NYSBA FALL 2014 | VOL. 42 | NO. 4 N.Y. Real Property Law Journal A publication of the Real Property Law Section of the New York State Bar Association

IInsidenside • RRightsights ooff FFirstirst OOfferffer aandnd FFirstirst • EEB5:B5: TThehe IIntersectionntersection ofof RealReal RRefusalefusal EEstatestate aandnd IImmigrationmmigration • MModelodel RRightight ooff FFirstirst OOfferffer • MMiller-Francisiller-Francis: A DDisturbanceisturbance iinn thethe ForceForce • OOptionsptions aandnd RRelatedelated RRightsights aandnd tthehe RuleRule AgainstAgainst PPerpetuitieserpetuities • HHiddenidden DangerDanger ofof thethe MMisindexedisindexed MortgageMortgage NEW YORK STATE BAR ASSOCIATION

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Get the Information Edge 1.800.582.2452 www.nysba.org/pubs Mention Code: PUB2793 Table of Contents

Message from the Section Chair...... 4 (David L. Berkey)

It Seemed Like a Good Idea at the Time: Rights of First Offer and First Refusal ...... 6 (Joshua Stein)

Model Right of First Offer… ...... 20 (Joshua Stein)

Options and Related Rights and the Rule Against Perpetuities ...... 28 (John C. Murray)

EB5: The Intersection of Real Estate and Immigration ...... 36 (S.H. Spencer Compton and Diane Schottenstein)

Miller-Francis: A Disturbance in the Force ...... 39 (Adam Leitman Bailey and Dov Treiman)

BERGMAN ON MORTGAGE FORECLOSURES: Hidden Danger of the Misindexed Mortgage ...... 42 (Bruce J. Bergman)

CHHECKECK US OUUTT OONN TTHEHE WEEBB hhttp://www.nysba.org/RealPropttp://www.nysba.org/RealProp

NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 3 Message from the Section Chair

These past few months have Force by Kevin continue into the future. We are also been very productive ones for our Kerwin and creating incentives to encourage re- Section. We were fortunate to enjoy Ron Kennedy cently admitted attorneys and others a wonderful Summer Meeting at the at NYSBA, to join our Section and experience the Queens Landing Hotel at Niagara-on- deserve great benefi ts of Section membership. the-Lake, Ontario, Canada, where we thanks. Our Section helps fund activities attended interesting CLE programs We have sponsored by our District Represen- and enjoyed the picturesque town, created a new tatives to educate and create social the Shaw festival, and Jet Boat rides committee to events for our members. The “Bark on the Niagara River, all highlighted bring our web in the Park” event organized by Alice by dinner at the Ravine Vineyard site and communications into the Breding, our Third District Repre- Estate Winery. Congratulations to 21st Century. The RPLS Website and sentative, at the Tri-City ValleyCats Leon Sawyko, our Program Chair, for Electronic Communications Commit- baseball game on July 7 was a big arranging such a great meeting. tee, chaired by Susan Scharbach and success and the September 17 cock- Our Task Force on Title Agent Michael Stevens, is coordinating with tails and theater event (My Manana Licensing’s efforts to assure that at- the State Bar’s Management Informa- Comes) sponsored by the First and torneys may continue to act as title tion Services Staff and its technology Ninth District Representatives, Nancy agents was rewarded when New offi cers to help create the Real Proper- Connery and Lisa Stenson Desa- York’s Title Agent Licensing Statute ty Law Section “Community” and to mours, was a big hit as well. We now was enacted, effective this September, insure that our web site contains the have a full complement of District containing language that clarifi ed an most current programming informa- Representatives, with Daniel Baker attorney’s ability to act as a title agent tion, committee reports, minutes and and Sanford Pomerantz joining us as in a matter where the attorney also other information of interest to our Tenth District Representatives and represents a party. (See NY Insurance members. Joseph Risi and Steven Wimpfheimer Law §2113(e).) The Task Force has representing the Eleventh District. Our Section fi nances are holding reviewed the proposed regulations on strong and we have increased the I hope that you all have an op- title agent licensing and has submit- amount of our annual Lorraine Pow- portunity to participate in our CLE ted a Comment on Regulation 206 to er Tharp Scholarship and Melvyn programs and social events this fall assure that the regulations conform to Mitzner Scholarship awards to $2,500 and continue to enjoy your Section the new statute and do not curtail an each. We have contributed more membership. attorney’s right to act as title agent. principal to the scholarship funds, The continuing efforts of Tom Hall, administered by The New York Bar Jerry Antetomaso, Karl Holtzschue, David L. Berk ey Foundation, so that the awards will Sam Tilton and Ben Weinstock and the assistance given to our Task

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4 NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 Thank You, Jack Murray!

A few months ago my friend Jack Murray, of First American Title Insurance Company in Chicago, mentioned he had written an article about how the rule against perpetuities applies to options and rights of fi rst offer and fi rst refusal (“ROFOs” and “ROFRs”). He was looking for a home for that article.

Jack didn’t know it yet, but I had written and wanted to expand and republish an article on the practicalities and impracticalities of ROFOs and ROFRs. So I suggested that we collaborate on a special issue of the NYSBA N.Y. Real Property Law Journal—the issue now in your hands or on your computer screen. You’ll fi nd in this issue not only Jack’s and my articles, but also a Model ROFO I wrote. In that model, I tried to respond to the concerns I de- scribed in my article, offering language that might work better than some of the ROFOs I’ve encountered.

Working with Jack on this project was an honor and a pleasure. For three decades, Jack has been one of the leading writers of serious scholarly articles about commercial real estate law. He takes a hard look at recent cases and uses them to draw out practical lessons for lawyers who close deals, exploring the legal issues that commercial real estate lawyers deal with all the time—prepayment penalties, mezzanine fi nancing, percentage rent, foreclo- sures, partial guaranties, malpractice, the automatic stay, other bankruptcy issues, limited liability companies, and many more. Jack is always at the forefront of whatever cases have just been decided. His ever-expanding article about nonrecourse carveout guaranties, for example—which he seems to reissue every quarter or so—is the defi ni- tive guide to that wretched area of the law.

Jack has served as Vice President and Special Counsel at First American in Chicago since 1996, a position from which he is now semi-retired. Before that, he worked for 20 years as regional real estate counsel for three major institutional lenders, where he participated in some of the major litigations that have helped defi ne modern com- mercial mortgage law. For many years, he has been one of the go-to advisers on title insurance and on structuring sophisticated transactions from coast to coast.

In the last few months, the Illinois Institute for Continuing Legal Education has arranged with Jack to republish all 200+ of his articles on the Institute’s website. At this point, those articles have not yet been uploaded or made available, but they soon will be, through this web address: www.IICLE.com.

In the meantime, I’m pleased to have played a role in adding one more article to the Jack Murray Library. With or without that last addition, Jack has made a huge contribution to commercial real estate legal scholarship. And he has been a good friend and resource for many commercial real estate lawyers, in New York and elsewhere, for many years. Thank you, Jack!

JOSHUA STEIN

NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 5 It Seemed Like a Good Idea at the Time: Rights of First Offer and First Refusal First Rights Can Cause More Problems Than They Solve By Joshua Stein

Nobody, except perhaps a plumb- feror”) decides it wants to sell its inter- ground lessees, largely because the er, gives much thought to the pop-up est in the property or the transaction parties endured a ground lease nego- stopper in most bathroom sinks. These (Offeror’s “Interest”).2 In a ground tiation—rather than an outright sale pop-up stoppers are everywhere. lease, Offeror’s Interest would consist of the premises—because the ground They’ve been around for ages. When of the ground lessor’s leased fee estate lessor allegedly wanted to continue to did you last see a bathroom sink or the ground lessee’s leasehold. A own the fee estate forever and had no with a rubber stopper on the end of a First Right says Offeror cannot sell its interest in selling. If the ground lessor chain? Interest unless Offeror fi rst gives the ever changes its mind, it seems reason- other party (the “Offeree” under any able to give the ground lessee—who The basic idea makes sense: build First Right) an opportunity to buy that has a major investment in and a long- the stopper into the drainpipe so no Interest. The idea has a ring of fairness term commitment to the property— one needs to fi ddle with, or keep track and logic to it. Whoever fi rst came up another shot at buying the ground of, a grotty-looking plug and a chain. with it was really creative. But, as this lessor’s Interest. A First Right also lets And set it up so anyone can operate it article will demonstrate, what seemed the ground lessee protect itself from with a quick fl ip of a lever or a pull on brilliant and creative in theory doesn’t an unknown and perhaps undesirable a knob. always work so well in practice—just new ground lessor.3 But in my limited experience—I’m like the drain stoppers in all those A ground lessee will also some- a lawyer, not a plumber—bathroom bathroom sinks. times give First Rights to its ground sink pop-up stoppers never work This article concludes by offering lessor. Then, if the ground lessee ever the way they should. Sometimes the some specifi c suggestions for how to decides to sell, the ground lessor can seal on the stopper doesn’t fi t closely write and live with First Rights, taking prevent the ground lessee from sell- enough to the rim of the drain. Some- into account the rest of the discussion. ing to the purchaser it found or plans times the mechanism goes out of Many of those suggestions are imple- to eventually fi nd (an “Offeror’s whack and no amount of tugging on mented in a Model Right of First Offer Purchaser”), and instead pre-empt the control knob will seal the drain. that accompanies this article. That the sale by exercising its First Right. Sometimes, something in the mecha- Model ROFO includes some introduc- The inclusion of these clauses may nism gets disconnected deep in the tory comments on how the model refl ect a desire for symmetry; a desire bowels of the bathroom sink. In any ROFO language fi ts with the rest of to protect the ground lessor from an event, the result is usually the same: the Lease. Footnotes in the model undesirable or at least unknown new the drain won’t seal and the water ROFO overlap many comments in this ground lessee;4 or a simple exercise of goes down the drain. Or sometimes article. negotiating leverage to create future the drain plug just closes and refuses opportunities for the ground lessor, to open. Once a First Right exists, this ar- either to execute a favorable transac- ticle also offers a roadmap for compli- Leaky or broken bathroom sink tion or at a minimum to torment the ance or for kicking up dust, if desired. pop-up stoppers remind me of some ground lessee. And, as an overarching and even bet- provisions often found in ground ter suggestion, this article considered Joint venture (“JV”) agreements leases. They sound like terrifi c ideas as a whole provides a roadmap to often establish First Rights between but rarely work right in the real world, persuade one’s client not to spend real the venturers. Though this article fo- and often instead create dissatisfaction dollars—potentially a signifi cant num- cuses on ground leases, most of the and uncertainty, even litigation, for all ber of them—to negotiate complex discussion also applies to First Rights involved.1 First Rights that will at best produce in JV agreements.5 First Rights also The provisions I have in mind are a dispute at some time in the future. appear in space leases, but they create rights of fi rst offer (each, a “ROFO”) That may be the most valuable service a much narrower range of issues than and rights of fi rst refusal (each, a a lawyer can provide to his or her cli- those discussed here.6 “ROFR,” typically pronounced as ent once the parties start to talk about Defi ciencies • Regardless of the deal “roafer” rather than spelled out). First Rights. context, actually trying to exercise a These rights (each, generically, a “First Business Context • Ground lessors First Right—or having one exercised Right”) arise if one party (an “Of- often agree to grant First Rights to against your client—will make it clear

