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"One Time Right" Ruled Wrong
by Ron Davis

A San Diego retail firm will get a chance to buy a portion of a local shopping center despite the objections of the center’s owner.

The retail firm—San Diego Watercrafts—has been in business at the shopping center since gaining a lease assignment from one of the center’s tenants. In getting the assignment, San Diego Watercrafts obviously believed it would be afforded all the rights and privileges of the tenant. And one of those rights includes that of first refusal if the shopping center owner decides to sell the premises occupied by San Diego Watercrafts.

The lease between the center’s owner and the tenant states, for example, that the center’s owner, before the sale or acceptance of an offer from a third party, “tenant shall first have had the opportunity to accept landlord’s offer.” The lease also provides that “if tenant does not timely and properly accept landlord’s offer at such first opportunity, then this section…shall be of no further force and effect whatsoever.”

So when the center’s owner recently announced the sale of the tenant’s leased premises to a third party, San Diego Watercrafts protested that the terms of the lease had been violated.

In response, the center’s owner argued that he had indeed complied with the sales provision in the lease. In fact, six months before the tenant assigned the lease to San Diego Watercrafts, a prospective buyer had made an offer for the tenant’s leased premises. But when the tenant had an opportunity to match the offer, he declined.

Characterizing the first-refusal provision of the lease as a “one-time right,” the center’s owner believed he had satisfied the lease requirements.

San Diego Watercrafts sued. But a state court sided with the shopping center owner.

On appeal, however, a California appellate court refused to allow the sale, explaining, “The lease is ambiguous. There is a question as to whether it applies at all where the offer providing the basis for the invocation of the right of first refusal ultimately proves to be unacceptable. Moreover, the lease phrases ‘only until such time as tenant shall first have had the opportunity to accept landlord’s offer’ and ‘at such first opportunity’ are susceptible to at least two reasonable meanings. If those terms differ, the offer was in bad faith, and the tenant’s right [to purchase] the property was not extinguished.” (125 Cal. Rptr.2d 499 [Cal.App. 4 Dist. 2002])

Decision: October 2002
Published: December 2002



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