Understanding a Tenant’s Right of First Refusal

The concept behind the right of first refusal is fairly straightforward: Contractually, it’s a right granted to Entity A to enter into a business transaction with Entity B before anybody else is able to. If Entity A decides not to take part in the transaction, Entity B is then free to negotiate with other potential buyers.

Often, this concept appears in real estate transactions, where the seller grants a certain party the right to purchase a property before anybody else can. Many leases executed between tenants and landlords contain a right of first refusal clause. In Baltimore City, however, a tenant’s right of first refusal is on the legal books, established in Subtitle 6 of Article 13 of the Baltimore City Code.

What does the law say?

The Tenant Opportunity to Purchase Act (TOPA) maintains that “before title to any single-family residential rental property is voluntarily transferred, the tenant of that property shall have the opportunity to purchase the property on terms accepted as reasonable in the residential real estate market.” TOPA also guarantees that landlords “shall not be unreasonably impeded in selling their properties nor required to accept unreasonable terms of sale.”

What does it mean?

If you’re living in a single-family rental property, and your landlord wants to sell or transfer it, he must first give you a chance to buy it at a reasonable rate. In many cases, the landlord may have already agreed to sell to a third party (i.e., not the tenant).

But if the landlord does sell to a third party and specifics of TOPA are not followed to the letter, not only may the sale be invalid, but—since it’s Baltimore City code—criminal penalties may follow.

How does it work?

TOPA outlines a few steps that must be taken, involving some back-and-forth between the landlord and the tenant.

The offer:

Typically, the landlord will send the tenant a written offer of sale, stating the sale price as well as the terms and conditions of the sale being agreed to by the landlord and a third party. The landlord must send the notice with postage prepaid first-class mail, and the landlord must get a receipt from the post office (i.e., a Certificate of Mailing) that the notice was sent. At the same time, the landlord must also send a copy of the offer to Baltimore’s Department of Housing and Community Development.

Accepting the offer:

The tenant has 30 days after the offer was mailed to accept the offer. The acceptance must also be sent via prepaid first-class mail, with the tenant obtaining a Certificate of Mailing, which will prove that it was mailed before the 30-day deadline. If the tenant plans to use a government program to assist in the purchase, he must specify that in the acceptance of the offer.

Third-party offers:

If the landlord has already entered into an agreement with a third-party buyer, either before he mailed the offer to the tenant or within the 30-day period after mailing it, he must mail a notice of the contract to the tenant (again, with first-class prepaid mail and a Certificate of Mailing). The tenant then has 30 days after that mailing to notify the landlord of his intent to accept the offer for at least as much as the amount stated in the contract.

After the 30 days:

If the 30-day period has expired, and the landlord enters into an agreement that is less than the original offer to the tenant (or otherwise more beneficial to the buyer), he then must notify the tenant again and give him the right of first refusal. The tenant has either 15 or 30 days to accept, depending on how long it has been since the original offer and how much lower the second offer is.

The contract:

If the tenant accepts the offer, the landlord then has 10 days to offer a signed sales contract, and the tenant has 10 days to sign and return it, along with a deposit. The settlement must happen within 60 days, and the contract must include the right of the tenant to be released from the purchase if he can’t obtain the necessary financing.

TOPA does contain several exceptions. For instance, the landlord does not have to offer the right of first refusal if he is transferring or gifting the property to family members or a government agency or charity.

The concept of right of first refusal may be simple, but the laws in Baltimore City are not. For a successful sale or purchase of rental property, the buyer and seller should both have the advice of an attorney knowledgeable in landlord/tenant law. Lusk Law, LLC, has helped rental property owners and tenants comply with TOPA. If you need legal advice about buying or selling a rental property, contact our office soon for a consultation.

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