6 NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 that First Rights are like those pop-up Why Bother with First Rights, not meet the price in the First Right drain stoppers that never work cor- Anyway? Notice, then the Offeror can sell to an rectly. First Rights turn out to work If First Rights do not work very Offeror’s Purchaser, as long as the Of- badly, or not at all. But you can never well, why bother with them? No Of- feror achieves at least a high percent- predict exactly what problems and is- feror would voluntarily give an Of- age (typically 95 percent) of the price sues they will cause, or when or how. feree a First Right. Offerees demand the Offeror proposed in the First Right 8 You can, however, safely predict that them as part of “making a deal,” in Notice. if anyone ever reads the First Right the belief that they may create benefi ts A ROFR, on the other hand, clause in the ground lease, the next and opportunities later. In some sense requires the Offeror to go into the act in the play will probably not be they often amount to a “throw-in”— market, fi nd an Offeror’s Purchaser, pleasant. One party or the other will not a fundamental economic motiva- then give the Offeree a First Right feel it is being oppressed, or will try to tor for the deal but an extra goodie Notice allowing the Offeree to match exploit a leverage opportunity. And, that might help and can’t hurt the Of- the purchase price proposed by the of course, once in a while, a First Right feree—but something the Offeree de- Offeror’s Purchaser.9 One might bet- may play out just fi ne with no dis- mands, sometimes quite vociferously, ter call a ROFR a “right to match.”10 agreement at all. as the price of doing the deal. From And clients often say ROFO when that vantage point, even if First Rights 11 Some Examples they mean ROFR, and vice versa. are never perfect, they are substantial- Sometimes, they talk about a “right to I have recently lived through three ly better than nothing to an Offeree; match” when they mean a ROFR or major adventures, each with a differ- Offerors can sometimes be persuaded even a ROFO.12 And they rarely give ent client, each of which involved a to grant them; so why not grab them much thought to how any of these First Rights clause, negotiated before I for whatever they are worth? One can First Rights might play out in the real became involved. In all three cases, the also argue that First Rights, however world. They leave those details to the contractual language on the First Right imperfect they may be, are “market lawyers. failed to answer some basic questions. standard” or at least “common” in And though the contractual language ground leases, especially as they relate A ROFO lets the Offeror clear the did defi ne some rights and obligations to a possible transfer of the ground decks before going out into the market of the parties, some of rights and those lessor’s fee estate. to try to sell its Interest. If the Offeror obligations in some ways made little gives a valid First Right Notice and sense. The First Rights just did not Defi nitions of Terms: ROFO vs. the Offeree does not respond in time, work, at least from the perspective of ROFR • The many problems with the Offeror can go about its busi- the Offeree, who ended up thinking he First Rights start at the very beginning, ness—marketing, bidding and negoti- got less than he bargained for because with the defi nitions of terms. What’s a ating—without having to explain13 to the First Right created very little value. ROFO? What’s a ROFR? Clients throw prospective Offeror’s Purchasers that these acronyms around rather loosely, the Offeree might match their bids. Almost every one of the problems to refer to any concept of giving the With a ROFR, though, the Offeror will discussed in this article arose, or were other party a pre-emptive chance to worry, with good reason, that prospec- at least identifi ed, in the three matters I purchase before an Offeror sells its tive Offeror’s Purchasers will not take mentioned above; a fourth First Rights Interest to an Offeror’s Purchaser. In the Offeror’s offering seriously if the matter that led the parties to negotiate common parlance, the term ROFR of- Offeree can pre-empt any attractive another resolution; and a fi fth, involv- ten captures a ROFO as well. transaction the Offeror and the Of- ing a decades-old ground lease, where feror’s Purchaser negotiate.14 A ROFR a First Right process has not started What Happens and When will drive away Offeror’s Purchasers, yet but could soon. Each of the three My informal research suggests thus driving down the Offeror’s sell- completed matters involved a major that many commercial real estate pro- ing price. building in Manhattan. In no case did fessionals believe a ROFO (as opposed On the other hand, a ROFO forces the Offeree actually exercise its First to a ROFR) arises right at the begin- an Offeror to fi gure out satisfactory Right. In no case was the Offeree hap- ning of the selling process, i.e., when pricing when it gives a First Right No- py with the process, the contract docu- an Offeror fi rst decides it wants to go tice, long before it has fully exposed ments, or the outcome. But in no case into the marketplace to try to make Offeror’s Interest to the marketplace. did the matter go into litigation. And a deal and eventually sell Offeror’s The Offeror may set its price too high in each completed matter the Offeror Interest to an Offeror’s Purchaser.7 or too low in the First Right Notice. If did achieve its ultimate business goal: Before the Offeror even starts that pro- the Offeror sets too high a price, then a safe and not too painful exit from, or cess, the Offeror must offer (the “fi rst it won’t fi nd any serious interest from resolution of, a relationship it regarded offer”) the Offeror’s Interest to the potential Offeror’s Purchasers without as unsatisfactory. Offeree, at a price the Offeror speci- substantially lowering its asking price, fi es in a notice to the Offeree (a “First which will require enduring the First Right Notice”). If the Offeree does

NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 7 Right process once again. If the Offeror need a few days to fi gure out what First Right while ignoring the conse- sets too low a price, then the Offeree the First Right Notice is, what to do quences of a possible change of heart. might snap up the Offeror’s Inter- about it, which lawyer to call,20 and The Deadline will become par- est and the Offeror will leave money what its rights and options are. First ticularly burdensome if the Offeree, in on the table, every Offeror’s worst Right Notices have a habit of arriving addition to trying to decide whether nightmare. on the Friday before a long weekend, and how to exercise its First Right, or when the decision-maker is out of An Offeror can, of course, reduce also tries to negotiate with the Offeror town, or during some extended pe- those risks by doing some marketplace to resolve their relationship in some riod of religious holidays. For those homework before naming its ROFO way other than the transaction that the and other reasons, the typical 30-day price. That often happens.15 But the First Right Notice contemplates. If the Deadline often effectively allows 20 process will still probably lack the Offeree chooses to go down those two days or less. discipline, information fl ow, and reli- paths at once, each exercise will drain ability that full market exposure and With the Deadline approaching energy and focus from the other, and real bids from real potential Offeror’s so quickly, an Offeree has little time the 30 (really 20 or fewer) days will Purchasers might have produced. The to decide whether it wants to buy the pass very quickly. Offeror’s willingness to live with that Offeror’s Interest—typically a major To mitigate these problems, an imperfection may depend in part on capital investment that may or may Offeree may want a contractual right just how “generic” the real property in not match the Offeree’s current invest- to signifi cantly extend the Deadline, question actually is. It may be easier ment agenda, liquidity, time horizon, in exchange for paying an extension for the Offeror to estimate pricing for and funding position. The Offeror’s fee, perhaps a high one, calculated on an ordinary rental apartment building timing won’t necessarily match the Of- a daily basis. The Offeror will worry than for a building that has a museum, feree’s appetite or timing. Particularly that any delay increases the risk of fi ve restaurants, an observatory, offi ce if the Offeror is the ground lessee, the losing its Purchaser, or of deterring space, and some high-tech workspace. Offeree’s decision requires signifi - the Offeror’s Purchaser from the out- cant underwriting and due diligence, set. In my experience, however, most Think ROFO First somewhat mitigated by the Offeree’s Purchasers aren’t in a great hurry existing familiarity with the Offeror’s In my experience, if any party to to close once they sign a contract, Interest. In contrast, when the Offeror a real estate transaction cannot avoid hence will probably not mind some is the ground lessor, the Interest con- granting a First Right, it will typically additional delay, although that state- sists primarily of the right to receive a prefer to grant a ROFO rather than a ment, of course, represents a gross fi xed or predictable series of payments ROFR. On the other hand, plenty of overgeneralization. smart people favor the ROFR. In my for an extended time, so the analysis experience, the Offeror’s desire to becomes easier. The Offeree must also An Offeree might also decide not simplify third-party marketing usually fi gure out how to fi nance the pur- to wait until it receives a First Right outweighs the burden of the Offeror’s chase. A real estate investor will rarely Notice. Instead, if the Offeree knows having to come up with pricing for the have piles of cash sitting around wait- it might receive a First Right Notice ROFO before going to market.16 ing to fund the entire purchase price of at any time, the Offeree might plan the next deal.21 ahead for it, or even proactively reach Giving the First Right Notice; Time out to the Offeror to try to make a pre- A conservative or cash-strapped to Respond • For any First Right, if an emptive deal even when no First Right 17 Offeree will not want to commit to Offeror ever wants to sell, the Offeror Notice appears to be on the horizon. purchase unless it knows a lender is will have to give the Offeree a First And, as a variation on planning ahead 18 willing to provide fi nancing for most Right Notice, triggering the Offeree’s for a First Right process, the Offeree of the purchase price.22 But 20 days is First Right and allowing the Offeror to might as part of the original deal try to barely enough time to engage a mort- proceed only if the Offeree chooses not negotiate limits on when and how the 19 gage loan broker (if desired) and open to exercise. The Offeree must then Offeror can send a First Right Notice. conversations with potential lenders, respond to the First Right Notice so For example, perhaps the Offeror can let alone identify—and obtain a com- quickly that the First Right becomes only give a First Right Notice during mitment from—a lender to support a at worst useless and at best highly the fi rst calendar quarter, or must give purchase through a First Right.23 problematic. an “advance warning” notice if the Offeror might decide to send a notice Is It Ever a Good Time? Even though the Offeree will not have to close within 30 days after during a particular calendar year. An After an Offeree receives a First receiving a First Right Notice, it will Offeror could still give a First Right Right Notice, the Offeree generally has have only 30 days to decide and com- Notice without complying with these only 30 days (the “Deadline”) in which mit to close—with potentially serious conditions, but in that case the Of- to exercise its First Right. But if an consequences if it defaults. The Offer- feree would have some extra time to Offeree receives a First Right Notice, ee cannot easily decide to exercise its respond or the Offeror might need to even the most diligent Offeree will

8 NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 include a payment to the Offeree to Offeree exercises its First Right. This to require the Offeree to issue a formal compensate the Offeree for the time, fi rst notice would comply with the lit- confi rmation, in recordable form, ac- trouble, and disruption that the First eral requirements of the ground lease. knowledging the Offeree has received Right Notice would trigger. Although It would otherwise take no position a valid First Right Notice and chosen the suggestions in this paragraph rep- about what constitutes a valid notice not to exercise it.27 And if the Offeree resent meaningful measures to protect or any other issues, thus avoiding giv- thinks a First Right Notice is invalid, an Offeree, I have never seen anyone ing the Offeror grounds to claim the then perhaps the Offeree should have actually use them. exercise notice was invalid. an obligation to notify the Offeror quickly, rather than wait until the day Uncertainties About Valid Exercise • The Offeree could also give a before the Deadline or say nothing at The next common problem with First second notice, addressing whatever all. Rights involves the garden-variety is- issues have arisen and offering to re- sue of making sure that if an Offeree solve them quickly, but making clear Of course, if the First Right lan- does decide to exercise its First Right, that the fi rst notice is unconditional guage requires the Offeree to provide it does so in a valid and effective way, and effective regardless of those issues formal notice or confi rmation in re- sometimes not as easy as it sounds.24 or their resolution. The Offeree will sponse to a First Right Notice, then In the world of First Rights, the courts probably not want uncertainty or is- any Offeror’s Purchaser will insist that have been known to cut Offerees sues to cloud the effectiveness of the the Offeror obtain it—thus guaran- some slack if they do not exercise in exercise notice. The fi rst notice would teeing that the Offeror will be at the strict compliance with the First Right, eliminate uncertainty about whether mercy of the Offeree if the Offeree has much as the courts sometimes excuse the Offeree actually exercised its First any basis to try to refuse to issue the imperfections in the exercise of an op- Right, while the second notice would confi rmation.28 tion. An Offeror can try to protect itself formally open a dialogue about what- Unless the First Right language from sympathetic courts by building ever issues required discussion. protects the Offeree from liability if it appropriate protective language into Conversely, the Offeree may re- incorrectly withholds a confi rmation, the First Right.25 And, to avoid any ceive a First Right Notice that it claims the Offeree may hesitate to voice its need to throw itself upon the mercy of is not valid, or may not respond at all objections to the First Right Notice for the courts, sympathetic or otherwise, before the Deadline. In that case, can fear of incurring substantial liability to the Offeree should re-read the ground the Offeror safely go ahead with an the Offeror. The Offeree would much lease and the First Right Notice to Offeror’s Purchaser? Yes, but only if prefer to see language expressly say- ensure that it complies with the notice the Offeror is absolutely certain that ing that any disagreement about these requirements as soon as it begins to the First Right Notice was valid and matters can be resolved only by issu- consider exercising its First Right. And that the Offeree was completely wrong ance of an injunction or a declaratory no law says exercise notices can only to claim that it was not. judgment—perhaps by an arbitrator— be sent on the day before the Deadline. much like language in a lease that Few Offerors and even fewer Of- exculpates a lessor from liability for How to Do It ferors’ Purchasers (and even fewer unreasonably withholding a consent. lenders to those Offerors’ Purchasers) Even if an Offeree intends to Without that, the Offeree will fear would want to proceed in the face of exercise its First Right strictly in ac- that the Offeror will assert theories such a dispute. Whether or not a court cordance with its terms, the exact for huge claims against the Offeree if would ultimately side with the Of- requirements for valid exercise of a any dispute between them derails a feree, the mere existence of the dispute First Right may be uncertain, as I will favorable transaction with Offeror’s could seriously impede any further describe below. The Offeror may have Purchaser. Offeror will claim that Of- progress with an Offeror’s Purchaser. taken certain positions about what feror’s Purchaser was willing to pay If the Offeror ultimately prevails, does would constitute a valid exercise. If far more than anyone else, and would the Offeree face substantial liability for the requirements aren’t clear, it may have done so, but for the fact that Of- having derailed the transaction with be hard for the Offeree to fi gure out feree wrongfully stood in the way by the Offeror’s Purchaser? Might the Of- exactly how to give a valid exercise creating obstacles and claims that the feree even face liability for merely fail- notice. And if any substantive issues Offeror regarded as spurious. have already risen in informal discus- ing to respond before the Deadline?26 sions between the parties, those may If a dispute arises about a First Right, These hypothetical situations themselves create concern about what what type of relief can the Offeror or and risks may sound far-fetched and constitutes a valid exercise notice. the Offeree obtain? Damages? Only an overly intricate, but issues like these injunction? Declaratory relief? can easily arise and become crucially In any such case, the Offeree may important if any Offeror ever gives Ordinary language on First Rights want to give two notices. The fi rst a First Right Notice. First Rights lan- rarely addresses these issues, just as it would say as little as possible, merely guage rarely addresses the practical rarely addresses many others. For ex- referring to the ground lease and the diffi culties of a First Right Notice First Right Notice and stating that the ample, an Offeror may want the right

NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 9 process, which can be substantive and thusiastic about the transaction, which closing, the parties must continue to even expensive when a First Right dis- one should assume will always be perform all their obligations under the pute actually plays out. the case. And sometimes the timeline ground lease, and won’t do anything for those negotiations contemplates that would violate the ground lease or When an Offeror negotiates a that the parties will agree on a form affi rmatively diminish the value of the contract of sale with its Offeror’s Pur- of contract by the Deadline—a virtual Interest to be sold. chaser (the “Offeror’s Contract”) and impossibility.30 knows the Offeror’s Contract may Another problem, more specifi c to be subject to a First Right, it should An industry-standard purchase a First Right: if an Offeror sold to an consider the possibility that, when the and sale agreement would ordinarily Offeror’s Purchaser the Offeror would Offeror gives a First Right Notice, the require the purchaser, here the Offeree, probably need to pay a brokerage Offeree will raise issues with the Offer- to fund a deposit at the time of sign- commission out of the selling price. If or. The terms of the Offeror’s Contract ing the contract. The Offeree would the Offeror sells to the Offeree, the Of- should give the Offeror some breath- probably disclaim any obligation to feror might avoid that expense. Who ing room—at least some extra time if fund any deposit at all, particularly should benefi t from those savings? needed before Offeror’s Purchaser can if the First Right language says noth- How should they be quantifi ed? walk—to deal with whatever claims a ing about contractual terms, beyond That’s not the end of the contrac- diffi cult Offeree might assert. a bare obligation to purchase and sell tual issues that First Rights language the Offeror’s Interest. After all, infer- The parties may also want to will often fail to address. When must ring an obligation to fund a deposit consider the possibility that the Of- the Offeree close? Can the Offeree if no written document identifi es its feror will give a First Right Notice, but adjourn the closing? What about amount is a diffi cult task. then later change its mind, deciding it condemnation? Adjustments? Real wants to withdraw the Notice and halt Whether or not the Offeree funds estate tax protests? Pending litiga- the process. Can the Offeror do that? a deposit, what happens if the Of- tion? Uncertainty about ground rent If the ground lease is silent on that feree exercises the First Right, and calculations or payments? Payment of point—and it usually is—then New then defaults? Does that constitute transfer taxes? Prepayment or yield York law would allow the Offeror a default under the ground lease? If maintenance fees? Environmental to have its way, undo the First Right the ground lessee is the purchaser, risks? Unpaid brokerage commis- Notice, and restore the status quo.29 the prospect of a lease default arising sions? Credit against the purchase That would probably hold true even from a failure to close after exercising price for future free rent periods? Per- if the Offeree had expended consider- a First Right could create serious angst mitted title exceptions?32 Obligations able time and resources considering for leasehold mortgagees. Ground les- to clear unexpected title issues? whether to exercise its First Right and sees and their lenders will therefore The First Right language will to arrange fi nancing. If an Offeree want to make it very clear that any often fail to address these and many regards that prospect as unsatisfac- purchase transaction triggered by a other contractual provisions. Ninety- tory, then it should negotiate language First Right has nothing to do with the nine percent of a purchase and sale in the ground lease that prohibits ground lease itself. From the Offeree’s transaction consists of the purchase withdrawal of any First Right Notice, perspective, the two should not be and sale itself, so that might not be requires a withdrawal fee, or at least cross-defaulted.31 tragic. But the other one percent of the after withdrawal prohibits the Offeror And what about all those other transaction often incurs legal fees that from sending another First Right No- terms that often make negotiation of outweigh the practical value of these tice for a while. an ordinary purchase and sale—really issues to the parties. All too often, the Consequences of Valid Exercise • a very simple transaction—so complex ground lease does not consider how If an Offeree does decide before the and protracted? most of those issues would be handled Deadline to acquire the Offeror’s if the Offeree decides to exercise its What representations and warran- Interest and successfully issues a valid First Right. ties should the Offeror make? Should exercise notice, what then? The typical they be subject to baskets? Floors? For a First Right to work well, the First Right simply gives the Offeree an Caps? Those questions may be less parties should give some thought to option, a possible purchase price based troublesome than usual in a contract the multitude of issues that arise even on the First Right Notice, and perhaps arising from a First Right, given the in a simple purchase and sale contract, a deadline for closing. Sometimes the Offeree’s overall familiarity with the and either defi ne in the First Right First Right language contemplates that Offeror’s Interest, but the Offeree will how those issues will be handled or the parties will negotiate some form still worry about what the Offeror establish a simple, quick way to fi ll the of industry-standard purchase and might do to frustrate the Offeree’s gaps. The First Right language might sale agreement. That can invite delay expectations under the contract. One also require the Offeror to specify all or disaster. Those negotiations will might resolve at least a good number “material terms” of any proposed sale probably fail if the Offeror is not en- of these issues by saying that until the in the First Right Notice, and perhaps

10 NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 defi ne what the “material terms” period with the right to terminate reasonable representations and war- would be. If the First Right language if Offeror’s Purchaser doesn’t like ranties. The possibility of assuming leaves these issues open, the Offeror what it fi nds? We all know that a an existing mortgage creates its own and the Offeree will need to negotiate due diligence period often allows the set of issues, especially if the existing them when the Offeree exercises its purchaser to renegotiate the purchase mortgage is held by a securitization First Right. There is no reason to think price based on alleged defi ciencies or trust. The Offeror’s Contract can’t those negotiations will succeed, and allegedly unexpected facts discovered have other terms that would create an every reason to think they will fail. in the due diligence period, or because unusual and impractical burden for the deal doesn’t “appraise out” (i.e., the Offeree, frustrating its ability to Offeror’s Contract as A Guidepost? the buyer can’t fi nd the money, i.e., exercise its ROFR. Smart lawyers can • In the case of a ROFR—as opposed can’t justify the price it’s paying). If think of a long list of criteria for the to a ROFO—a mechanism does ex- the Offeror’s Contract has an unex- Offeror’s Contract.33 ist to determine all the terms under pired due diligence period, should it which the Offeree would need to buy Concerns like these may lead trigger a ROFR at all, or only after the if it exercised its ROFR: matching the either party to insist on defi ning the due diligence period has lapsed? Offeror’s Contract. Though that ap- form of the Offeror’s Contract as part proach seems simple and logical, as Any Offeree will also worry about of the original transaction, attaching it always in the world of ROFOs and the closing date in the Offeror’s Con- as an exhibit to the ground lease. That ROFRs, appearances of simplicity and tract. The Offeror’s Purchaser proba- does not seem to be market standard. logic can be deceiving. bly will not sign the Offeror’s Contract No one seems to want to go to the until after it has completed its due trouble. And it may not be possible to The Offeror’s Contract could con- diligence, and found a lender that can foresee everything the Offeror’s Con- tain terms that the Offeree has no abil- be trusted to close. The closing might tract might ultimately need to address. ity to match, like an obligation for the happen relatively soon after all parties Offeror’s Purchaser to deliver certain Once the parties defi ne the form sign their Offeror’s Contract. real property in exchange for the Of- of the Offeror’s Contract, the Offeree feror’s Interest. To respond to that con- If the Offeror blindsides the Of- will want to restrict amendments. cern, First Rights language will often feree by giving a First Right Notice, Going a step further, a careful Of- say that the Offeror’s Contract must though, the Offeree will have had no feree should worry not only about require payment of the purchase price preparation time at all. The Offeree the terms of the Offeror’s Contract in cash at closing—with no purchase- may well need more time to close than but also about what it doesn’t say. For money fi nancing and no other consid- would an Offeror’s Purchaser. example, a devious Offeror could “get eration beyond the purchase price for around” the Offeree’s ROFR by call- ROFRs do often give the Offeree the sale. ing for an above-market price in the some minimum guaranteed time in Offeror’s Contract but simultaneously Reasonable enough, but Offeror which to close, even if the Offeror’s entering into some other agreement will often have bona fi de reasons for Purchaser would have closed faster. with Offeror’s Purchaser. It could be an Offeror’s Contract to require con- Practically speaking, though, the clos- as simple as an agreement for the Of- sideration beyond the stated purchase ing timeline may often still be too tight feror to provide below-market services price: for example, a possible future for an Offeree that starts from square after the closing or as sophisticated as payment to refl ect the outcome of a one. Thus, the Offeree will probably a simultaneous sale of another prop- pending issue such as a construction want the First Right language to give erty at a below-market price, but con- dispute, or an earn-out. Does that the Offeree at least (for example) 60 or ditioned on the closing of the above- future payment—even though rea- 90 days to close. Perhaps the Offeree market transaction under the Offeror’s sonable, bona fi de, and agreed to in should have the right to a reasonable Contract. good faith—invalidate the First Right extension, with or without a payment Notice? If not, the Offeree will need for that extension. Very likely each of those deal to have the ability to understand and structures constitutes fraud. Maybe Other provisions in the Offeror’s quantify the likely payment before we should assume everyone is ethical Contract might cause an Offeree deciding whether to exercise its ROFR. and no one will commit fraud, so we concern, such as extreme or unusual The First Right language should give should not worry about it. But we de- remedies for default; an extraordi- the Offeree the ability to obtain all the vote a lot of time and thought in real narily high deposit; requirements for necessary information as well as time estate transactions to identifying and credit support that the Offeree simply to process it. If the Offeror provides squeezing out the possibility of fraud. cannot satisfy; restrictions on assign- missing information the day before the We are not willing to assume parties ment; or provisions that otherwise Deadline, the Offeree should have the will behave in an ethical and upstand- do not match the Offeree’s likely right to an extension. ing way. Think about the recording business agenda. The Offeror’s Con- system, for example. Its primary pur- Does the Offeror’s Contract give tract shouldn’t have weird closing pose is to prevent fraud, i.e., a sale of Offeror’s Purchaser a due diligence conditions. The Offeror should make

NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 11 the same property to two purchas- benefi t of an Offeree’s Purchaser, even consider, and knotty negotiations with ers. Escrows serve a similar function if the Offeree itself does not want to the Offeree’s Purchaser. After the bur- and appear all the time in real estate acquire the Offeror’s Interest. dens described in this paragraph, the transactions. fl ip transaction might not make sense. Can It Really Be Done? In assessing the likelihood of the Second, the Offeree would need The time constraints of a typical occurrence of any scheme of the type to negotiate a contract with the Of- First Right make it almost impossible, suggested above, the Offeree might feree’s Purchaser, covering its sale of though, for an Offeree to do any of or might not take comfort from its the Offeror’s Interest to the Offeree’s this. If, as noted earlier, the typical knowledge of the Offeror’s character Purchaser, after the Offeree acquired it 30-day Deadline does not give an Of- and business ethics. If not, the Offeree (or obtained the right to acquire it) by feree—except one that is extremely could at a minimum insist on receiv- exercising its First Right. A different wealthy and cash-rich—enough time ing some certifi cation from the Of- problem then arises: merely negotiat- to fi nd a lender, it surely does not feror’s Purchaser’s about the absence ing a “fl ip” contract might require the give an Offeree enough time to fi nd of other agreements. Similarly, the Offeree to give (or to have given) the an Offeree’s Purchaser and for that Offeree might also worry about future Offeror a First Right Notice, entitling Offeree’s Purchaser to then fi nd its amendments of the Offeror’s Contract, the Offeror to acquire whatever the own lender. Thus the Offeree will particularly ones that could make the Offeree was getting ready to agree not be able to squeeze out of the First economics more favorable to the Of- to sell to the Offeree’s Purchaser. A Right an opportunity to bring in an feror’s Purchaser. Should any such simple fl ip of the Offeror’s Interest Offeree’s Purchaser or make a profi t amendment require the Offeree’s con- will send the Offeree down a separate or both. If those opportunities repre- sent? Should it entitle the Offeree to a road in giving the Offeror a new First sented one reason the Offeree wanted new First Right Notice? Right, with its own First Right Notice, a First Right, then it probably will not Deadline, and issues. That prospect Rather than parse through and achieve its goal. will almost certainly cause delay, con- consider every possible provision that fusion, and headaches, and may even might appear in the Offeror’s Con- Will the Flip Work? derail the Offeree’s fl ip completely. tract, an Offeree might insist that the Let’s suppose, though, that a pre- ground lease defi ne a simple contract scient Offeree negotiated a First Right Third, if the Offeree wants to go that would govern if the Offeree exer- with a Deadline generous enough that: a step further and offer the Offeree’s cised its First Right—regardless of the (a) the Offeree could fi nd an Offeree’s Purchaser the Offeror’s Interest as terms of the Offeror’s Contract. Purchaser to buy either the Offeror’s well as its own, then this increases the Interest or conceivably both the Of- likelihood that the Offeree will need Flipping the Transaction • If an feror’s and the Offeree’s Interests; and to give the Offeror a First Right Notice Offeree receives a First Right Notice (b) the Offeree’s Purchaser could fi nd based on the Offeree’s sale of its own and the idea of the Offeree’s buying a lender and close a loan. Even then, Interest. Again, this creates practical out the Offeror’s Interest at the pro- the “fl ip” transaction might not work, problems and delays, potentially pre- posed price has no appeal at the mo- because the typical First Rights lan- venting the Offeree from completing ment, should the Offeree do nothing guage creates stumbling blocks for the the fl ip transaction with the Offeree’s and let the Offeror proceed with an Offeree. Purchaser. Offeror’s Purchaser? Not necessarily. The Offeree may think the Offeror is First, if the Offeree chooses to ex- If the Offeree anticipates entering selling too cheap; it could purchase the ercise the First Right, the ground lease into any fl avor of fl ip transaction by Offeror’s Interest and resell it to some- will often just say the Offeree must exercising a First Right, then it will one else for a profi t. The Offeree might acquire Offeror’s Interest. That is just need to make sure the First Right lan- even decide to throw in the Offeree’s what the words say. No one thought of guage allows it. Once the Offeror has own Interest, offering both fee and the possibility that the Offeree might given a First Right Notice, First Right leasehold on a combined basis and want the right to designate someone language should ideally allow the Of- making a larger profi t as a result.34 else to acquire Offeror’s Interest, or feree to structure whatever transaction to assign the Offeree’s First Rights or it wants, including any assignments, Even if the Offeror’s offering price any resulting contract to an Offeree’s as long as the Offeree matches the in the First Right Notice seems reason- Purchaser. So the actual closing might price in the First Right Notice. At that able, the Offeree may prefer to bring in fact require two closings, with two point, the Offeror already wants to in a known third party to acquire the potential sets of transaction costs. At exit the transaction, so why should it Offeror’s Interest (an “Offeree’s Pur- best, the Offeree might need to agree have the right to torment the Offeree chaser”), as opposed to an unknown to acquire the Offeror’s Interest, and by claiming the right to claw its way and possibly undesirable Offeror’s then only have the right to designate back in if the Offeree decides to sell its Purchaser. For these and other reasons, the actual purchaser at closing. There own Interest?35 the Offeree may want to fi gure out a would be a huge number of issues to way to exercise a First Right, for the

