It is common for residential leases to include options allowing the tenants to purchase the property during the lease if the owner decides to sell. For unique properties, or in areas with tight housing markets, the option to purchase can make up a significant portion of the lease’s value.
The option to purchase is commonly structured as either a right of first refusal or right of first offer:
- Rights of first refusal require the owner to offer to sell the property to the tenant once the owner receives a bona fide offer from a third party. Typically, the owner is required to allow the tenant to match the offer to purchase made by the third party.
- Rights of first offer generally require the owner to offer to sell the property to the tenant before offering to sell the property to third parties. If the tenant declines to purchase the property, the owner may sell it to a third party, but the terms of the sale to the third party cannot be more favorable than those offered to the tenant.
In Greenwald v. Keating, the New Hampshire Supreme Court interpreted a residential lease of lakefront property that included both a right of first refusal and a right of first offer. 172 N.H. 292 (2019). The lease’s right of first offer allowed the tenant the first option to purchase the property prior to it being listed on the MLS. If the right of first offer was not exercised and the property was listed for sale on the MLS, the lease’s right of first refusal then allowed the tenant to match the terms of a bona fide third-party offer. The issue in the case was whether the right of first offer was triggered if the owner intended to sell the property without first relisting the property for sale.
Instead of offering the property for sale to the tenants or listing it on the MLS, the owners instead agreed to sell the property to a third party through a mutual connection. The tenants sued the owner for specific performance under the contract.
The trial court found that the dual purchase options only required the owner to offer to sell the property to the tenants if the owner intended to actually list the property for sale on the MLS and had actually received an offer from a third party. Thus, the trial court ruled that no breach had occurred because the triggering conditions for both options – listing the property for sale and receiving an offer – were never met.
Conditions precedent, such as only receiving the benefits of the agreement if triggered by certain circumstances like intending to list the property for sale, are not favored in New Hampshire, and courts will not construe contacts to include them unless they are required by the plain language of the agreement. Conditions precedent are typically apparent if the clause uses phrases such as: “if”, “on condition that”, “subject to”, and “provided.”
Under this background, the NH Supreme Court disagreed with the trial court and ruled that a right of first offer can be triggered solely by the owner’s general intent to sell the property, regardless of whether it was actually listed for sale to the public on the MLS or whether the owner had received an offer from a third party. The Court pointed out that the trial court had improperly applied the law relating to rights of first refusal to a right of first offer by requiring the owner to first receive a third-party offer.
Ultimately, the Court found that the option language was ambiguous and remanded the case back to the trial court. On remand, the trial court was instructed to consider the intent of the parties in the context of the totality of the circumstances to determine whether the right of first offer is triggered under the contract when the owner intends to sell the property, or whether it is trigged only by a specific intent to sell the by listing the property through MLS.
When including a purchase option in a lease in New Hampshire, it is important to carefully craft the options’ language. For example, the tenants in Greenwald v. Keating would have had additional protections had the option been worded in a way requiring the owner to offer the property to the tenants before the owner could offer the property to any third party (regardless of the method – on the MLS or through a more informal sale). Similarly, the owner could have likely avoided protracted litigation with the tenants by more clearly stating that the option only applies when the owner actually formally lists the property for sale on the MLS (and thus preserving the ability to sell the property in a more informal way, such as to a family member).