Court Addresses Whether a Tenant Can Enforce a Right of Refusal in Third-Party Sale

In Tri-Outdoor v. Keyser, 2022 Pa. Super. Unpub. LEXIS 891 (Apr. 18, 2022), the Pennsylvania Superior Court recently addressed whether a tenant could specifically enforce a right of first refusal provision contained in a lease agreement where the landlord sold the leased premises to a third-party purchaser.

Lease and Right of First Refusal

In Keyser, the landlord and tenant entered into a written lease for purposes of the tenant erecting a billboard on the leased premises, the opinion said.

Under the written lease, the 20-year lease term began upon the completion of construction of the billboard, the opinion said.

In the written lease, the tenant was also granted a right of first refusal to purchase the leased premises “at the same price and on the same terms as any proposed sale that the landlord desires to consummate.”

According to that lease provision, the landlord was obligated to provide written notice to the tenant of any offer received from an interested third-party purchaser, at which point the tenant would have 30 days from the date of receipt of such written notice to exercise the tenant’s right of first refusal.

Tenant’s Preparations and Landlord’s Breach

After the execution of the written lease, the tenant paid for a survey of the leased premises and a wetlands study as well as for contractors to prepare the leased premises for construction of the billboard, the opinion said.

According to the opinion, when the landlord received an offer from a third-party to purchase the leased premises for $18,000, the landlord mailed written notice of the offer to the tenant.

Notwithstanding the foregoing, within the 30-day exercise period, the landlord, unbeknownst to the tenant, sold the leased premises to a third-party purchaser for $9,000, the opinion said.

Within the exercise period, but after the leased premises was already sold, the tenant notified the landlord of the tenant’s intention to exercise the tenant’s right of first refusal to purchase the leased premises from the landlord.

Procedural History

Upon discovering that the leased premises was sold, the tenant filed a complaint against the landlord and the third-party purchaser with the Northampton County Common Pleas Court, requesting, among other things, specific performance of the tenant’s right of first refusal contained in the written lease.

The trial court originally found that the tenant had not established valid consideration for the written lease and, therefore, dismissed the complaint.

The tenant then appealed the trial court’s ruling to the Superior Court.

Disagreeing with the finding that no consideration was established by the tenant on account of the written lease, the Superior Court reversed the trial court’s ruling and remanded the case for further proceedings to determine whether specific performance should issue in light of the equities between the parties.

On remand, the trial court dismissed the action for specific performance, concluding that the third-party purchaser should be deemed a bona fide purchaser for value because it did not have actual or constructive notice of the tenant’s right of refusal to purchase the leased premises from the landlord under the written lease.

Yet again, the tenant appealed the trial court’s ruling to the Superior Court.

Superior Court Analysis on Specific Performance

According to the Superior Court in Keyser, “a request for specific performance invokes the equitable powers of the trial court,” and “will only be granted if the plaintiff is clearly entitled to such relief, there is no adequate remedy at law, and the trial judge believes that justice requires such a decree.”

The Superior Court then referenced the case of Thuemler v. Brown, 18 Pa. Super 117 (1901) in which a landlord sold a leased property to a third-party purchaser and the tenant attempted to enforce an option-to-purchase clause contained in the written lease between the parties.

In Thuemler, the Superior Court held that “the sale of land to a third-party, in derogation of an option-to-purchase clause,” typically renders the landlord “liable for the damages resulting to the lessee by reason of the breach.”

The Superior Court in Keyser emphasized that “equity has only interposed the remedy of specific performance in cases where the land at issue was unique,” such that “the incidental or consequential damages of contract law would not make the optionee whole.”

Case Comparisons and Final Holding

The Superior Court in Keyser then pointed to the case of Boyd & Mahoney v. Chevron U.S.A., 614 A.2d 1191 (Pa. Super. Ct. 1992), in which an award of specific performance to a real estate leasing company that had a right of refusal clause in the seller’s deed was affirmed on appeal.

In Boyd & Mahoney, the Superior Court agreed that the land was highly special to the real estate leasing company because it was situated at the entrance to the real estate leasing company’s commercial development properties that would have allowed the real estate leasing company to control the architectural design and future development of the area.

In comparison, the Superior Court in Keyser believed that the tenant “had no particularly compelling need for the leased premises (a small triangle with space for a single billboard) such that damages at law would be inadequate to remedy” the landlord’s breach of the right of first refusal provision contained in the written lease between the parties.

Since the Superior Court concluded that the tenant had an adequate remedy at law, such as the money spent preparing the leased premises for erecting the billboard, it allowed for the dismissal of the specific performance action.

In doing so, the Superior Court in Keyser did not believe it was necessary to analyze whether the third-party purchaser should be deemed a bona fide purchaser for purposes of dismissing the specific performance claim on these grounds as well.

Regardless, the Superior Court in Keyser noted that, even if that issue was not moot, it stated that it would have affirmed the trial court’s ruling on those grounds as well since the third-party purchaser had neither actual nor constructive notice of the right of first refusal provision contained in the written lease.

Author Information and Reprint

Alan Nochumson is the sole shareholder of Nochumson P.C., a legal services firm with a focus on real estate, land use & zoning, litigation, and business counseling for the people of Pennsylvania and New Jersey. Nochumson is a frequent author and lecturer on issues commonly confronting businesses, individuals and professionals. You can reach him at 215-399-1346 or alan.nochumson@nochumson.com.

Alex Goldberg is an associate attorney at the firm. You can reach him at 215-399-1346 or alex.goldberg@nochumson.com.

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