12 NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 Conversations with Offeror’s were not enough, First Rights can cre- at the height of the fi nancial crisis. As Purchaser • In considering the ate other issues if an Offeror starts to part of the merger agreement, Bear Offeror’s Contract and deciding how think about transactions that should Stearns gave JPMC an option to ac- to respond to the First Right Notice, not trigger a First Right36 and circum- quire the leasehold of the Bear Stearns the Offeree may fi nd itself tempted stances under which the First Right headquarters at a fi xed price if the to open a dialogue with the Offeror’s should go away. merger failed. Purchaser. For example, the Offeree For example, suppose an Offeror’s The Bear Stearns ground lessor might offer to waive its ROFR if the overall business strategy involves the asserted that JPMC’s contingent op- Offeror’s Purchaser agrees to an ad- creation of a portfolio of similar assets, tion violated a ROFO in favor of the justment in the ground rent. Or the which the Offeror intends eventually ground lessor, which required Bear Offeree might see an opportunity to to sell as a group or convert into a Stearns to offer the leasehold to the structure a profi table transaction that real estate investment trust. The Of- ground lessor before offering it to would involve the Offeror’s Purchaser feror will want to ensure that any such anyone else. But the ground lessor’s in some way. After all, the Offeror’s transaction does not trigger a First ROFO did not apply if “Tenant shall Purchaser is unique in that the Offeree Right. The parties may address that determine to sell, transfer or otherwise already knows with certainty that concern by agreeing that if the Offer- dispose of its interest in this Ground Offeror’s Purchaser has a genuine in- or’s contemplated sale includes other Lease to…any entity into which or terest in acquiring Offeror’s Interest, property, then the Offeree’s First Right with which Tenant may be merged, has already done its due diligence (one does not apply and perhaps even goes consolidated or combined or any hopes), and might be willing to pay away permanently. entity which shall purchase all or sub- something more than the price in the stantially of the assets of Tenant.”38 Offeror’s Contract. How much other property must the transaction include to defeat the The court concluded that the If an Offeree yields to the temp- First Right?37 In one recent transaction quoted exclusion from the ROFO was tation to speak to the Offeror’s Pur- with a carve-out of this type, the Offer- broad enough to protect Bear Stearns chaser, then any such conversations or informed the Offeree that it might and JPMC from the ground lessor’s may, at a minimum, violate real estate decide to throw in a small property in claims, regardless of whether the etiquette. But do they expose the Of- another state, so the transaction would merger actually closed. By referring feree to potential liability? What if they technically include “other property” to an entity into which Bear Stearns somehow lead the Offeror’s Purchaser and hence not trigger a First Right. “may” be merged, the exclusion could to take actions the Offeror does not defeat the ground lessor’s claims like? To that end, the Offeror, here the even if the merger did not proceed; ground lessee, could also have argued: The answer, as always, depends the fact that it “may” have occurred (a) that the First Right language ex- on all the facts and circumstances. was enough to activate the ROFO empted any transaction that involved My own limited research suggests, exclusion. any “other property” in addition to however, that ordinary business ne- the leasehold; and (b) that under the The court’s decision refl ected a gotiations will not expose the Offeree facts of the particular contemplated simple reading of the language of the to liability—though they could create sale, the Offeror would also have ROFO exclusion in the Bear Stearns potentially costly claims, which could included a signifi cant amount of ground lease, with a generous inter- require signifi cant time and money to personal property in addition to the pretation of the word “may.” When defend. An Offeree should probably leasehold itself. Would that have been the negotiators of the ground lease resist the temptation to speak to any enough “other property” to defeat the threw in the word “may,” did they Offeror’s Purchaser. Of course, if an ground lessor’s First Right? The ques- really mean to cover the case where Offeree has all the time and knowl- tion became a point of contention in a merger seemed possible but ulti- edge in the world when negotiating the generally contentious discussions mately might not have occurred? Who a First Right, the Offeree will insist between the Offeror and the Offeree. knows? It did not matter. The word that the First Right language includes “may” was broad enough to prevent the Offeror’s consent to any such If a possible Offeror is a non-real a problem for Bear Stearns and Chase. conversations. estate company that could merge into And, of course, the merger did ulti- some other entity, the Offeror will As an alternative, the parties mately occur, sidestepping the issue. want to ensure that a sale of the Of- might move in the opposite direction feror’s Interest in connection with that To prevent a similar problem, the and state that neither party can dis- merger will not require the Offeror to drafters of First Right language usu- close anything about any First Right issue a First Right Notice. That was ally do remember to add an exclusion Notice or its consequences, and every- exactly the issue that arose in 2008, stating that a foreclosure sale affecting thing about the process is confi dential. when the Bear Stearns Companies, the Offeror’s Interest does not trigger Exclusions and Exceptions • As if the Inc. (“Bear Stearns”) agreed to merge a First Right. They recognize that no problems I have already discussed into JPMorgan Chase & Co. (“JPMC”) lender would want to endure a First

NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 13 Right Notice and the ensuing trail of under these circumstances the Offeree though, will the drafters of a First trouble as the price of foreclosing on had its opportunity to acquire the Right think of most of them. its collateral.39 Offeror’s Interest and should not have As a variation on the concept of another. The Offeror would insist that If the Offeror envisions certain excluding certain transactions from under these circumstances the First other possible transactions in its fu- the First Right, any drafter of a First Right should no longer apply to future ture, the Offeror may want to carve Right might want to consider requir- transactions. The Offeror, and par- those out from the First Right as well. ing the Offeree to make some modest ticularly the Offeror’s Purchaser, may Examples might include a future joint annual payment to preserve its First want the Offeree to agree to confi rm in venture with a developer, a transfer to Right. Any such measure would in- writing that the First Right has fallen a department store for development, centivize the Offeree to abandon its away and will never come back.41 transfers among affi liates, conversion First Right if the Offeree ever doesn’t to a different entity type or a tenancy Conversely, the Offeree may actu- really attach meaningful value to the in common, mergers or consolida- ally want the First Right to survive First Right. I have never seen any such tions, or a transfer in contemplation of a sale to an Offeror’s Purchaser and provision in a ground lease, however. condemnation. An Offeror might also continue to apply to all future possible Conclusion • First Rights can create want a First Right to vanish after a cer- sales. In that case, the ground lease a variety of legal and practical issues, tain number of years. The possibilities should say so. both in negotiations and in real life are endless. The Offeror should start The Offeree might also exercise if anyone ever actually exercises a by thinking about its long-term plans the First Right and then fail to close. First Right. No one should place great for its Interest. If that happens, the Offeror might weight on First Rights as a source of Why Offeree Must Stay Alert reasonably say that the Offeree had reliable protection or value in a deal. its opportunity to buy the Offeror’s From the perspective of an Offeree, As a practical matter, if the Offer- Interest. Having defaulted, the Offeree though, having any First Right—even or’s loan goes into default, any Offeree does not deserve another shot, so the a bad one—may seem better than hav- can achieve the functional equivalent First Right should terminate. ing no First Right at all. Regardless of of a First Right by bidding at the how poorly drafted or impractical it is, An Offeree might have similar lender’s foreclosure sale, though it a First Right will at a minimum give thoughts. For example, an Offeree does come with the burden of having the Offeree leverage and some (maybe might point out that if the Offeree to face competitive bidding and the not much) opportunity to cause issues takes a First Right Notice seriously, uncertainties of any foreclosure sale. Is and delays. It may force the Offeror then fi guring out how to respond will it then reasonable to ask the Offeror’s to pay attention to the Offeree, and, require an enormous amount of time, lender to notify the Offeree of any up- if nothing else, pick up the telephone energy, and legal fees. Thus, if an Of- coming foreclosure sale? That sounds and have a conversation, or pick up a feror gives a First Right Notice, then like a great idea, but lenders typically checkbook and make a payment. refuse to undertake any such obliga- perhaps it should not be allowed to tion. So, if the Offeror wants its Inter- give another until a certain amount In general, though, like those est to remain fi nanceable, the Offeree of time has passed. As an alternative, faulty pop-up drain stoppers, First cannot expect the Offeror’s lender to if the Offeror does give another First Rights almost always work better in assume any legal obligation to keep Right Notice within a certain period, theory than in practice. the Deadline might be much more the Offeree informed. The Offeree will But First Rights may actually be generous than otherwise.42 And if the need to keep its ear to the ground to worse than leaky drain stoppers. Be- Offeree sells its position, perhaps the fi nd out about any upcoming foreclo- sides failing to function properly, First 40 First Right should fall away in any sure sale. Rights also create a world of trouble event. First Rights And Future Transactions and surprise for all parties involved, • First rights also need to deal with Conversely, if the Offeree passes adding layers of complexity to trans- other possible contingencies. For on its First Right and the Offeror fails actions that could have been relatively example, if the Offeror gives a valid to close a transaction, then the Offeror simple. Practically speaking, First First Right Notice, the Offeree does may want to be excused from giving Rights may just force the parties into not exercise its First Right, and the any more First Right Notices for a negotiating an amicable parting of the Offeror sells to an Offeror’s Purchaser, certain time, unless the offered price ways to avoid the headaches this ar- should the First Right still apply when drops by more than 5 percent. ticle describes. the Offeror’s Purchaser later decides All these permutations, varia- Drafting Suggestions • If an Offeror to sell again? If the ground lease says tions, and implications may seem cannot avoid granting a First Right, nothing, then the First Right could overwhelming, but when a First Right what can the Offeror do to avoid dis- very well continue to apply, burdening actually arises in the real world, they putes? And when an Offeree negoti- every future Offeror and every future can make a huge difference. Rarely, ates a First Right, how can the Offeree sale. A careful Offeror will argue that

