Landlord’s Termination of Lease Overrides Tenant’s First Right of Refusal Claim

One of the most prevalent of such contractual rights is known as a first right of refusal. Under such circumstances, the landlord may list and market the property for sale and, if the landlord obtains a bona fide offer from a third party, the tenant has the right to enter into a written agreement to purchase the leased premises under the same terms and conditions as the offer from the landlord.

In Tri-State Auto Auction v. Gleba, 2021 Pa. Super. LEXIS 340 (May 26, 2021), the Pennsylvania Superior Court recently found that a tenant’s right of first refusal to purchase the leased premises contained in a written lease did not survive a landlord’s termination of the lease arrangement.

In Tri-State, the landlord owned a commercial property in Upper Merion Township, Pennsylvania, the opinion said.

According to the opinion, in late 2010, the landlord and the entered into a written lease regarding the leased premises.

The written lease contained a provision providing the tenant with a right of first refusal as to any bona fide offer the landlord received from a third party to purchase the property during the lease term, the opinion said.

Also included in the written lease was a provision allowing the landlord to terminate the lease arrangement at any time upon 90 days prior to written notice of termination to the tenant and the payment of $100,000 to the tenant.

In 2014, the landlord received an offer from a third party to purchase the leased premises along with an adjoining property, the opinion said.

A controversy then ensued between the parties whether the tenant had an obligation to make any decision or exercise its right of first refusal to purchase the leased premises from the landlord, the opinion said.

The landlord then executed the written agreement to sell the property to the third party, the opinion said.

The third-party, however, subsequently terminated the written agreement pursuant to its due diligence provision.

After that happened, the landlord received other offers from interested third parties but elected not to consider any of these offers while the lease remained in effect.

When the tenant exercised its option to renew the lease, the landlord elected to terminate the lease early by paying the requisite $100,000 in order to market and list for sale both the leased premises and the adjoining property, the opinion said.

On March 9, 2016, the landlord sent a letter and a $100,000 check to the tenant that constituted the landlord’s notice of termination of the written lease.

In the letter, the landlord also sought written confirmation that the tenant would vacate from the leased premises in a timely fashion.

According to the opinion, the tenant received the letter and the check on March 13, 2016.

Since the landlord never received such written confirmation, it initiated a declaratory judgment action against the tenant in the Montgomery County Common Pleas Court, seeking, among other things, a declaration that the landlord properly terminated the written lease and the tenant’s right of first refusal terminated contemporaneously with the written lease.

Although the tenant never confirmed its intention to vacate from the leased premises, it deposited the check on June 9, 2016, the opinion said.

When the tenant failed to vacate from the leased premises in a timely fashion, the landlord also filed a complaint for confession of judgment for possession and money against the tenant.

On Oct. 13, 2016, the landlord ultimately obtained possession of the leased premises by way of a writ of possession it obtained in connection with the confessed judgment for possession.

After receiving possession of the leased premises, the landlord sold the leased premises and the adjoining property to one of the previously interested third parties.

A bench trial occurred in the declaratory judgment action.

The trial court held that the landlord properly terminated the written lease on June 13, 2016, 90 days after the tenant received the letter and the $100,000 check, as per the terms and conditions of the written lease, and, as a result, the tenant’s right of first refusal was deemed ineffective as of that date of termination.

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

Quoting T.W. Phillips Gas & Oil v. Jedlicka, 42 A.3d 261 (Pa. 2012), the Superior Court in Tri-State highlighted that a lease is in the nature of a contract and is controlled by principles of contract law and that it must be construed in accordance with the terms of the agreement as manifestly expressed, and the accepted and plain meaning of the language used, rather than the silent intentions of the contracting parties, determines the construction to be given the agreement.

The Superior Court in Tri-State went on to emphasize that the intent of the parties to a written agreement is to be regarded as being embodied in the writing itself and that the whole instrument must be taken together in arriving at contractual intent.

When addressing the merits of the appeal, the Superior Court in Tri-State relied upon the trial court’s reasoning.

In response to the tenant’s argument that the trial court erroneously determined that the written lease terminated on June 13, 2016, the Superior Court in Tri-State noted the trial court’s interpretation of the following language in the written lease: “Lessor shall have the right to terminate this lease at any time during any term upon 90 days prior written notice of termination to lessee and payment to lessee of a termination fee of $100,000.”

The Superior Court in Tri-State supported the trial court’s interpretation of the words “payment to,” together in context with the remainder of the provision, to mean that the landlord had properly terminated the written lease as of June 13, 2016, 90 days after the tenant admitted received the letter enclosing the $100,000 check.

Moreover, the Superior Court in Tri-State affirmed the trial court’s determination that it was not relevant when the tenant deposited the check enclosed with the letter.

In response to the tenant’s argument that its right to refusal was violated, the Superior Court in Tri-State upheld the trial court’s decision that when the written lease terminated, so too did the right of first refusal.

In doing so, the Superior court in Tri-State agreed with the trial court that the tenant failed to present any evidence, a viable argument, or applicable law in support of a claim that the right of the first refusal somehow survived the proper termination of the written lease.

Lessons Learned

The Superior Court’s decision in Tri-State emphasizes the importance of drafting legal documents, especially written leases, in a detailed and clear manner to avoid any potential litigation as a result of ambiguous language or unintended consequences.

The written lease in Tri-State was strictly enforced, which allowed the landlord to terminate it and sell a highly valuable piece of land to a third party.

— Clementa Amazan, an associate at Nochumson P.C., is the co-author of this article.

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