes a decision to sell their interest in the property. Unlike a valid option provision where a cotenant is obligated to sell the property to the other cotenant subject to the terms of the ownership agreement, under a right of first refusal, a second cotenant’s ability to purchase the first cotenant’s interest depends on the first cotenant’s desire to sell it. The right of first refusal becomes an option when the owner “voluntarily decides to sell the property and receives a bona fide offer to purchase it from a third party.” (Campbell v. Alger (1999) 71 Cal.App.4th 200, 206-207.)
What types of instruments contain a right of first refusal?
Right of first refusal provisions are common in lease agreements entered into by landlords and tenants. As discussed above, a right of first refusal may also appear in a tenant in common agreement where two or more parties purchase property as co-owners. For example, in Campbell, a few years after two men purchased a ranch as tenants in common, they executed an agreement expressly providing each other a right of first refusal if one of them desired to sell their interest in the property. (Campbell, 71 Cal.App.4th 200, 203.)
In Pellandini v. Valadao, a right of refusal was included in a partition settlement agreement where beneficiaries of a trust received a portion of the trust’s property as tenants in common. (Pellandini v. Valadao (2003) 133 Cal.App.4th 1315, 1317.) In that case, a grandfather left property held in a trust to be distributed to his grandchildren upon his death. After some dispute about the property’s distribution ensued, the parties eventually entered into an agreement to create a new parcel for two of the trust’s beneficiaries by partition. The agreement provided that the two beneficiaries would be tenants in common, and it also gave the grantor – in this case, the trustee – a right of first refusal.
How does someone exercise their right of first refusal?
A right of first refusal is triggered when the grantor chooses to sell their property interest and receives a legitimate offer from a third-party purchaser. For example, cotenants A and B own a home together, and in their ownership agreement, they granted each other the first right of refusal. If B decides to sell their undivided one-half interest in the home and soon after receives a bona fide offer from C to purchase that interest, B must first give A the option to purchase B’s interest before B can sell to C.
In this hypothetical, A has two choices: (1) they can match C’s offer, or (2) they can reject it. Whichever choice A makes, they must do so within a reasonable time frame. If A chooses to match C’s offer, B is obligated to sell their interest to A. If A chooses to not match C’s offer, B has satisfied their right of refusal contractual duties and can proceed to partition the property in order to sell their interest to C.
In most other circumstances, B has a broad right to seek partition of their respective interest in the property under Code of Civil Procedure § 872.710(b). Cotenants wishing to sell their interest have a general statutory right to seek partition of the property without getting the consent of their fellow cotenants, as long as they did not waive the right expressly or impliedly.
When there is a right of first refusal agreement between cotenants, however, a selling cotenant’s statutory right to partition is limited by their agreement to give their cotenant a right of first refusal. In LEG Investments v. Boxler, the appellate court held that a right of refusal provision is not a permanent waiver of the selling cotenant’s right to partition. (LEG Investments v. Boxler (2010) 183 Cal.App.4th 484, 497.) Instead, it is a contractual modification of the selling cotenant’s statutory right to partition.
When is a right of first refusal not triggered?
A couple of cases illustrate when a grantor does not have to give the grantee a right of first refusal, even when the right is provided in an agreement between the parties.
First, if two cotenants grant a right of refusal to a third party, like a trustee, the trustee cannot enforce the right to refusal when one of the cotenants transfers their property interest to the other cotenant. (Pellandini, 113 Cal.App.4th at 1319.) In Pellandini, the right of first refusal provision was included in a partition settlement agreement that transferred a certain parcel to a pair of cotenants, Wooldridge and Valadao.
When Wooldridge transferred her interest in the parcel to Valadao by a deed in lieu of foreclosure, the trustee sued, claiming that Valadao violated the right of first refusal previously granted to him. The court rejected the trustee’s claim and concluded that the right of first refusal wasn’t triggered because there was “no transfer of an interest in the property to a third person.” (Id.)
Second, the right of first refusal is not triggered if the government, through eminent domain, “condemns land for a public purpose,” even though the property is subject to a right of first refusal agreement between cotenants. (Campbell, 71 Cal.App.4th at 202-203.) The court in Campbell confirmed that submitting one’s property interest involuntarily did not violate the cotenant’s obligation to give their fellow cotenant a right of first refusal. (Id. at 203.)
How can Underwood Law Firm, P.C. help you navigate a right of first refusal?
A right of first refusal is an important contractual duty (for the grantor) and right (for the grantee). If a grantor is a cotenant who wishes to sell their property interest, they must follow their contractual obligations before doing so, or they risk being sued by the nonselling cotenant for damages.
Additionally, if a nonselling cotenant fails to respond to their selling cotenant in a reasonable time or decides that they do not want to exercise their right of first refusal, California law allows the selling cotenant to move forward with partition proceedings in order to sell their interest in the property. Knowledgeable counsel from the experienced attorneys at Underwood Law Firm, P.C. can help you better understand your rights as either a grantee or a grantor of a right of first refusal. Contact us today.