Albert died in 1990, leaving 582 acres to his relatives. Among the parcels was a property left to cousins Suzanne and Cathryn as co-owners.
James, another relative, held a right of first refusal to buy the parcel if Suzanne and Cathryn should decide to sell their property. A right of first refusal gives the holder the right to match any purchase offer received from a buyer of the property. But the holder of a right of first refusal cannot force a sale if the property owner doesn’t want to sell.
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Later, Suzanne borrowed $163,000 from Cathryn, secured by Suzanne’s half-ownership of their property. After Suzanne was unable to repay Cathryn, Suzanne gave Cathryn a deed in lieu of foreclosure, making Cathryn the sole owner of the property.
When James learned Cathryn owned the entire parcel, he sued her, arguing the transfer of a half ownership from one co-owner to the other co-owner triggered his right of first refusal. But Cathryn, not wanting to sell the property, replied this was just a transfer between co-owners, so James’ right of first refusal to buy the parcel was not triggered.
If you were the judge would you rule James is entitled to enforce his right of first refusal to purchase half of the property for $163,000?
The judge said no!
Although the facts of this case are a bit unusual, the judge began, the rules for rights of first refusal are quite clear. “A right of first refusal becomes an option to purchase when the owner, voluntarily, decides to sell the property and receives a bona fide offer to purchase it from a third party,” he continued.
“While we agree that a deed in lieu of foreclosure could in some circumstances be used to circumvent a right of first refusal, we conclude the right of first refusal was not triggered in this case because there was no transfer of an interest in the property to a third person,” the judge ruled.
“A bona fide sale for purposes of a right of first refusal does not occur unless there is a transfer for value to a third party,” he concluded, ruling James is not entitled to enforce his right of first refusal against Cathryn.
Based on the 2003 California Court of Appeal decision in Pellandini v. Valadao, 7 Cal.Rptr.3d 413.
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