A California Guide to Rights of First Refusal

What is the Right of First Refusal?

A “preemptive right”. In other words, a right provided by contract that gives a party priority to purchase a property if the owner decides to sell.

The person who holds the right = “grantee”.

The person who gives the right to a fellow co-owner = “grantor”.

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.

Right of First Refusal vs. Option Contract

In a valid option provision, a cotenant must sell their property share to the other cotenant according to the ownership agreement.

However, under a right of first refusal, the second cotenant can only buy the first cotenant’s share if the first cotenant decides to sell it.

The right of first refusal turns into an option when the owner voluntarily chooses to sell and gets a genuine offer from a third party. Campbell v. Alger (1999) 71 Cal.App.4th 200, 206-207.

Where is a Right of First Refusal Found?

First, they are common in lease agreements.

They can also be found in tenant-in-common agreements where co-owners purchase property together. For instance, in Campbell v. Alger, two men who co-owned a ranch gave each other the right of first refusal if either decided to sell their share.

In Pellandini, a right of first refusal was included in a partition settlement where beneficiaries of a trust received property as tenants in common. The agreement provided that the beneficiaries would co-own the new parcel, and the trustee was granted the right of first refusal. Pellandini v. Valadao (2003) 133 Cal.App.4th 1315, 1317.

How to Exercise the Right

A right of first refusal is triggered when a co-owner decides to sell their property interest and receives a legitimate offer from a third party.

For example, if co-owner B decides to sell their half of a home and receives an offer from C, B must first give co-owner A the option to buy their share before selling to C.

In this situation, A can either match C’s offer or reject it, and must do so within a reasonable time. If A matches the offer, B must sell to A. If A doesn’t match the offer, B can then sell to C after fulfilling their right of first refusal obligations.

Partition Right

Under Code of Civil Procedure § 872.710(b), co-owners generally have the right to seek partition of the property, meaning they can sell their share without needing consent from the other co-owner unless they’ve waived this right.

However, when there is a right of first refusal agreement between co-owners, the selling co-owner’s statutory right to partition is limited by their agreement to give their co-owner the first opportunity to purchase.

In LEG Investments v. Boxler, the appellate court held that a right of first refusal provision does not permanently waive the selling co-owner’s right to partition but instead acts as a contractual modification of that statutory right.

Instances Where Right of First Refusal Is Not Triggered

If two cotenants grant a right of first refusal to a third party, like a trustee, the trustee cannot enforce it when one cotenant transfers their interest to the other cotenant. In Pellandini, the court ruled that the right of first refusal wasn’t triggered because the transfer was not to a third party.

Additionally, the right of first refusal isn’t triggered if the government condemns the property through eminent domain. In Campbell, the court held that involuntary transfer due to eminent domain does not violate the cotenant’s right of first refusal.

Questions?

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