Legal question - can a valid contract be nullified due to a pre-existing first right of refusal?

Question

To anyone who might have experience with this,

Facts:

1. I have a fully executed contract to purchase a bank-owned commercial office condo for all cash, closing next Friday. (Roughly 2-week closing period).

2. I am also in negotiations with the adjoining condo unit to purchase their unit so that I can combine the two units and lease the combined space to a medical practice that wants to do a long-term (7-year) lease. Once the transaction is complete and the tenant has moved in, I would then package the property as a net-leased investment sale and sell to a long-term investor.

3. Yesterday, I was notified by the listing broker on the bank-owned unit that the condo docs (which I also just received yesterday) give the association and the other unit owners a first right of refusal to purchase the unit.

4. The right of refusal states that the association and unit owners would have to purchase it based on the same price and terms as any bona fide offer received by a unit owner desiring to sell their unit. They are required to be notified within 5 days of receiving the offer and have 30 days to decide whether or not to execute their right. It appears the bank and listing agent goofed by not taking my offer to the board and instead entering into a purchase contract with me.

Question

Is my contract enforceable?

Thank you in advance for sharing your thoughts.

(Note - Yes, I will definitely consult with an attorney asap but before I do I just want to see if anyone here has encountered a similar situation).

Wayne Brooks · Answer

Not really a conundrum, just an over sight. The closing Has to be delayed, unless the COA/unit owners sign off before their 30 day review period. Disregarding the clear title issue, I'm sure there are other out clauses for the bank in the addendums/contract. Get the notification/review process started as soon as you can. I also have never seen a bank contract addendum that has specific performance as a cure if they cancel.

Dion DePaoli · Answer

"Is your contract enforceable?" Yes.

First right of refusal does not make your contract unenforceable. Having a enforceable contract is not the same as being able to purchase the property though. Even though, we understand what you are really asking.

In most cases, you signed not only the purchase contract with the bank but a contract addendum as well. Usually that gives the bank the right to cancel the contract at any time for any reasons.

That is important because again, your contract is "enforceable". You made an offer and it was accepted and the contract was executed. Can you enforce "Specific Performance" on the contract? Meaning, can you force the bank to sell to you, essentially ignoring the associations first right of refusal. No.

In the event you have suffered damages, such as paying for inspections and other expenses based on thinking you are in a contract and purchasing the property, you may be able to seek reimbursement for those expenses from the bank. The bank had the responsibility to allow the right of refusal to be processed, if they did not, that is their fault. You will not have damages above your expenses in most, if not all, cases.

This is pretty standard stuff. Accidents/errors happen not much you can do.

Bennet Sebastian · Answer

Good advice guys - thanks!

Bill Gulley · Answer

Dion s correct, the bank screwed up big time as that should have been caught in the search for the foreclosure. An attorney in FL would need to pass an opinion on the FRR as an encumbrance is squashed by the foreclosure. The HOA probably had notice as public notice is made.

If you are willing to proceed, proceed. Continue with your plan. If the HOA pops up saying they want it, they will have to pay the price. Since they dragged their feet having notice, they could be required to pay for the lease and costs.

If the HOA pops up, and they only pay the sale price, you certainly have an issue with the bank as to their lack of diligence. I suggest you have your attorney review any waiver as to accepting title so that it does not include any release of future liability of the bank in the event the HOA performs, that may be difficult. You may be able to proceed without any waiver toward the bank but only to title insurance, so see your attorney. :)

Dion DePaoli · Answer

Bennet, do yourself a favor and stop speculating on what others, who you don't even know, may or may not do. Let's not pretend the current owners of the units don't know a unit was being foreclosed. This is one of those things where all you can do is plan for the worst and hope for the best.

You would not be able to take title subject to the refusal right. No sense even thinking about that. That would be a huge problem for the bank that they don't want. The concept is out in the open, somebody messed up, it is an inconvenience for all involved but nonetheless, it is what it is.

Hope for the best and plan for the worst. Good luck.

Wayne Brooks · Answer

Bennet, have you read the entire addendum, usually 8 pages or so. Also, as the other unit owners they wouldn't have close in 1 or 2 days, on the same date date of your closing to meet the "on the same terms and conditions clause" it would be 2-3 weeks ( whatever your contract had after acceptance) after their allowed review period. By the way, did you use one of the standard FL purchase contracts, and if so which one (name/revision date).

Bennet Sebastian · Answer

OK, thanks. FYI, it is a major bank and their addendum reads as follows:

"If Seller fails or refuses to proceed to Closing on the Closing Date, ........, Buyer's sole and exclusive remedies shall be to either (i) terminate the Agreement......... or (ii) commence an action for specific performance of the Agreement within thirty (30) days after the date of Seller's default."

Bennet Sebastian · Answer

Thanks Dion, I get where you are going but I keep going back to the fact that both the contract and the addendum state that I have the option to accept the title with defects and close the transaction. This is where it's getting confusing.

I am perfectly OK with waiting the thirty days but the problem is that the bank decided to take a massive write-off and get this off their books by accepting my all cash offer and that closes in two weeks. I'm 90% sure that if the other unit owners see that this unit could be had for this price that one of them will take it. However, the condo docs state that they have the right to purchase on the same price AND terms and unless they are notified prior to closing date and close in 1-2 days they wouldn't be closing on the same terms as my contract.

I'm not really concerned about losing my inspection costs on this. I am more so than the $200k or so profit I would have been able to achieve if I'm able to assemble the units, execute the long-term lease and sell off the investment. I know this may give some people the impression that I'm a money-hungry schemer (I felt that way about myself at first when I considered this whole issue) but real estate investment is now my full-time business and I have to treat it like just that, a business.

Bennet Sebastian · Answer

Hi Wayne,

The bank's addendum is consistent with the main contract as it relates to title defects. Basically if I have an objection to a defect on the title (in this case the right of first refusal in the condo docs) then I have to let the Seller know at which point they can choose to either cure the defect or terminate the contract. Assuming I don't take objection to the defect and decide to move forward with the closing, the addendum states that the bank can still refuse to close at which point my options are either to take back my deposit and move or sue for specific performance within 30 days of default of the contract. The association management company will handle notification to the board and the other unit owners but that will be long after the scheduled closing date which is next week. Quite a conundrum, huh?

Dion DePaoli · Answer

Not to steal Jon's thunder but you would have the first bank in the last 5 years which doesn't have a special addendum to their contract. Perhaps someone messed up twice. Hard to imagine though. In any manner, the contract itself calls for clear and marketable title be conveyed.

Secondly, the first right of refusal is a deed restriction. Jon points to title as there is where the concept comes into play. Title is not clear of encumbrances if the right of refusal has not been exercised. The HOA's claim, through first right, is superior to yours.

Now, before this goes from molehill to mountain, why not simply talk to the bank or agent and tell them that you are willing to extend the closing date so they can properly give the HOA the right of their refusal. Create an addendum to your contract which extends the closing date and expressly state you are entitled to all of your earnest money and reasonable costs if the contract is canceled due to the HOA excising their rights.

Just because they can purchase the property, doesn't mean they will.

Legal question - can a valid contract be nullified due to a pre-existing first right of refusal?

Legal question - can a valid contract be nullified due to a pre-existing first right of refusal?

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