RIGHT OF FIRST REFUSAL – WHO IS ENTITLED TO A COMMISSION?
A typical right of first refusal (ROFR) gives a tenant the option to purchase the property during their tenancy on the same terms and conditions that the owner is prepared to sell the property to a third person. The most important question when listing or selling a property with a ROFR is what broker(s) is/are entitled to a commission.
Let me set the stage. Mary is the owner. Joe is the tenant. At the time they entered into the tenancy agreement, Joe was given a typical ROFR. Mary hires a broker to market the property, finds a buyer (William), negotiates the sale, reduces the terms to writing, and presents it to Joe. Based on his Tenancy Agreement, Joe has 14 days to decide whether or not he wants to purchase the property. Joe decides to purchase the property under the same terms and conditions as William.
There is no question that the listing broker is entitled to a commission if William purchases the property. But the Listing Agreement should include an agreement that the listing broker will earn their commission even if the tenant purchases the property.
But what about Joe’s realtor? He procured the tenant who eventually became the buyer. Is he entitled to a commission? This determination should have been made at the time the Tenancy Agreement was entered into. Joe’s realtor should have suggested that the Lease Agreement or a separate Agreement between the realtors should state that Joe’s realtor would be paid a commission if Joe exercised the ROFR.
And what about Williams’ broker? Is it entitled to a commission? It is well known that a realtor is entitled to a commission when they procure a buyer that is ready, willing and able to consummate the sale on the seller’s terms. However, in the example above, although Williams’ realtor procured the buyer, the sale would be contingent upon Joe’s decision to buy or not to buy. Thus, Williams’ realtor would not be entitled to a commission.
If you are about to list a property that is tenant occupied, exercise due diligence by taking the following steps: (1) ask the seller if the tenant has an option to purchase; (2) obtain a copy of the current lease so you can personally verify the terms and conditions; (3) include the existence of the ROFR in the Listing Agreement and MLS listing; and (4) specify in the Listing Agreement that the owner will be responsible for the listing and tenant’s agent’s commission if the tenant exercised the ROFR.
There are many other issues that can occur relating to a right of first refusal. How long is the right? Does it continue if the property sells to a third party, does the tenant still have a right of first refusal if the new owner wants to sell? If the contract with the third party changes (i.e. the purchase price is decreased), does the tenant then get a second bite of the apple? Does the “same terms and conditions” include method of purchase (i.e. cash or mortgage)? The list of issues is too numerous to itemize, but you get the point.
There have been numerous lawsuits filed relating to disputes regarding rights of first refusal. To avoid disputes or ambiguities, a right of first refusal should be tightly drafted. It should address every possible issue that may occur, including the realtors’ commissions. A carefully drafted right of first refusal can greatly reduce the risk of disputes. At Posternock Apell, PC we make every effort to avoid future problems by assuring the contracts/leases our clients sign clearly set forth everyone’s expectations. Although we know that certain disputes will arise, we strive to create a contract/lease that will provide not only the protection necessary for our clients but one which everyone understands.
SKELETONS IN THE COMMITMENT
I’m sure you’ve heard of skeletons in the closet, but are you aware that there could be “skeletons” in a title commitment? We have recently come across several title commitments that include judgments against the sellers which were discharged in bankruptcy. So, you say: “No problem, they’ve been discharged.” Yes, problem. The discharge of a judgment or any other lien on real estate only relieves the debtor from making payments on the judgment or lien. It does not eliminate the lien on the property. Therefore, it is an issue that must be addressed before settlement by filing a Motion with the court to have the property removed from the lien. At Posternock Apell, PC we have competent, experienced bankruptcy attorneys to serve your client’s needs, whether it be filing the motion to have property removed from liens, or filing Chapter 7, 11 or 13 bankruptcy.
Try us. You might find the path to closing a little smoother when one of our attorneys provide assistance from the outset of the transaction, rather than after a dispute arises or a skeleton emerges from the closet.