A right of first refusal in a real estate contract is a provision that gives a potentially interested party the right to buy a property before the seller negotiates other offers. A recent New York case looked at whether one party could structure a transaction in a way that essentially kept another party from exercising its right of first refusal. The New York Appellate Division, Third Department of the Supreme Court held that a party who had contractually granted a “right of first refusal” could not then enter into an agreement with a third party in an effort to defeat this right. Parties who are considering incorporating a right of first refusal into a contract should understand this case to avoid problems with their own transactions.

In Clifton Land Co. LLC v. Magic Car Wash, LLC the owner of the car wash, Defendant Husisian, had sold a different car wash business and the land upon which it was located to Plaintiff in 2014. At the time of that first sale, Plaintiff negotiated and obtained the right of first refusal regarding another property – a car wash located in the town of Vestal.  The agreement provided that Husisian was to provide written notice to Plaintiff of an acceptable offer to purchase the Vestal property and that, thereafter, Plaintiff would have five (5) days to notify Husisian whether it intended to purchase the property “on the same terms as set forth in the third-party offer.”

Husisian entered into a contract to sell the Vestal car wash to co-defendant CC Parkway Development, LLC, which owns and operates a competing car wash located across the street from the Vestal property. The agreement between Husisian and CC Parkway provided that there couldn’t be a car wash on the Vestal property for ten (10) years after the sale.  Plaintiff took the position that it could not exercise the right of first refusal under those circumstances and instead sued Husisian and CC Parkway.

The Plaintiff argued that the Defendants added the provision prohibiting the operation of a car wash on the property to deter the Plaintiff from exercising its right of first refusal and buying the property. By intentionally structuring the transaction in a way that defeated its right of first refusal, the Plaintiff claimed that the Defendants had breached the covenant of good faith and fair dealing that is implicit in every agreement in New York.

Many New York court decisions have recognized an implied obligation of each party not to purposely or intentionally prevent the other party from carrying out an agreement.  This concept is “rooted in notions of common sense and fairness.” As noted by the Court in Clifton, these cases stand for the proposition that land owners and potential buyers may not structure property transfers in bad faith for the purpose of defeating the exercise of a right of first refusal.

In support of its position that Defendants acted in bad faith, Plaintiff provided the Court with email correspondence between the Defendants discussing the Plaintiff’s right of first refusal and deed restriction. Although Defendant Husisian claimed that she should not be liable to Plaintiff since she did not participate in the drafting of the  contract provision, the Court found that the mere inclusion of the proposed deed restriction within the purchase agreement prevented Plaintiff from exercising the right of first refusal which it had negotiated in order to preserve the opportunity to operate a car wash on the Vestal property.

The lesson from this case is that parties must take care not to try to circumvent a right of first refusal. If you are involved in or thinking about entering into a transaction which includes a right of first refusal, contact one of our real estate attorneys prior to taking any action which might impact your rights or the rights of others.