What Is a Right of First Refusal in Real Estate? | realtor.com®

In Headquarters Hotel, LLC v. LBV Hotel, LLC, a court ruled that a buyer rejected an offer by refusing to execute a confidentiality agreement required by the seller as part of the offer under a right of first offer provision.

The buyer and seller are parties to a 129-year lease for the property at 154 Berkeley Street in Boston. The seller (i.e., LBV Hotel, LLC) operates the Loews Boston Hotel on the property.

The lease contains a so-called “ROFO provision” requiring that if either party desires to market its interest in the property, it must first offer its interest to the other party “at the same price and upon all of the same terms and conditions” that would be offered to third parties. This is the key language in the ROFO.  The way the Court saw it, the provision is so broad that it allows the seller to determine for itself the terms of the sale.

The buyer exercising its rights under the ROFO had to satisfy the same conditions imposed by the seller on any potential buyer.  The Court reasoned that the seller was well within its rights by asking the buyer to execute a confidentiality agreement because the seller would have required any third party interested in acquiring the property to execute the same confidentiality agreement.

By way of background, an owner of a property interest generally wants to avoid granting someone a ROFO (or right of first refusal). When selling a property interest, ROFOs can cause delays and increase transaction costs and limit a seller’s flexibility in dealing with potential buyers. In the case at hand, the ROFO rights are reciprocal, so each party’s property interest in encumbered by a ROFO.

In 2018, the seller decided to sell its interest in the property. In accordance with the ROFO provision in the lease, the seller offered the property to the buyer (i.e., Headquarters Hotel, LLC) by sending a letter containing the terms and conditions of the sale, which included an $83 million purchase price and a four-page confidentiality agreement that the seller described as necessary to provide the buyer with access to the property and the seller’s business records for due diligence purposes.

Under the terms of the ROFO provision, the buyer has 90 days from the date it receives “all information which it reasonably requests which is necessary to evaluate the value of” the property interest and to notify the seller if it has elected to purchase the property “at the same price and in accordance with the terms and conditions of notice” from the seller.

The buyer did not accept or reject the offer. Instead, it responded by refusing to sign the confidentiality agreement, arguing that the ROFO provision does not require the buyer to do so, and demanding that the seller provide copies of various documents so the buyer could conduct its due diligence.

Later, the buyer sent a “significantly revised draft” of the confidentiality agreement that would, among other things, have permitted the buyer to share information with third parties that the seller had intended to keep confidential.

The seller was unwilling to accept the buyer’s new terms and withdrew its ROFO offer. The seller decided to cancel its sale. The buyer sued, seeking to enforce its ROFO rights under the lease.

The Court ruled against the buyer, saying the buyer effectively rejected the offer as a matter of law when it refused to sign the confidentiality agreement.  If the buyer wanted to be sure it could negotiate the confidentiality agreement proposed by the seller or that it would not be required to sign a confidentiality agreement, the ROFO provision should have expressly provided for those rights.

This case is a reminder that ROFO language that may seem routine or “boilerplate” when entering into an agreement should be carefully thought out so that it will serve the parties’ interest when it comes into play.

COVID-19 Creates New Barriers for Developers | National Real ...

The press has reported on many government actions to help individuals and small businesses to weather the storm caused by the coronavirus pandemic. Massachusetts has taken additional steps directed at providing clarity for developers in these difficult times.

State Permit Applications:

Governor Baker has issued COVID-19, Order No. 17, which affects state permit applications in play on March 10, 2020, as follows:

  • No constructive approvals shall issue from state permitting entities during the state of emergency and the running of the time period for such approvals shall resume only 45 days after the termination of the state of emergency (the “45 Day Period”).
  • Likewise, hearing deadlines are suspended and the running of the time period for such hearings shall resume only after the “45 Day Period.”
  • Deadlines for decisions and to request superseding orders are also suspended and the running of the time period shall resume after the “45 Day Period.”
  • Deadlines for filing appeals of state permits or approvals that fall within the state of emergency shall be extended to the end of the “45 Day Period.”
  • Any state permit or approval issued and valid on March 10 shall not lapse and shall be tolled until the passage of the “45 Day Period.”
  • The permitting authority may extend or waive deadlines or conditions in permits or approvals that fall within the state of emergency.

