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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.

What Is a Right of First Refusal by Condo Boards in NYC?

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!

Can Condo Boards Abuse Their Right of First Refusal in NYC?

As of November 2017, we are seeing and hearing about more instances where condo boards have abused their right of first refusal to effectively discourage a potential buyer from completing their purchase. A condo board typically has 30 days to respond with a right of first refusal after a condo purchase application has been submitted. However, if the condo board requests additional information say on day 28, the 30 day time limit starts all over again.

This is the case even if the condo board maliciously asks for something trivial or for something that was not even in the original condo application. By doing this, they can frustrate a potential condo buyer and perhaps even force the buyer to abandon the deal due to a rate lock expiring or just pure frustration.

As of November 2017, we are seeing and hearing about more instances where condo boards have abused their right of first refusal to effectively discourage a potential buyer from completing their purchase. A condo board typically has 30 days to respond with a right of first refusal after a condo purchase application has been submitted.

However, if the condo board requests additional information say on day 28, the 30 day time limit starts all over again.

This is the case even if the condo board maliciously asks for something trivial or for something that was not even in the original condo application. By doing this, they can frustrate a potential condo buyer and perhaps even force the buyer to abandon the deal due to a rate lock expiring or just pure frustration.

Here is an interesting real world example we’ve encountered of condo boards abusing their right of first refusal in New York City.

A wealthy finance executive recently had a divorce with his wife. The wife was now in contract to buy a luxury condo to live in with their children. Even though it was an all cash purchase and the husband made a tremendous amount of money, the condo board wanted to be difficult because the wife had no income of her own. As a result, they came back around 25 days after the condo application had been submitted to ask if the ex-husband could co-sign the purchase. The husband grudgingly agreed since it was for his wife and kids after all. However, after another 20 days or so the condo board came back again and asked to see the husband’s tax returns. This was egregious because the husband was well known and very wealthy, and the condo board knew the husband’s name by now. The husband was furious but ultimately agreed to share his tax returns which were several hundred pages in length. Then after another 20 days or so the condo board asked to see if the husband could put several years of common charges into escrow. This was the last straw, the buyer’s lawyer sent in a letter threatening to sue if the board didn’t dutifully make a decision on their right of first refusal immediately.

This ultimately got the condo board to issue a waiver of their right of first refusal; however, it should be noted that if you decide to litigate you had better be able to follow through on it. If not, your bluff will be called and you will lose all leverage. Also remember that condo boards are usually not afraid to litigate as they are not using their own funds, but are rather being funded through a potentially unlimited levy on all of the fellow condo owners.

Have Condo Boards Ever Exercised Their Right of First Refusal in NYC?

Yes, although the chances of a condo board being able to scrape together enough funds to purchase the average $2 million New York City condominium are exceedingly slim.

The only case we’ve heard of a condo board actually exercising its right of first refusal was for an Upper Manhattan condo that was priced just under $1 million so buyers could avoid the Mansion Tax in NYC. The buyer put an offer in of $920,000 and for some reason the board was able to scrape together the funds to buy the apartment. Perhaps the board felt that the price was too low, or that it was undervalued for some reason. The buyer ended up raising his offer to $990,000 in order to stave off this exercise of the condo board’s right of first refusal (remember that the condo board can only exercise it and buy it at the same terms as the prospective buyer of a condo unit).

However, the condo board raised the funds and exercised its right of first refusal anyway. In the end, the condo board ended up flipping the condo a few months later for around $1,100,000. However, with closing costs in NYC as high as they are, the condo board did not make a profit. Talk about a strange exercise in futility! What a waste of time and energy by that condo board!

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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