14 NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 maximize the practical value of that First Right. Give the Offeree ways to allow a fl ip. But decide First Right? Here are some sugges- a somewhat painful right to one way or the other. tions, inspired by the preceding dis- extend its decision period by up • Mortgagee Protection. Beyond cussion. These suggestions could ap- to, say, 30 days. If the Offeree saying that a mortgage ply to either the Offeree or the Offeror, exercises, allow a reasonable foreclosure does not trigger or sometimes both of them. The reader time to obtain fi nancing and a First Right, the First will need to make that determination, close, perhaps with another Right language should also as well as a determination of whether painful right to extend. permanently go away if a the reader’s client will benefi t or suffer • Triggering Events. Specify exactly mortgagee ever completes a as a result of the many problems that what will trigger a First Right. foreclosure. First Rights can create. An Offeror’s mere intent to • Exclusions May Apply. Other • Just Keep Saying No. An Offeror sell or expose its Interest to the than protecting mortgagees and should do what it can to head market should not activate the transactions among affi liates, off a First Right even before the First Right. Something more what other exclusions should an parties start to negotiate the needs to happen to trigger the Offeror try to add to any First ground lease. For example, say First Right. Right? in the term sheet something like • Exercise. Defi ne with total this: “The Lease shall establish • Loan Coordination. In negotiating simplicity exactly what the no conditions or restrictions to permitted transfers in a Offeree needs to do to exercise either party’s sale of its interest mortgage loan, try to build in its First Right. Perhaps attach in the Property.” exceptions for transfers that a form of exercise notice as an occur through exercise of a First • ROFO vs. ROFR. I believe an exhibit to the ground lease. Right. Offeror should usually prefer • Contract Terms. If Offeree to grant a ROFO rather than a • Communications. Rather than exercises its First Right, make ROFR in most cases. As noted rely on any First Right, any the resulting contract between above, others disagree. Offeree should try to maintain Offeror and Offeree as simple good relations and lines of • No Cross-Default. Any ground and unambiguous as possible. communications with the lessee will want to make sure Try to defi ne all the contract Offeror, so the parties can have a that any default under a First terms in the ground lease, conversation instead of enduring Right does not trigger a default leaving nothing for discussion. any First Right process and all under the ground lease. In particular, think about exactly the issues it can entail. how the parties will calculate • Second Bite. If the Offeror gives the fi nal net purchase price. • Notice Address. If the Offeree a First Right Notice and the If the Offeror will avoid some moves, it should notify the Offeree doesn’t bite, but the ordinary transaction costs, who Offeror of the Offeree’s new Offeror later improves the deal should get the benefi t of those address for notices. it offers to a third party, the savings? How does one measure Offeree should have a reasonable • Giving a Notice. In giving a them? The contract issues in any “second bite.” But try to defi ne First Right Notice, the Offeror purchase and sale are really not “improvement.” should scrutinize the First Right all that complicated. language in the Lease and make • Future Documents and Obligations. • Failure to Exercise. If the Offeree sure the notice fully complies. The First Right language should decides not to exercise its First What creative arguments might leave nothing to be negotiated, Right, it should agree to confi rm the Offeree make to support a resolved, or signed later (beyond that waiver in writing, to claim of invalidity? Negate those a notice of exercise) to implement avoid concern by the Offeror’s arguments in advance. the First Right. The ground Purchaser. Failure to exercise lease should defi ne the rights • Disputes. If the Offeror and should have consequences, at and obligations of the parties, the Offeree disagree about the least for some period. recognizing that if a First Right operation, implementation, or ever becomes relevant the parties • Flip? Either expressly prohibit meaning of a First Right, or will almost by defi nition fi nd the Offeree from entering into any notice given pursuant to themselves unable to negotiate a fl ip transaction, or facilitate a First Right, provide for an anything. any such transaction by saying expedited arbitration or other that it does not trigger a new dispute resolution process and • Timing. An Offeree will probably First Right, and the Offeror must a limitation of remedy and need more than 30 days to cooperate in certain customary liability. decide whether to exercise its

NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 15 Endnotes “fl oor” price, can Offeror require a sale negotiate an entire Offeror’s Contract to one of its own affi liates? Can Offeree increases the burden of a ROFR on any 1. The number of reported cases involving stop such a sale? Other footnotes in this Offeror and its efforts to negotiate a deal First Rights is astonishing, demonstrating article mention some but not all issues with an Offeror’s Purchaser. that First Rights fail at an extraordinary specifi c to First Rights in JV agreements. rate. The volume of litigation suggests 10. I have also heard references to a “right of Buy-sell (“shotgun”) clauses in a JV raise that no one should rely on First Rights as last refusal” or “last right of fi rst refusal,” many issues similar to those in this article a reliable source of value beyond nuisance which I thought just meant ROFR, until I (text and footnotes), plus many more. If value and legal fees if you’re a lawyer. The found the case described in this footnote. a dispute ever arises within a JV about challenge in writing this article has been At least one court has distinguished a a First Right, one of the fi rst issues will to separate the vast number of “ordinary” ROFR from a “last right of refusal” that relate to choice of counsel. Can the JV’s First Right lawsuits from the truly gave Offeree an opportunity to beat—but counsel represent either of the venturers? interesting ones, of which there are also not match—the terms of any bona fi de Who negotiated the JV agreement for many. offer. Jeremy’s Ale House Also, Inc. v. Joselyn whom? Do the parties all need to go out Luchnick Irrevocable Trust, 22 A.D.3d 6, 10, 2. If an Offeror never decides to sell, then and hire new counsel? (Probably.). 798 N.Y.S.2d 416, 419 (1st Dep’t 2005). the First Right never arises. In contrast, 6. Those issues relate primarily to pricing In fi nding the distinction to be more a purchase option lets an Offeree buy on and timing, and secondarily (from the than academic, the court stated that the specifi ed terms at certain time(s), whether lessor’s perspective) to coming up with right at issue was “not a [ROFR], with or not Offeror wants to sell. Ground as many exceptions and exclusions as its well-known and recognized meaning leases have fewer purchase options than possible for any First Right. The lessor also as a preemptive right, but…a last right First Rights, because a ground lessor must ensure that no two lessees can ever of refusal, thus according the right a assumes—often correctly—that the claim a First Right to the same space for different meaning.” Id. at 8; 798 N.Y.S.2d ground lessee will exercise any option at the same period. at 419. While a ROFR would have given the fi rst opportunity, defeating the ground its Offeree a chance to match a third-party lessor’s goal of preserving long-term 7. As an alternative, if and when Offeror has offer, the last right of refusal at issue in ownership and an annuity. An individual told Offeree that Offeror wants to sell, a this case gave its Offeree “an opportunity ground lessor’s death sometimes triggers ROFO could entitle Offeree to give Offeror it would otherwise not have [under a a purchase option, because the resulting the “fi rst offer” for Offeror’s Interest. ROFR] and that no other bidder enjoy[s].” basis step-up can fi nally make a sale That “fi rst offer” would then defi ne the Id. at 8; 798 N.Y.S.2d at 419. The court said palatable as a tax matter. The timing fl oor for Offeror’s sale to an Offeror’s Offeree had the opportunity to “beat any will also often correlate with the absence Purchaser. In my experience, though, the offer…and the [third party] transaction of an obvious successor to take over “fi rst offer” in any ROFO comes from could not close without affording competent management of the ground Offeror, not Offeree. [Offeree] that opportunity.” Id. at 10; 798 lessor’s position, assuming competent 8. If Offeror wants to sell for less than the N.Y.S.2d at 419. management matters. stated percentage of the price named in 11. Another variation on this theme, a “right 3. Of course, the ground lessee should the First Right Notice, then Offeror must of fi rst negotiation,” requires a prospective negotiate the ground lease so the ground give Offeree another First Right Notice at Offeror only to notify Offeree of Offeror’s lessee does not care who the ground the lower price. Offeree then has “another intention to try to sell its Interest. After lessor is. Because ground leases rarely bite”—typically with a shorter response that, the parties are supposed to try to restrict conveyances of the fee estate in time because Offeree presumably now has negotiate a deal, often “in good faith” any meaningful way, except sometimes done enough homework to respond faster and on an exclusive basis. If they do not through First Rights, the ground lessee and because Offeror will already be sick actually make a deal within some stated should assume that the worst possible of the process and have a headache by this time, though, Offeror can go to market. counterparty in the world will acquire point. Offeree will also often get a second These clauses have their own advantages the fee estate. The ground lease just needs bite if Offeror plans to offer Offeror’s and disadvantages, starting with the great to “work” for the ground lessee and its Purchaser other terms “materially more advantage of simplicity, sidestepping most present and future lenders, regardless of favorable,” whatever that means, than of the problems in this article. Logically, the identity of the ground lessor. That’s those in the First Right Notice. That if the Offeree makes the best offer for true even if the lease includes a First Right, concept opens up a whole new area for Offeror’s Interest, the Offeror should as the Offeree will almost never actually discussion and dispute. No two buyers want to sell it to the Offeree. A potential exercise the First Right, hence will usually have the exact same agenda. Even a recipient of a “right of fi rst negotiation,” bear the risk that the Offeror will transfer simple purchase and sale agreement though, would generally regard a to an unsavory buyer. can be negotiated and retraded in many ways—both at the outset and as the traditional ROFO or ROFR as more solid 4. Just as the ground lessee should not care parties proceed down the road toward a and reliable. That proposition may sound who the ground lessor is, the ground closing. At what point does that process convincing in theory, but the questions lessor should not care who the ground give Offeree a “second bite”? As an aside, raised in this article may call it into doubt. lessee is. my informal and very limited research 12. The New York Court of Appeals stated 5. If anything, First Rights in JV agreements suggests that the concept of a “second that a “right of fi rst refusal” requires a often raise more and larger issues. In the bite” is more common in New York than property owner, “when and if he decides context of a JV, the stakes rise because if elsewhere in the country. to sell, to offer the property fi rst to the Offeree does not exercise its First Right, 9. A ROFR typically requires a fully party holding the preemptive right so Offeror can often force a sale of the entire negotiated and signed contract with that he may meet a third-party offer or property, not just Offeror’s Interest, and Offeror’s Purchaser, with the closing buy the property at some other price Offeree must cooperate. For example, conditioned on Offeree not exercising its set by a previously stipulated method.” a JV agreement will often say that if an ROFR. This way, Offeree will know the Metro. Transp. Auth. v. Bruken Realty Offeree does not exercise its First Right, identity of Offeror’s Purchaser, unless the Corp., 67 N.Y.2d 156, 163, 492 N.E.2d then Offeror can require a sale of the ROFR allows Offeror to submit a redacted 379, 382, 501 N.Y.S.2d 306, 309 (1986). entire property at a price equal to 95 Offeror’s Contract. Offeree may regard That defi nition of “right of fi rst refusal” percent or more of the valuation Offeror the identity of Offeror’s Purchaser as captures both a ROFO and a ROFR as proposed for the entire property in its very important information. The need for this article defi nes them. The Bruken First Right Notice. If Offeror forces a sale Offeror and Offeror’s Purchaser to fully case considered whether the rule against of the entire property at that 95 percent

16 NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 perpetuities applies to First Rights. the ROFO. Some ground leases give an example, Offeror proposed to take back The Court of Appeals stated: “the rule Offeree the right to buy if an Offeror a small mortgage. Finally, in many cases, against remote vesting [perpetuities] “decides to sell,” with no objective or an Offeror can sidestep any First Right does not apply to preemptive rights bright-line defi nition of what that means obligation by structuring the transaction [i.e., First Rights] in commercial and or how to measure the state of Offeror’s as a sale of the equity interests in Offeror governmental transactions, [and] their mind. If Offeree were to engage a rather than as a sale of Offeror’s Interest. validity is to be judged by applying the psychic to delve into Offeror’s innermost In my experience, many First Rights rule against unreasonable restraints.” thoughts, Offeree or Offeree’s psychic disregard equity sales. On the other hand, Id. at 168; 492 N.E.2d at 385; N.Y.S.2d at could say Offeror’s inquiries in the if a First Right does apply to equity sales, 312. Although this case and other more marketplace evidenced a decision to sell, then any equity investor contemplating recent New York cases favor enforceability triggering the ROFO. Offeror, of course, a sale of its equity may need to contend of “reasonable” First Rights, whatever will want to avoid any unintentional with two First Rights—one under the that means, counsel should consider the triggering of a ROFO and will want to ground lease and perhaps another under Rule Against Perpetuities in structuring stay away from psychics. But does (lack the JV. Attempting to properly analyze any First Right, particularly outside of) physical proximity make a difference and align those two First Rights creates New York or involving individuals. See, when dealing with psychics? That may be almost endless new opportunities for e.g., Morrison v. Piper, 77 N.Y.2d 165, 566 the subject of a future article. mistakes, practical problems, issues, and N.E.2d 643, 565 N.Y.S.2d 444 (1990) (Rule 16. A ROFO results in more time between the litigation. Of course, we have nothing to Against Perpetuities applies to ROFR that First Right Notice and the closing than worry about because smart lawyers can involves an individual). The Rule Against would a ROFR. That delay can create always fi gure everything out perfectly. Perpetuities has perpetual life. For a additional problems for an Offeror if the See, e.g., Joshua Stein, It’s Complicated, But discussion of the rule against perpetuities marketplace pricing for Offeror’s Interest Is It Right?, THE MORTGAGE OBSERVER, at 12 as it applies to First Rights, see John C. is volatile. For example, leased fee estates (2013), http://www.pdf2go.org/100006. Murray, Option and Related Rights and the involving corporate credit ground lessees html. Rule Against Perpetuities, N.Y. REAL PROP. often trade much like bonds. Pricing can 18. Offeree will want to make sure Offeror L.J. 47 (2014). change dramatically in a short time based always has Offeree’s correct address. If 13. Prospective Offeror’s Purchasers will on small changes in interest rates or the Offeree moves, it should remember to fi gure out the existence of a ROFR ground lessee’s credit rating. If a ROFO notify Offeror of Offeree’s new address. soon enough when they start their due (or, to a lesser degree, even a ROFR) When a party moves, how often does diligence, i.e., when they read the ground requires Offeror of the leased fee estate it actually remember to formally notify lease. Offeror may as well simplify the to specify a fi xed dollar price in the First all its counterparties of the move, in process and hopefully prevent surprises Right Notice, Offeree (here, the corporate a way that complies with the specifi c and emergencies by mentioning the ROFR credit ground lessee) may get the best requirements of each of its contracts? early on. As its best strategy, Offeror might of both worlds if interest rates move in 19. In the case of a ROFO, does Offeror have try to negotiate Offeree’s waiver of the the “wrong” (or “right”) direction. Use to go through the ROFO process before ROFR long before going to market. Offeree of a ROFR rather than a ROFO shortens negotiating or signing an Offeror’s may or may not like that idea. Offeree may the process, which mitigates but does Contract? Or can Offeror fi rst sign an see it as just another revenue opportunity not eliminate the problem. Offeror may Offeror’s Contract, but make it entirely of the type that usually arises from time want the right to specify in the First subject to subsequent compliance with the to time under any long-term Lease. An Right Notice a pricing formula tied to ROFO? Depending on the wording of the early conversation may give Offeree that interest rates and other variables on the ROFO, Offeree might argue that Offeror opportunity without overcomplicating closing date, rather than the fi xed dollar must go through the process sequentially, Offeror’s selling process. price required by traditional First Rights so Offeree gets a clean fi rst bite before 14. Offeror might mitigate that problem language. Similar issues arise in any anything else happens. In that case, if by offering a break-up fee to Offeror’s period of unusually fast appreciation Offeror signs an Offeror’s Contract before Purchaser if Offeree exercises its ROFR or the bubble bursting that sometimes sending the ROFO Notice, then at best that and “takes the deal” that Offeror’s follows. might invalidate the ROFO Notice, and at Purchaser negotiated. Of course, Offeror’s 17. The ground lease should prohibit any worst the whole exercise might constitute Purchasers don’t invest time and trouble sale transaction at all unless Offeror has a default under the ground lease. The in pursuing transactions just to recover given a First Right Notice, subject to a few validity of this argument would depend a break-up fee. In a market full of other exceptions such as affi liate transactions entirely on the precise words of the First opportunities, they may go look at other, and foreclosures. That sounds easy but Right and how a court interpreted them. less “hairy,” opportunities instead. If an many First Right clauses get it wrong. 20. If an Offeror actually triggers a First Offeror’s Purchaser does earn a break- For example, a ROFR often arises only Right, particularly with no warning, up fee, should Offeree agree to bear part if, in the words of the ground lease, it often signals that the relationship of that fee? If so, might it make sense to Offeror “receives an offer that it intends to between lessor and lessee has reached allow Offeree to make a “standing offer” accept.” If instead Offeror communicates a point where the parties cannot for Offeror’s Interest to defi ne a fl oor an offer to an Offeror’s Purchaser and amicably negotiate a satisfactory exit or for future sales? This sounds great but Offeror’s Purchaser then accepts Offer, restructuring that makes sense to both could create its own complexities. As that sequence of events does not satisfy of them. A First Right is supposed to the best solution to those complexities the express conditions under which encourage the parties to work together and the others this article describes, Offeree would actually have a ROFR, to do exactly that. No one should ever perhaps Offeree and Offeror should, as because Offeror did not “receive” an actually have to exercise any First Right. a practical matter, just try to maintain offer that it wanted to accept. Offeror When someone does, it’s often a prelude a good relationship and good lines of could then go ahead and sell, free of the to a fi ght. In that fi ght, Offeree may communication. If Offeree wants to buy First Right. Sometimes a ground lease want to engage new counsel to ensure Offeror’s Interest, Offeree should feel free requires a proposed sale to satisfy certain Offeree receives objective advice on to make an offer at any time. criteria (such as all cash, no other real whether the First Right was negotiated 15. When an Offeror dips its toe into the property involved, a deposit of at least and documented appropriately. Offeree marketplace, though, it should try not a certain amount, and no due diligence may fear that the lawyer who negotiated to stub its toe by accidentally triggering period), before any ROFR actually arises. and documented the First Right may not The ROFR would not apply at all if, for

NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 17 tell Offeree if the First Right was badly get to the right place at the right time under a First Right as something entirely written—and many of them, probably without going astray. Too much judicial independent from the ground lease. most of them, are very badly written kindness to imperfect givers of notices 32. In a ground lease of the Roosevelt Hotel indeed. The same dynamic comes into may lead to unpleasant surprises for the in Manhattan, Schedule B listed matters play whenever any transaction starts to recipients of imperfectly given notices. of record against the ground lessor’s title. head toward litigation. 26. The First Right language will usually say The ground lease also gave the ground 21. Real estate investors with substantial that 30 days of silence constitutes a waiver. lessee an option, not just a First Right, liquidity in the form of cash or large Does that automatically cure Offeree’s to acquire the ground lessor’s leased fee revolving credit lines—REITs, for default, if any, by failing to respond? Will estate, at a fi xed price, subject to “only example—may be the ones most likely Offeror want to rely on a deemed waiver? the matters set forth in Schedule B.” That to benefi t from First Rights. Conceivably, Will Offeror’s Purchaser? Its lender? A schedule listed some fee mortgages, all to make First Rights useful for less title insurance company? prior to the lease. The ground lessee liquid Offerees, one could also build in 27. An Offeror should look ahead to the claimed credit against the purchase a requirement for Offeror to provide closing with Offeror’s Purchaser and the price for the amounts due under those short term purchase-money fi nancing to need for Offeror’s Purchaser to obtain title mortgages. The ground lessor claimed help Offeree close, after which Offeree insurance. The title insurance company the ground lessee owed the full cash would still need to arrange new fi nancing will probably demand a high comfort purchase price, and also had to take reasonably soon. I have not seen such level that Offeror complied with the subject to all the mortgages. The trial provisions, however, probably in part First Right and Offeree’s rights lapsed court held: “the lease purchase option because they contemplate continued without exercise. Hence the likely need establishes a fi xed, all-inclusive purchase entanglement between parties who were for a written confi rmation from Offeree. price…free from any additional mortgage supposed to become less entangled Even if the ground lease doesn’t directly obligations.” Roosevelt Hotel Corp., N.V. through the First Right mechanism. As a require such a confi rmation, Offeror may v. Letoh Assoc.; Court Decisions; First variation, perhaps the First Right could be able to rely on language in the ground Judicial Department; Supreme Court; give Offeror a choice between offering lease about estoppel certifi cates—though New York County, 223 N.Y. L.J. 5 (2000), purchase-money fi nancing and allowing that may take a while. If Offeror can’t aff’d, 282 A.D.2d 380, 723 N.Y.S.2d 653 Offeree an extended response period for give the title insurance company 100% (App. Div. 2001). The parties could have any First Right Notice. comfort about the First Right, the title avoided several years of litigation by more 22. Ideally, the mortgage that already insurance company will probably demand carefully defi ning the scope of permitted encumbers Offeror’s Interest will include an indemnity from a creditworthy party— title exceptions, and not assuming that the lender’s pre-approval of a conveyance forcing Offeror or its principals to bear permitted title exceptions should always to Offeree if Offeree exercises a First Right. some level of continuing liability and risk be permitted. If an Offeree has perfect and complete for a transaction that should have become 33. Other smart lawyers can later fi gure out foresight and all the time in the world, it purely historical with a clean exit. ways to get around them. And then smart might even consider requiring Offeror to 28. Offeree might agree in a side letter to: (a) litigators can spend months digging include such a pre-approval in any such provide that confi rmation if asked; and through email looking for the smoking mortgage. But even if Offeror’s loan did (b) enter into a similar side letter with the gun. include such a pre-approval, how likely next Offeror if Offeree does not exercise its 34. An Offeree will more likely want to is it that Offeree’s tastes in mortgage First Right. Side letters raise problems of convert Offeror’s transaction into an fi nancing match Offeror’s? First Rights their own, though, starting with the fact outright sale of the property in the case granted between members of a JV raise that they often get lost. of a First Right within a JV agreement, as similar issues. There, the JV agreement 29. LIN Broad. Corp. v. Metromedia, Inc., 74 opposed to a First Right in a ground lease. will often try to assure that the JV’s lender In the context of a ground lease, leasehold pre-approves any transfers between the N.Y.2d 54, 63, 542 N.E.2d 629, 634, 544 N.Y.S.2d 316, 321 (1989); distinguished and leased fee estates trade regularly and joint venturers, by exercise of a First Right are a known quantity. Investors know or otherwise. from Henderson v. Nitschke, 470 S.W.2d 410, 414 (Tex. Civ. App. Eastland 1971) (First how to analyze them and what they entail. 23. Perhaps Offeree should ask for the ability Right Notice gave Offeree irrevocable In contrast, JV interests vary widely and to exercise the First Right, but with no option, exercisable until Deadline even if entail a closer relationship with a possibly obligation to close unless Offeree obtains Offeror withdrew First Right Notice). unknown counterparty. Thus an Offeree a mortgage (i.e., a mortgage contingency). will probably have more trouble fi nding a Conditions of this type are rarely seen 30. If the parties do not attach a form of buyer for just a JV interest in a property- in any commercial purchase and sale contract to the ground lease, then the owning entity, and will probably face a transactions. First Right should perhaps provide for substantial “minority interest discount.” negotiation of the contract only if and Offeree’s best execution of a “fl ip” of a 24. For a discussion of the many ways an when Offeree has actually exercised its Offeror, an Offeree, or anyone else giving JV interest seems more likely to require First Right, perhaps with a “baseball Offeree to include its own interest in the a notice can do so incorrectly, see Joshua arbitration” mechanism to resolve any Stein, A Checklist For Giving Legally Effective property. There, an Offeree may want possible deadlock. That approach creates the right to convert its exercise of the Notices, THE PRACTICAL LAWYER, August its own risks and problems. 2005 at 12. See also Joshua Stein, Good Faith First Right into the JV’s sale of the entire 31. If Offeree is the lessee under a ground and Fair Dealing in Optionland, 25 SHOPPING property to a third party. Even in a ground lease and Offeree’s default under a First CTR LEGAL UPDATE 14 (2005), discussing lease, though, Offeree could conceivably Brunswick Hills Racquet Club, Inc. v. Route Right also constitutes a ground lease decide that the best possible fl ip would 18 Shopping Ctr. Assoc., 864 A.2d 387, 395 default, then the ground lessee’s leasehold include Offeree’s interest in the property. (2005). (optionee forgot to include required mortgagee will worry about the possible 35. Answer: all is fair in love and real estate. check with exercise notice; implied need to cure a hypothetical future default And in the world of First Rights, it is covenant of good faith and fair dealing whose magnitude or cost the leasehold particularly hard to fi gure out where required optionor to tell optionee about mortgagee cannot predict. Although there fairness and justice end and opportunism the mistake). are ways to give the leasehold mortgagee and abuse begin. Moreover, even if an comfort, those measures can create their 25. Of course, parties who expect to receive Offeror wants to sell its Interest at one own issues. One can easily avoid the price, it still might want to buy both notices do care about compliance with issue by treating a ground lessee’s default notice clauses, if only to assure that notices parties’ Interests—the whole thing—at

