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How does a Right of First Refusal work in NYC?

What is the Right of First Refusal in real estate? How does a Right of First Refusal work in NYC?

A Right of First Refusal is a typical requirement in a condominium’s By-Laws which allows the condominium corporation to purchase an apartment at the same terms as a buyer who has already signed a contract to purchase the apartment.

The Right of First Refusal is a privilege that is rarely exercised by condo boards primarily because it is exceedingly difficult to raise funds either through a special assessment or a loan to be able to purchase a multi-million dollar condo in NYC. Furthermore, even if it were possible to raise the funds, there would likely be severe opposition against the board from most condo owners in the building. This could result in unnecessary litigation within the building which costs everyone money, uses the building’s reserves and destroys the marketability of the building!

The Right of First Refusal exists to protect condo owners in the building from non “arms length” transactions at off market prices between friendly parties. For example, no owner would be happy if one of their neighbors decided to sell their apartment at half its market value to their family member. Doing so may legitimately confuse future buyers that the deal was a real comparative transaction which would lower potential sale prices for everyone’s apartments in the building!

The Right of First Refusal is a privilege that is rarely exercised by condo boards primarily because it is exceedingly difficult to raise funds either through a special assessment or a loan to be able to purchase a multi-million dollar condo in NYC. Furthermore, even if it were possible to raise the funds, there would likely be severe opposition against the board from most condo owners in the building.

This could result in unnecessary litigation within the building which costs everyone money, uses the building’s reserves and destroys the marketability of the building!

The Right of First Refusal exists to protect condo owners in the building from non “arms length” transactions at off market prices between friendly parties. For example, no owner would be happy if one of their neighbors decided to sell their apartment at half its market value to their family member. Doing so may legitimately confuse future buyers that the deal was a real comparative transaction which would lower potential sale prices for everyone’s apartments in the building!

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Sample Waiver of the Right of First Refusal by a Condominium Board in NYC

August 22, 2017

Re: [ADDRESS]

To Whom It May Concern:

The purpose of this letter is to state that the Board of Managers of [NAME] Condominium has waived the right of first refusal for the purchase of unit [X], owned by [NAMES], as Trustees of the [NAME] Trust, for the amount of $[AMOUNT].

If you have any questions regarding this matter, please feel free to call [MANAGEMENT COMPANY] at [PHONE NUMBER].

Sincerely,

[BOARD PRESIDENT’S SIGNATURE]

[BOARD PRESIDENT’S NAME]
Board President
[NAME] Condominium

You will receive a waiver of the Right of First Refusal from the condo board after you’ve submitted the condo’s purchase application and before closing. Not all condos require a purchase application, and even those who do typically only require a short form to be filled out in contrast to lengthy co-op purchase applications.

Sample Right of First Refusal clause and contract language in NYC

6. Right of First Refusal:

6.1 If so provided in the Declaration or By-Laws, this sale is subject to and conditioned upon the Waiver. Purchaser shall in good faith submit to the Board or the Managing Agent an application on the form required by the Board, containing such data and together with such documents as the Board requires, and pay the applicable fees and charges that the Board imposes upon Purchaser. All of the foregoing shall be submitted within 10 business days after the Delivery Date, or, if 1.1.1 or 1.1.2 applies and the Loan Commitment Letter is required by the Board, within 3 business days after the earlier of (i) the Loan Commitment Date or (ii) the date of receipt of the Loan Commitment Letter. Unless the Board requires a separate submission by Seller, Purchaser’s submission of an application shall be deemed to satisfy the notice requirement set forth in the Declaration and/or By-Laws;

6.2 If the Board shall exercise such right of first refusal, Seller shall promptly refund to Purchaser the Contract Deposit and upon the making of such refund this Contract shall be deemed cancelled and of no further force or effect and neither Party shall have any further rights against, or obligations or liabilities to, the other by reason of this Contract. If the Board shall issue a Waiver Confirmation (a copy of which shall be delivered by the recipient to the Parties promptly following receipt thereof), the Parties shall proceed with this sale in accordance with the provisions of this Contract;

6.3 Closing shall be adjourned for up to 30 business days if the Board neither exercises its right of first refusal nor issues a Waiver Confirmation on or before the Scheduled Closing Date. If neither Seller nor Purchaser nor their respective Attorneys shall have received either of such notices by such adjourned Closing Date, then Seller and Purchaser each will have the right to cancel this Contract by giving Notice (as defined in Paragraph 11) to the other, provided that, prior to the giving of such notice of cancellation, neither Seller nor Purchaser nor their respective Attorneys shall have received a Waiver Confirmation. In the event this Contract is cancelled pursuant to the foregoing provisions of this 6.3, then the Escrowee shall refund the Contract Deposit to Purchaser;

6.4 Notwithstanding the provisions of the preceding 6.3 that otherwise give Seller the right to cancel by reason of not having received a Waiver Confirmation, Purchaser will have the right to reject Seller’s notice of cancellation for such reason, thereby obligating Seller to fulfill its obligations and close here-under, in the event the Title Company agrees to insure title without exception for failure to obtain a Waiver Confirmation, and if applicable Purchaser’s Lender advises that it is prepared to close without issuance by the Board of a Waiver Confirmation, or if Purchaser notifies Seller that Purchaser wishes to close notwithstanding the failure of the Board to issue a Waiver Confirmation, provided that if, prior to Closing, one or both of the parties hereto receives notice from the Board of the Board’s exercise of its right of first refusal, Purchaser’s right to close under the provisions of this 5.4 shall terminate;

6.5 If the Board’s failure to either exercise such right of first refusal or issue a Waiver Confirmation is attributable to either Party’s bad faith conduct, that Party shall then be in default here-under and the provisions of Article 8 shall apply.

As you can see from the sample purchase contract language above, there is no way around the Right of First Refusal. A standard purchase contract in NYC will include language that requires you to abide by the Right of First Refusal language in the condominium by-laws.

However, it’s important to point out that unlike a co-op board, a condo board does not have the power to reject you for any reason. Just because your veteran buyer’s agent negotiated a great deal for you does not mean the condo board can reject you. The only way they can deny you your deal is if they muster the funds to purchase the apartment themselves. In contrast, co-op boards frequently reject applicants because they feel that a deal’s price is too low and that it won’t be helpful as a comparative transaction for future sellers in the building!

How does a Right of First Refusal work in NYC?

As you can see from the sample purchase contract language above, there is no way around the Right of First Refusal. A standard purchase contract in NYC will include language that requires you to abide by the Right of First Refusal language in the condominium by-laws. However, it’s important to point out that unlike a co-op board, a condo board does not have the power to reject you for any reason.

How does a Right of First Refusal work in NYC?

Just because your veteran buyer’s agent negotiated a great deal for you does not mean the condo board can reject you. The only way they can deny you your deal is if they muster the funds to purchase the apartment themselves. In contrast, co-op boards frequently reject applicants because they feel that a deal’s price is too low and that it won’t be helpful as a comparative transaction for future sellers in the building!

Disclosure: Hauseit and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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