Municipal Permit Applications:

On April 3, 2020, Chapter 53 of the Acts of 2020 was signed into law. That legislation took effect retroactively as of March 10, 2020. Section 17 of Chapter 53 addresses local permits. Key provisions of that Section include:

  • Applications may be filed through a municipality’s website or as attachments to email addressed to the clerk, secretary or other municipal official; the municipality must provide a certification of electronic receipt upon request.
  • The period for a hearing is suspended until later of 45 days after the state of emergency is lifted or such other date prescribed by law.
  • Hearings commenced before March 10, 2020, but still pending, are tolled to a date which is no later than 45 days after the end of the state of emergency or such other date as is prescribed by law or agreed upon in writing.
  • No constructive approvals will result from an authority’s failure to act as long as it acts within 45 days of the end of the state of emergency or such later date as is prescribed by law or agreed upon in writing.
  • Time limitations to record permits are tolled during any time where a Registry is closed or its rules restrict in-person access, and applicants may apply for and obtain construction permits without recording permits.
  • Permits issued as of March 10, 2020, and deadlines and conditions therein, are also tolled during the state of emergency.
  • The chairman can extend hearings and deadlines for decisions.
  • Nevertheless, a municipality may conduct hearings or issue decisions or permits on applications for which meetings have been held.
  • Hearings and meetings may be conducted remotely.

Our former colleague and now Land Court Judge Robert Foster recently decided Neily v. Gray.  That case concerns the rights of various owners in Lydia’s Island Road, a private way in Wareham leading to Onset Bay.  Judge Foster determined that different owners had different rights in that way, depending on their chain of title.  In doing so his decision provides a helpful review of the various means by which easements — to the beach and otherwise — may be created.

Express Easements.  We often think of easements as being granted by language in deeds.  Here, deeds to some of the parties (or their predecessors) contained express language granting them rights to use Lydia’s Island Road:  “together with the right of way over the road along the easterly side of said premises to and from the public highway and the beach.”  This is as good as it gets–as long as the person granting the easement also owns the way!

Easements by Estoppel.  An easement by estoppel is not expressly granted.  As explained in Neily:

Massachusetts recognizes two forms of easement by estoppel….  The first form of easement by estoppel arises when land is conveyed according to a recorded plan….  Under this classification, when a grantor conveys land located on a street according to a recorded plan on which the street is shown, the grantor is estopped to deny the existence of the street for the entire distance as shown on the plan.  In the second classification, an easement by estoppel is created when land bounded by a street or land bounded on or by the side line of a street is conveyed….  Under this second classification, the grantor [or a party claiming under the grantor] is estopped to deny the existence of such street or way, and the right thus acquired by the grantee (an easement of way) … embraces the entire length of the way, as it is then laid out or clearly indicated and prescribed….  [A] grantor or a successor to a grantor cannot claim an easement by estoppel.

Again, certain of the parties in Neily  benefited from an easement by estoppel, whereas others did not.

Implied Easements.  Implied easements are a bit more loossey-goosey.

 [A]n easement by implication is a term more commonly applied to an implied grant derived from an established pattern of prior use rather than from the necessity to access a newly landlocked parcel….  An implied easement arises when no easement appears in the record of a conveyance, but there is evidence tending to show an intent of the parties at the time of the conveyance that such an easement be then created….  Thus, an implied easement must be found in a presumed intention of the parties, to be gathered from the language of the instruments when read in the light of the circumstances attending their execution, the physical condition of the premises, and the knowledge which the parties had or with which they are chargeable.

Judge Foster concluded that, ” based on the language of the various deeds granted by Burgess and his heirs [the original owners of all of the parcels], viewed in light of the circumstances of their execution, the physical condition of the various granted parcels and Lydia’s Island Road, the reasonable necessity to use Lydia’s Island Road, and the knowledge of the parties as reflected in the deeds, Burgess and his heirs intended to and did create an implied easement in all of the property owners along Lydia’s Island Road to use Lydia’s Island Road in common for its entire length from Great Neck Road to the pedestrian easement” leading to the water.

This decision does not address two other types of easements:  easements by necessity or prescriptive easements.  Generally speaking (and there are a lot details to consider), the latter arises as a result of 20 or more years of adverse use of someone else’s land.  An easement by necessity is presumed to arise when someone conveys a portion of his or her land without granting an easement, but necessity to use the land retained by the grantor arises, most frequently because the conveyance creates a landlocked lot.  The thinking is that neither party could have intended to create a new, inaccessible parcel.

Easements are complicated and the cases considering them are driven by the facts and the title.  In other words, generalities will get us only so far.  However, we hope that this overview sets out different routes to consider when assessing whether an easement exists.

Over the years a number of clients have asked how to get out of joint ownership of a home or parcel of land when one party cannot buy out the other.  The answer is a court proceeding called a “petition to partition” under G.L. c. 241.

When faced with a petition to partition courts first look for a way to physically divide the property on the ground.  However, if that is impractical (think a single family home) then a different approach is called for.  A recent Land Court decision, Clarke v. Morgan, provides a good example of the types of issues faced in these types of actions.

