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.