How NJ Courts Interpret The Right Of First Refusal In Commercial Real Estate
The right of first refusal ROFR is a clause in residential leases in New Jersey that provides tenants with the right to match a third-party offer to buy the property they are leasing. New Jersey courts have overwhelmingly interpreted the RORF to be enforceable only when the tenant has complied with all their obligations on the lease, but there are many other gray areas where ambiguity in a ROFR hinders or delay a sale. That’s why it’s important to hire an experienced New Jersey real estate attorney to draft a lease that is clear and unambiguous.
ROFR and Month to Month Tenancy
New Jersey case law decisively holds that ROFR clauses are not enforceable by tenants that carry over their lease beyond its stated term. The 1947 Adreula v. Slovak Gymnastic Union case, held that “an option to purchase contained in a lease cannot be exercised after the expiration of the lease,” with current cases continuing to rely on this precedent. In Fedderly v. Skoda, the NJ Appellate Division in 2009, relying on Adreula, held that an office lease that contained a ROFR to lease additional space could not be exercised by a tenant whose lease had expired and became a month-to-month tenant. In contrast, the court in Balsham v. Koffler upheld a tenant’s option to purchase because the lease contained specific language about the continuation of the terms of the lease upon a transition to month-to-month tenancy. It’s clear that in New Jersey, it’s unlikely that ROFR will be enforced once a lease has expired unless that contingency is specifically addressed in the lease. It is important to work with an experienced New Jersey real estate attorney to ensure that a ROFR functions as you’d like it to and does not impede your ability to sell the property.
Drafting A Right Of First Refusal (ROFR) In New Jersey
It’s important to carefully draft an ROFR in manner that is least likely to hinder the sale of the property. The most common type of ROFR is the option to match the offer a seller has from another party. It’s important that the clause is drafted to require that all the terms are matched, not just the price. For example, an offer of cash from a third party should require the ROFR to pay cash to purchase the property. Without this clear guidance a property owner could lose a qualified buyer while the tenant applies for a mortgage. It’s best to avoid language such as “any sale or transfer” will trigger the ROFR as you may want to preserve your right to transfer your property to family members by specifically excluding such transactions from the ROFR. It’s also prudent to have an expiration date on the ROFR and to specify whether it will apply to the first sale of the property or to all future sales. An ROFR can also protect owners by specifying notice requirements such as:
- Delivery methods that must be used;
- The ROFR holder’s address and obligation to advise of address change;
- The amount of time required to respond to a notice;
- The information about the third party offer that the notice must contain;
- The actions that must be taken by the ROFR holder to accept an offer.
In can also be helpful for require the ROFR to sign a document when they chose not to exercise their ROFR. For some types of property it might also be important to specify whether the ROFR would be available if the property is being sold as a package with other properties, rather than on it’s own. There are so many important details that must be considered in every lease that’s extended by a property owner, that’s why it’s important to work with an experienced New Jersey real estate attorney that’s looking out for your interests.