Clarke and Morgan are sisters.  With her husband Clarke, a sophisticated individual, purchased a condominium unit.  That unit was meant to provide a home for Clarke’s and Morgan’s elderly mother, and Morgan also lived there and took care of their mother at night.  Clarke received full ownership of the unit after her divorce and later, in 2009, conveyed it to herself and her sister as joint tenants.  By then the mother had moved to a nursing home and Morgan had found a rent paying tenant to live in the unit with her.

After a falling out the sisters agreed to sell the unit, but filed the action to have the court decide how to allocate the proceeds of the sale (note that in some cases the parties cannot even agree on a sale and the court may appoint a commissioner and authorize him or her to engage a broker to sell the property).

Judge Vhay first considered Clarke’s claim that she was entitled to more than 50% of the net sales proceeds because she had been the sole owner of the unit.  However, he rejected that position because Clarke was sophisticated and had knowingly decided to create the joint tenancy despite having other ownership options available.

Judge Vhay also rejected claims for reimbursement of improvements that each party could not establish were made after the joint tenancy was created.  Nevertheless, the improvements are typical of those that arise in these cases:  a refrigerator, a dishwasher, a stove and garbage disposals, replacing the roof and an oil tank, adding a deck and improving the basement and drainage.

On the other hand, the decision did reimburse Morgan $13,925 for her outlays after she became a joint owner to install new windows, siding and other exterior improvements and to replace the unit’s boiler.

Morgan was also entitled to be reimbursed for one half of certain real estate taxes she had paid.  However, Morgan was required to reimburse Clarke for her share of the net profits from certain rent that Morgan had collected.

This case demonstrates the painful detail of accounting issues in a petition to partition.  However, it also proves that, while breaking up is hard to do, it is possible to end joint tenancies in a way that, while not perfect, at least aims for an equitable outcome.

The Massachusetts Court of Appeals recently held that a foreclosing lender must use reasonable efforts to get the best price and, when those efforts reveal the potential to develop the property to increase the sale price, the lender should take such potential into account and share it with prospective bidders.

Don’t get nervous lenders. The decision does not mean the minimum value at a foreclosure is the value that could be achieved through developing the property. The decision in Property Acquisition Group v. Ivester, of course, is more nuanced because it’s driven by the facts of the case. The Court did not decide whether the lender violated its duty of good faith and reasonable diligence in conducting the foreclosure, so the case is ongoing.

However, this decision is noteworthy for two reasons. First, it is a wake-up call for lenders to make sure they take reasonable actions to get the best price. Second, it reminds us of the rules of the game in Massachusetts foreclosures, including the grey areas where lenders can get tripped up trying to realize on their collateral.

Duty to Act Reasonably to Get the Best Price

The Court stated that the duty of the lender is to do what a reasonable person would do to achieve the highest price possible to protect the interests of the borrower.

“When reasonable efforts to value the property reveal potential for development that could enhance the price of the property, the mortgagee should consider that potential and share it with prospective bidders.”

Whoa, slippery slope alert!  That could be interpreted as turning conventional wisdom on its head.

Does that mean you have to value the property based on what could reasonably be developed instead of what currently exists? The Court seemed to soften this “potential development” angle by acknowledging that “undeveloped properties are not to be valued as if the reasonably likely future uses already exist.” The Court also noted that “potential uses must be reasonably likely to be considered” and the potential price could be discounted “for the likelihood of their being realized.”

The Court reasoned that having some awareness of the fair market value of the property helps the lender determine the opening bid and whether to postpone the auction to protect the borrower’s interests. The lender in this case admitted in discovery it took no steps to determine the fair market value of the property before the auction. Say what? This is not a good fact for the lender. The Court’s comment on it was “no diligence is not reasonable diligence.”

So what is a lender supposed to do? The Court didn’t say you need to obtain an appraisal. The decision provided that the lender must in some way ascertain fair market value in order to satisfy its duty of good faith and reasonable diligence in selling the property. That could mean obtain an appraisal, contact a broker for a valuation or market information, or something similar.

Background of the Case

A borrower defaulted on its residential mortgage loan and the lender, Fannie Mae, sold the property to a third party at a foreclosure auction. The opening bid price at the auction was $329,000.  The winning bid was $355,000.  The assessed value was $361,900.

The borrower filed suit, claiming the lender did not satisfy its duty to exercise good faith and reasonable diligence in conducting the foreclosure sale. During the trial after the auction, the borrower’s expert appraised the property at $975,000, and the buyer’s expert at $385,000. All valuations concluded that the highest and best use of the property was as vacant land, developable into as many as four single family homes.

The trial court dismissed the case on a summary judgement motion. The trial court concluded that the borrower did not have enough evidence to prove the lender breached its duty. The judge reasoned that the lender had no obligation “to consider anything other than the value of the property as it was presently zoned and used.”

The Appeals Court instead found that the borrower had raised material disputes of fact as to whether the lender complied with its duty. The record showed that evidence exists of an inadequate price and other evidence that the lender:

  1. failed to take any steps to determine the current fair market value of the property before the auction sale;
  2. did not consider the development potential of the property or share that potential with potential bidders or in advertising; and
  3. did not take any steps other than compliance with statutory mandates.

Foreclosure Standards

The Appeals Court gave us a primer on the standards applicable to Massachusetts foreclosures:

  • The power of sale in a foreclosure permits a lender to foreclose without judicial oversight.
  • A foreclosing lender must exercise good faith and use reasonable diligence to protect the interests of the borrower.
  • The duty of good faith and reasonable diligence is not satisfied merely by following statutory requirements.
  • A lender must get for the property as much as it can reasonably, and do what a reasonable person would be expected to do to accomplish that result.
  • The mere inadequacy of a foreclosure sale price, alone, does not necessarily prove an absence of good faith or reasonable diligence; however, inadequacy of price may be considered with other evidence to support a finding of fraud or lack of reasonable diligence.

If you plan to rent your house this summer, be prepared for a change in the State Law effective July 1, 2019.  On December 28, 2018, Governor Baker signed An Act Regulating and Insuring Short-Term Rentals which sets forth a comprehensive framework for the regulation of short-term rentals.  The new law has several new requirements including registration, the payment of both State and local taxes, payment of fees and insurance.

A short-term rental includes an apartment, house, cottage and condominium rental where at least one room or unit is rented out by an operator through the use of advanced reservations.  The Act includes regulation of online rental companies such as Airbnb, Flipkey and VRBO. Hotels, motels, lodging houses and bed and breakfast establishments are not considered short-term rentals.

All short-term rental operators will be required to register with the Massachusetts Department of Revenue (“DOR”). Operators may then choose to allow an intermediary or other agent to handle the rental of their property who can register and submit returns and taxes due to DOR on their behalf.  The State will maintain a short-term rental registry that will be accessible to the public.

The new law imposes State and local excise taxes on short-term rentals that are rented for more than fourteen days in a calendar year starting on July 1, 2019.  This taxation will apply to any rental contract entered into on or after January 1, 2019. Short-term rentals will be required to pay the 5.7% State excise tax rate to the DOR and additionally, communities can add local taxes of up to 6.0%, and 6.5% in Boston.

There are also new insurance requirements under the Act.  Operators of short-term rentals are required to maintain liability insurance of not less than $1,000,000 to cover each short-term rental, unless such short-term rental is offered through a hosting platform that maintains such coverage.

Finally, local municipalities may charge an additional community impact fee of up to 3% on certain short-term rentals. There are some other fees that are permitted by certain municipalities and these fees, unlike the taxes, are paid directly to the municipality. The law also allows for local regulation and fines for violations of local laws.  If you have any questions regarding local fees or regulations, it is strongly advised that you speak with your local municipality.

When the Conservation Commission refused to permit the construction of a house on her residential lot in a Falmouth subdivision, Janice Smyth decided to take action and sought damages for a regulatory taking of her land under the U.S. Constitution and the Massachusetts Declaration of Rights.  She was successful initially, recovering damages of $640,000.  But, in Smyth v. Conservation Commission of Falmouth, the Appeals Court reversed the lower court’s decision.

Continue Reading No Damages to Owner Whose Lot Is Unbuildable Due to Wetlands Regulations

The Boston Redevelopment Authority d/b/a Boston Planning and Development Agency has the right to challenge a foreclosure that purportedly terminated a covenant restricting the use of property to affordable housing.

Continue Reading Affordable Housing Covenants Have Protected Status in Foreclosures

In a satisfying win for Rackemann, the Appeals Court today upheld a Land Court decision that inland lot owners hold no easement rights over our clients’ waterfront property.

Loiselle v. Hickey concerns a large subdivision in Dennis with a number of ways leading to Cape Cod Bay.  An earlier case between many of the same parties established that the inland lot owners had easement rights in all of those ways.  In Loiselle, many of the same the inland lot owners argued that they also had the right to use the private beach between those ways for recreational purposes.

The Appeals Court rejected that claim.  While the decision does not break new legal ground, it does serve as a helpful review of the basic legal principles governing waterfront land.

Continue Reading More Beach Rights Litigation