18 NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 some higher price, especially if Offeror of itself, defeat a First Right. Offeree can exercises its First Right and actually buys and Offeree have not played well instead insist on receiving a First Right Offeror’s Interest. A thoughtful Offeree together and the transaction would Notice covering only the property subject might ask for such a discount in any allow Offeror to get rid of Offeree. If a to the First Right. K.S. & S. Rest. Corp. v. event, as compensation for the burdens of First Right arises in a JV, an Offeree’s Yarbrough, 104 A.D.2d 486, 487-88, 479 dealing with a First Right Notice. Such a quick profi table “fl ip” might, in Offeror’s N.Y.S.2d 235, 237 (2d Dep’t 1984). discount would also incentivize Offeror mind, constitute actionable trickery. See 38. 383 Madison LLC v. Bear Stearns Cos., Inc., not to send a First Right Notice, and to Blue Chip Emerald LLC v. Allied Partners No. 601570/08, N.Y. Slip Op. 33409(U) at negotiate a more collegial resolution. I Inc., 299 A.D.2d 278, 279, 750 N.Y.S.2d 6, 2008 N.Y. Misc. LEXIS 9581, at 8 (Sup. have never seen such a discount in any 291, 294 (1st Dep’t 2002) (LLC member Ct. N.Y. Cnty. Dec. 18, 2008). First Right; nor have I seen it in any buy- bought out other members, soon resold at sell clause in a JV, where it seems even huge profi t; buyer’s superior knowledge 39. A lender will probably also want to assure more appropriate. Would such a discount meant disclosures and waivers could not that the First Right goes away forever create bad incentives? Probably not. As overcome perceived breach of fi duciary if Offeror ever loses its Interest through a similar thought, perhaps under some duty), abrogated by Centro Empresarial foreclosure. Without clear language on circumstances Offeror should agree to Cempresa S.A. v. America Movil, S.A.B de point, a foreclosure exclusion from a reimburse Offeree’s legal fees of dealing C.V., 17 N.Y.3d 269, 952 N.E.2d 995, 929 First Right may not eliminate the First with any First Right Notice, or vice versa. N.Y.S.2d 3 (2011). See also Steven Simkin Right permanently after a foreclosure, & Manuel E. Lauredo, Wearing Two Hats thus potentially discouraging bidders. That potential will concern prospective Joshua Stein, a former chair of at Once: Buyout Transactions Between Real the Section, practices commercial real Estate Joint Venture Partners, 32 Real Estate mortgage lenders to Offeror. Thus, a First Rev. 5, 7 (Winter 2004) (“The duty to fully Right will usually: (a) exclude foreclosure estate law at Joshua Stein PLLC in disclose should cease when the parties sales; and (b) go away permanently New York City. For information on become adversarial, in order to prevent if Offeror loses its Interest through foreclosure. As a compromise, sometimes the author, visit www.joshuastein. the alleged fi duciary from occupying com. The author appreciates helpful confl icting roles.…Well-drafted waivers the “foreclosure sale” exclusion will also and disclaimers should be given effect[.]”). extend to the fi rst sale after the foreclosure comments on this article and the ac- But see Centro Empresarial Cempresa sale, and then the ROFO will apply again companying Model Right of First Of- to future sales. S.A. v. America Movil, S.A.B. de C.V., 17 fer from Michael J. Berey, S.H. Spen- 40. At a suitable time, Offeree might want to N.Y.3d 269, 279, 952 N.E.2d 995, 929 cer Compton, and John C. Murray, N.Y.S.2d 3, 10 (2011) (“Where a principal be proactive and reach out to Offeror’s and fi duciary are sophisticated parties lender to request notice in the case of any all of First American Title Insurance engaged in negotiations to terminate their foreclosure sale or adjournment, even if Company; Carl Gaines, former editor relationship…the principal cannot blindly the lender does not contractually agree of Mortgage Observer, NY; Andrew trust the fi duciary’s assertions.”). to give that notice. In practice, the lender might welcome Offeree’s interest, fearing L. Herz and Robert M. Safron of Pat- 36. What constitutes a third-party transfer that terson Belknap Webb & Tyler LLP, would trigger a First Right? What about claims from Offeror if the lender tells transfers between related entities? Does a likely bidder to get lost. On the other NY; Alfredo R. Lagamon, Jr., of Ernst execution of a contract of sale evidence a hand, Offeror might see it as meddling & Young LLP, NY; Donald H. Oppen- third-party offer? Any First Right should and a breach of etiquette, so Offeree might want to ask Offeror to consent to such heim of Berkeley, CA; James Patalano answer those questions and others. and Lauren Silk, of the author’s legal Though the answers may seem obvious, communications in advance. California questions like these trigger a remarkable law gives anyone a statutory right to staff; Elizabeth T. Power, the author’s amount of litigation. As one example, record a “request for notice” of a trustee’s managing editor; Jonathan R. Shils in Hartzheim v. Valley Land & Cattle Co., sale. Cal. Civ. Code § 2924b(a) (West 2014). The party conducting the sale must of McGuire Woods LLP, Atlanta; He- 153 Cal. App. 4th 383, 393, 62 Cal. Rptr. laina Stein and Susanna Stein, NY; 3d 815, 822-23 (6th Dist. 2007), the court comply with that request. Cal. Civ. Code needed to fi gure out whether a particular § 2924b(b)(2) (West 2014). An Offeree and Michael B. Vincenti of Wyatt, transfer constituted a bona-fi de third may want to exercise any such right that Tarrant & Combs, LLP, Louisville, party offer, which would trigger a First might be available. An Offeree could also buy the loan or fi gure out a way to hold KY. Blame only the author for any er- Right. The court applied a three-prong rors or missed insights. A very short test in deciding what those words meant. some recorded interest in the property The court looked at: (1) the terms of the subordinate to the mortgage, e.g., a notice preliminary version of this article contract, which said certain circumstances of the First Right, if the lender will tolerate appeared as an installment of the au- that. triggered the First Right; (2) whether thor’s monthly column in Mortgage Offeror’s transaction was entered into at 41. This is an example of a nonstandard Observer, www.commercialobserver. arm’s length and involved a change of assurance that an Offeror may want control of the property; and (3) whether to incorporate into future estoppel com. Other versions appeared in Offeror had tried to defeat the ROFR. certifi cates. When the parties negotiate the American College of Real Estate Based on those three considerations, the the estoppel certifi cate clause of the Lawyers Papers (March 2014 Kauai); court decided that a particular transaction original ground lease, they may not think the Georgetown Law School Ad- did not trigger a First Right, because it of requiring this assurance, though. It did not result from arm’s-length dealing, demonstrates the benefi ts of including vanced Commercial Leasing Institute did not result in a change of control, and “catch-all” language stating that estoppel program book; Practical Real Estate had legitimate tax planning purposes. The certifi cates must include other assurances Lawyer; and elsewhere. Readers are result seems reasonable, but demonstrates reasonably requested in the future. encouraged to comment on and re- the issues that can arise in testing whether 42. Offeree might also propose that, under spond to this article by sending email particular circumstances trigger a First these circumstances, the First Right Right. language should give Offeree some to [email protected]. 37. According to one decision, an Offeror’s substantive improvement in the deal, decision to include other property in a such as a low single-digit percentage Copyright © 2014 Joshua Stein. All contemplated transaction does not, in and discount in the unlikely event that Offeree rights reserved.

NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 19 Model Right of First Offer By Joshua Stein

This Model Document consists These rights (each generically, Tenant originally wanted, i.e., of language one might include in a a “First Right”) differ. A ROFO a purchase? As a result, many long-term ground lease (a “Lease”) activates at the beginning of the Leases do have First Rights, to establish a right of fi rst offer (a selling process before Offeror particularly in favor of Tenant. “ROFO”), typically in favor of Ten- begins to market its Interest. A Even if a First Right will never ant but sometimes in favor of either ROFR, in contrast, arises only work right, it may at least force Landlord or Tenant. As the accom- when Offeror has signed a con- the parties to have a conversa- panying article by the author de- tract with a Third-Party Buyer. tion and perhaps a negotiation. scribes, when a party (an “Offeror”) At that point, Offeree can then If the parties ever go through grants another party (the “Offeree”) match the deal Offeror made the ROFO process in accordance a ROFO, that means if Offeror ever with the Third-Party Buyer. One with its terms, though, that decides it wants to sell its position in can adjust this Model Document usually means the relationship the transaction (its “Interest”), it must to work for a ROFR, although has gone bad—not a great start fi rst give Offeree a chance to buy nonobvious differences exist for enduring a very complicated Offeror’s Interest at a price Offeror between the two First Rights. process with a lot of moving names. If Offeree declines, then Offer- Anyone using this document parts, nuances, and potential or can sell to a Third-Party Buyer. If as a ROFR should review other for varying interpretations, i.e., Offeror later lowers the asking price, ROFR documents and consider litigation. Offeree might get “another bite.” It all issues beyond those raised here. Both parties should instead seek sounds very reasonable and perhaps • Not a Fan. The author’s recent to maintain a reasonable rela- even creative. experiences suggest that no First tionship with reasonable lines A ROFO will also sometimes Right will ever actually work as of communication. For more appear in a joint venture agreement. the parties expect. A First Right thoughts on First Rights, please The model language offered here will instead simply create dis- see the author’s article in this will work as a starting point in that putes, issues, and uncertainty. issue of the New York State Bar context, but additional issues will The parties and their counsel Association N.Y. Real Property arise there, which this language does are overly optimistic, perhaps Law Journal. Endnotes in this not consider. Buy-sell clauses in joint even hubristic, to think they model ROFO repeat and supple- ventures also raise many issues like can “get everything right.” The ment many comments from that those arising in this model ROFO, author does not guarantee that article. plus others. this model ROFO achieves that • Complexity vs Practicality. This diffi cult and perhaps illusory Blank spaces, brackets, or end- model ROFO goes beyond a goal. notes in this model ROFO indicate typical ROFO in the detail it blanks to fi ll, options, and issues. • Any ROFO, if fully thought provides about exactly how the Please forward comments, improve- through and played out, can process will work. That detail ments, suggestions, or corrections to easily become the longest, most responds to sad history. But, the author. important, and most complicat- when anyone actually pulls this ed part of any Lease, with impli- language out of the drawer and This model ROFO seems extraor- cations for many other parts of tries to comply with it, he or dinarily long, but in truth it is merely the Lease as well. But the ROFO she may experience the same long—as opposed to extraordinarily will still very likely never work problem that arises whenever long—if one excludes endnotes and perfectly. The facts will inevita- any legal document goes into introductory comments. After those bly unfold in whatever way lays a lot of detail: provisions that exclusions, the model ROFO is about bare the defi ciencies. Any Of- sounded perfectly reasonable fi ve pages. Great minds could still feror should strenuously resist to the drafter may not actually probably think of ways to double its granting any First Right. Tenant work all that well—and may length. can reasonably point out, how- raise a panoply of new issues Substantive Comments. In using ever, that the whole premise of a of their own—when someone this Model Document, consider these Lease consists of the proposition actually has to live with and issues, among others: that “Landlord doesn’t want work through all those words. • ROFO/ROFR. This Model Docu- to sell.” If Landlord changes We think we know how a ROFO ment consists of a ROFO—not a its mind, shouldn’t Tenant get should work. But we can’t pos- right of fi rst refusal (a “ROFR”). “fi rst shot” at making the deal sibly fi gure out every weird

20 NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 set of facts in which this or any • Reporting and Documentation. Interest, Exempt Transfer, Fee other ROFO might unfold. That Offeror must periodically report Estate, Foreclosure Event, Insol- problem is hardly unique to this ownership of its Equity Inter- vency Proceeding, Laws, Lease, model ROFO. It arises when- ests, to police compliance with Lease Abandonment, Leasehold ever anyone needs to actually the ROFO. Offeree may want Estate, Leasehold Mortgage, apply and follow to the letter the right to receive backup doc- Leasehold Mortgagee, Modifi ca- any modern legal document that umentation for that ownership. tion, Mortgage, Notice, Notify, was carefully thought through • Financing Limitations. Because Permitted Exceptions, Person, by lawyers who believed they Foreclosure Events are exempt Rent Regulation, and Transfer. thought of everything and got from the ROFO, Offeree may A Different Approach. Instead of a everything right. wish to limit any fi nancing that ROFO, the parties might want to try • Maintenance Fee. Offeror may Offeror obtains. Those limits a simpler approach, suffi cient merely want Offeree to pay a modest could fall away if the Mort- to push the parties to have a mean- annual fee to retain the ROFO. gagee agrees to either: (a) honor ingful conversation if either wants This would incentivize Offeree the ROFO in connection with to buy out the other. Each of these to release its rights if it no longer a foreclosure sale; or (b) give alternatives would establish chan- regards them as valuable. The Offeree at least __ days’ prior nels of communications, and then idea of a recurring maintenance notice of the time and place let ordinary business negotiations fee (for any pre-emptive right of of any foreclosure sale, and at and incentives take over the process. any kind, including an ordinary least __ days’ prior notice of any That should work well as long as the option) makes great sense but adjournment. Any Mortgagee relationship has not deteriorated. Un- the author has never actually will generally laugh at either fortunately, it often does deteriorate, seen it in any document. suggestion, and note that the because over time either Landlord or fi rst suggestion might impair Tenant often ends up wishing it had Other Documents. The parties may, Mortgagee’s ability to hold a not signed the Lease. And the three in appropriate cases, want to provide valid foreclosure sale. Hence the suggestions here are not much better for other documents as exhibits to the justifi cation to limit Offeror’s than the suggestion that the parties Lease of which this ROFO would be fi nancing. should maintain each other’s con- part, such as: (a) a form of contract tact information and once in a while of sale, perhaps even with closing • Cross-Default. Although a trans- have a conversation. Here are three documents annexed; (b) forms of the fer in violation of the ROFO can possibilities: various notices contemplated here; (c) constitute a Default, a Lease- an organizational chart for each party hold Mortgagee will worry that (a) Expression of Interest. Either to memorialize ownership of Equity a ROFO creates a huge number party (a “Purchaser”) may at any Interests at Lease signing; and (d) dis- of headaches and concerns. time give the other (“Seller”) non- closure of the ROFO in any recorded The Lease should say that any binding notice (an “Expression of memorandum of Lease. default or dispute arising under Interest”) that Purchaser would have a ROFO will either: (a) not an interest in purchasing Seller’s Other Lease Provisions. The exis- constitute a Default at all for the Interest. Any Expression of Interest tence of a ROFO may lead the parties Lease; (b) never entitle Landlord shall include a conspicuous refer- to a Lease to include other provisions to exercise Lease remedies so ence IN BOLD FACE ALL CAPITAL in the Lease to make the ROFO work long as a Leasehold Mortgage LETTERS to this paragraph and shall right. Those provisions include: exists; or (c) expressly consti- state the purchase price that Purchas- • Transfer Procedures. As a condi- tute a “Tenant-Specifi c Default” er would potentially pay for Seller’s tion to any Transfer, Offeror so that instead of curing that Interest (the “Target Price”). Each must comply with the ROFO, Default, a Leasehold Mortgagee Expression of Interest shall remain where required. Also, after the can preserve the Lease by fore- effective for 90 days (the “Window closing of any Transfer, includ- closing or otherwise removing Period”) and shall then automatically ing even many Exempt Trans- Tenant from the Leasehold Es- terminate. If, in any Window Period, fers, Offeree should receive tate. Leasehold Mortgagee will Seller decides to sell its Interest, at an notice and copies of all closing want to know it will never need asking price at or below 110% of the documents. Somewhere the to cure any failure to perform Target Price, then Seller shall so no- Lease should say, once, that a under a contract resulting from tify Purchaser. The parties shall then “copy” means a full, complete, the ROFO. diligently seek to negotiate a sale of and unredacted copy, including • Defi nitions. This model ROFO Seller’s Interest to Purchaser. If those all related documents and side assumes the Lease defi nes these negotiations fail to produce a bind- letters. terms: Arbitration, Affi liate, ing agreement within 10 days (which Business Day, Default, Equity the parties may extend by agreement

NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 21 via email) after Seller received the any marketing activities; and also (ii) • Address. If Offeree changes Expression of Interest, then Seller 10 days before Seller signs a binding its address, the existence of a may offer the Interest to the market. agreement to Transfer the Interest. If ROFO makes it particularly In doing so, Seller shall initially offer Purchaser notifi es seller that Purchas- important for Offeree to notify the Interest at an asking price that er may have an interest in purchas- Offeror of the change. equals or exceeds the Target Price. ing, then Seller shall keep Purchaser • Status Checks. Offeree should Seller may, however, change that informed of Seller’s marketing and periodically exercise its right to asking price and sell Seller’s Interest selling activities; give Purchaser a obtain an updated report on the on any price and at any terms Seller reasonable opportunity to make an ownership of Offeror’s equity negotiates. Seller shall keep Purchaser offer; and consider any offer from interests, with suitable backup. reasonably informed of Seller’s ask- Purchaser. ing price and negotiations. • Pay Attention. Offeree should Post-Closing Administration. If a keep its ear to the ground and (b) Inquiries on Sale. Either party Lease contains a ROFO, the parties be ready to assert its rights if (“Purchaser”) may, at any time, ask may wish to pay special attention Offeror initiates any transaction. the other party (“Seller”) whether to these post-closing administrative Conversely, if Offeree would Seller anticipates seeking to sell its matters: like to acquire Offeror’s Interest, Interest within the next 90 days and, • Workings and Clarity. Because Offeree should make that desire if so, Seller’s asking price and terms. any ROFO is counterintuitive known in a serious way. Seller shall respond to those inquiries and, when actually played out, promptly and in good faith. • Relationship. Best of all, Offeree more complex than it sounds, should maintain a relationship (c) Determination to Sell. If either counsel should make sure its cli- and lines of communication party (“Seller”) decides it may wish ent understands how the ROFO with Offeror so that Offeror nev- to sell its Interest, then Seller shall works and what might trigger er sees any need to activate the Notify the other party (“Purchaser”) it. This may require a written ROFO. Instead, if Offeror wants at least: (i) fi ve days before listing memo. to sell, the parties should have a the Interest with a broker or starting conversation and try to make a deal. Right of First Offer If at any time1 Landlord or Tenant (either, “Offeror”) desires to Transfer its interest in the Premises (its “Interest”), except an Exempt Transfer,2 then, provided that no Lease Abandonment has occurred, Offeror shall fi rst give the other party (“Offeree”) a Notice (the “ROFO Notice”) offering to Transfer Offeror’s Interest to Offeree (Offeree’s rights under that Notice, collectively, the “ROFO”), all in accordance with this Article. Offeror shall not engage a broker, market Of- feror’s Interest, solicit offers, communicate to third parties the possible availability of Offeror’s Interest, offer Offeror’s Interest to anyone else, or Transfer Offeror’s Interest unless and until Offeror has complied with this Article.3 The ROFO shall apply to each and every proposed Transfer of an Interest that is not an Exempt Transfer. Any Transfer of an Interest, whether or not an Exempt Transfer, shall not terminate this ROFO except as this Article expressly states.4 A. Contents of ROFO Notice. Any ROFO Notice shall include, and shall not be valid unless it includes: (a) all mate- rial economic terms5 on which Offeror proposes to Transfer its Interest; (b) a proposed contract for the Transfer of the Interest in compliance with this Article (that contract, in the form submitted by Offeror, as modifi ed by written agree- ment between Offeror and Offeree, the “ROFO Contract”), which ROFO Contract would bind the parties if Offeree were to exercise its ROFO;6 (c) a statement on the fi rst page of the ROFO Notice, IN BOLD FACE TYPE ALL CAPI- TAL LETTERS, that it is intended to constitute a ROFO Notice (with a citation to this Article); (d) a statement on the fi rst page, IN BOLD FACE TYPE ALL CAPITAL LETTERS (the “Deemed Approval Reminder”), reminding Offeree that if Offeree fails to reasonably object to the ROFO Notice or the accompanying form of ROFO Contract (with a state- ment, in reasonable detail, of all of Offeree’s reasonable objections) within 10 Business Days after receipt (an “Objec- tion Notice”), then Offeree shall be deemed to have waived its objections to the ROFO Notice and the form of ROFO Contract (a “Deemed Approval”);7 and (e) only if Tenant is Offeror, then a Tenant Due Diligence Package. B. ROFO Contract. The “ROFO Contract” shall be on ordinary, customary, and commercially reasonable terms8 and shall conform to Exhibit A. The Transfer shall otherwise be on the terms of a standard printed form contract of sale used in the State for improved real property and selected by Offeror with Notice to Offeree, modifi ed only as neces- sary to refl ect the terms of the ROFO Notice and the factual circumstances of the Interest, except matters that violate this Lease.9

22 NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 C. Tenant Due Diligence Package. The “Tenant Due Diligence Package” means copies of all: (i) subleases and sub- subleases, and all Modifi cations, with a schedule of legal rents for all units subject to Rent Regulation; (ii) service agreements or contracts that will not terminate at closing; (iii) outstanding notices of violation; (iv) engineering, insurance, environmental, or other reports Tenant received in the last three calendar years; (v) income and expense statements in suffi cient detail to evaluate their accuracy, for the last three calendar years and any completed calendar quarters since then; (vi) current rent roll; (vii) unrecorded documents listed in every schedule or exhibit to the ROFO Contract; and (viii) other due diligence materials, if any, provided for in the ROFO Contract. D. Noncompliant ROFO Notice. If Offeree receives a Notice from Offeror that states it is intended to constitute a ROFO Notice, but Offeror believes that the purported ROFO Notice (or anything in or submitted with it) does not comply with this Lease or is otherwise not valid as a ROFO Notice, then Offeree shall promptly give Offeror an Objec- tion Notice. If Offeree fails to do that within 10 Business Days after Offeree receives the ROFO Notice and the ROFO Notice included a Deemed Approval Reminder, then a Deemed Approval shall occur. A Deemed Approval only pre- vents Offeree from asserting objections to the ROFO Notice. It does not constitute an Acceptance Notice.10 If a Deemed Approval occurs, then Offeree shall on request confi rm it in recordable form.11 E. ROFO Acceptance.12 Any ROFO Notice shall remain open for 60 days13 after Offeree receives it (the “Deadline”). To accept Offeror’s ROFO Notice, Offeree must give Notice of acceptance (an “Acceptance Notice”) so Offeror actually receives it before the Deadline, accompanied by: (a) a counterpart of the ROFO Contract signed by Offeree or its desig- nee;14 and (b) a check, payable to the escrow agent designated in the ROFO Contract, for the deposit under the ROFO Contract. TIME IS OF THE ESSENCE ON DELIVERY OF AN ACCEPTANCE NOTICE BEFORE THE DEADLINE. If Offeree delivers a timely and valid Acceptance Notice, then Offeror shall promptly countersign and return the ROFO Contract. Failure to perform under a ROFO Contract shall not constitute a Default under this Lease. It shall consti- tute a default only under the ROFO Contract, giving the non-defaulting party only the rights and remedies under the ROFO Contract.15 If Offeror does not sign and return an executed ROFO Contract within 10 days after receiving it in compliance with this Article, then Offeree shall be entitled to all legal and equitable remedies against Offeror, exclud- ing any right to declare a Default under this Lease.16 F. Extension. Offeree may from time to time extend the Deadline for up to __ additional days in aggregate (an “Extension Period”), by giving Offeror a Notice of extension (an “Extension Notice”) so Offeror actually receives it on or before the Deadline, before extension. To be effective, any Extension Notice must: (a) state the Extension Period; and (b) include a check payable to Offeror for $____17 for each day of the Extension Period. Offeror may keep that payment free of any claims of Offeree and with no obligation to credit it against any payment obligation of Offeree. TIME IS OF THE ESSENCE ON DELIVERY OF AN EXTENSION NOTICE UNDER THIS PARAGRAPH. Offeree may deliver multiple Extension Notices, in aggregate providing for only the maximum Extension Period this paragraph allows. If Offeree delivers a valid and timely Extension Notice, the Deadline shall be redefi ned to include the Extension Period Offeree specifi ed in the Extension Notice. Notwithstanding anything to the contrary in this paragraph, Offeree may never extend the Deadline beyond the aggregate maximum Extension Period this paragraph allows.18 G. Closing of Third-Party Transfer. If Offeree does not deliver a valid Acceptance Notice before the Deadline, TIME BEING OF THE ESSENCE, then Offeror may Transfer the Interest to any Person (“Third-Party Buyer”) if the Transfer otherwise complies with this Lease and satisfi es each of these conditions and qualifi cations (the “Third-Party Closing Conditions”): 1. Third-Party Contract. Offeror and Third-Party Buyer execute and deliver their contract for the Transfer of Offer- or’s Interest (including all side letters and related agreements, the “Third-Party Contract”), within six months after the earlier of (a) the Deadline or (b) the date of Offeree’s Notice that Offeree will not deliver an Acceptance Notice, TIME BEING OF THE ESSENCE; 2. Copy of Contract. Within three Business Days after Offeror and Third-Party Buyer sign their Third-Party Con- tract, Offeror so Notifi es Offeree, with a copy of the Third-Party Contract19 and a certifi cate from Third-Party Buyer confi rming: (a) the Third-Party Contract contains the entire agreement between the parties and their Affi liates; and (b) no other transaction is conditioned on the closing under the Third-Party Contract, or induced Third-Party Buyer to enter into the Third-Party Contract;20 3. Closing. Offeror Transfers Offeror’s Interest to Offeror’s Transferee in accordance with the Third-Party Contract no earlier than 15 days21 (which waiting period Offeree shall promptly waive on request provided Offeree has reason- ably confi rmed that the Third-Party Contract complies with this Lease) and no later than 90 days after execution of the Third-Party Contract, subject to extensions equivalent to those (if any) permitted in the ROFO Contract to allow for assumption of Mortgages, TIME BEING OF THE ESSENCE;

NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 23 4. Price. The price for the Transfer equals or exceeds 95% of the price in Offeror’s ROFO Notice. 5. Terms Generally. The terms of the Third-Party Contract: (a) to the extent they relate to assumption or obtain- ing any fi nancing, including deadlines and cost allocations, are to no degree more favorable than those in the ROFO Contract; (b) are otherwise not, taken as a whole, materially more favorable to the purchaser than those in the ROFO Contract;22 (c) give Third-Party Buyer no due diligence information beyond the Tenant Due Diligence Package, plus due diligence information on this Lease; and (d) contain no representations and warranties beyond those in the ROFO Contract, except on this Lease. H. Failure to Meet Third-Party Closing Condition. If Offeror fails to meet any Third-Party Closing Condition, includ- ing because Seller or its Affi liate enters into any Modifi cation or additional agreement relating to the Third-Party Contract that causes any Third-Party Closing Condition to fail, then Offeror shall not proceed with its Transfer without again delivering to Offeree a ROFO Notice. If the unmet Third-Party Closing Condition related to the price or terms of the ROFO Contract, then the additional ROFO Notice shall disclose the change and include copies of all related docu- mentation. Offeree shall again have a ROFO, except that: (a) every reference to the ROFO Contract shall refer to the Third-Party Contract; (b) the Third-Party Contract must nevertheless comply with all requirements that applied to the ROFO Contract; and (c) the Deadline shall be __ days after Offeree actually received the ROFO Notice.23 I. Termination of ROFO. Offeree’s rights under the ROFO shall terminate, and the ROFO shall be deemed to have been permanently and irrevocably removed from this Lease to the extent it gives any rights to Offeree, if: (a) Offeror gives Offeree a ROFO Notice and both (i) Offeree does not validly and timely accept it before the Deadline; and (ii) Of- feror Transfers its Interest in compliance with this Article;24 (b) Offeror gives Offeree a ROFO Notice and after Offeree delivers a valid and timely Acceptance Notice, the purchaser defaults under the ROFO Contract; (c) Offeree [is ever the subject of] [Transfers this Lease in] any Insolvency Proceeding;25 or (d) Offeror loses Offeror’s Interest through a Foreclosure Event.26 J. Simultaneous Transactions. If Offeree gives an Acceptance Notice and Offeree or its designee or assignee actually acquires Offeror’s Interest, then the ROFO shall: (a) terminate; and (b) not apply to any Transfer that Offeree makes or initiates and closes only simultaneously with or after Offeree’s acquisition of Offeror’s Interest.27 Any contract that Offeree enters into contemplating a Transfer of the type referred to in clause “b” shall not require Offeree to give a ROFO Notice, provided that the closing under that contract cannot occur except simultaneously with or after Offeree’s acquisition of Offeror’s Interest. K. Equity Interests. If the holder of any Equity Interest in Landlord or Tenant desires to Transfer that Equity Inter- est or any part of it, except an Exempt Transfer, then the ROFO shall apply as if that Equity Interest were an Interest subject to the ROFO, suitably adjusted given the nature of the Interest. If the Equity Interest relates to direct or indi- rect ownership in Tenant, then Landlord shall be the “Offeree” for that ROFO, and vice versa. Landlord or Tenant, as the case may be, shall cause Offeror of that Equity Interest to comply with the ROFO before Transferring that Equity Interest. L. Acknowledgment. If Offeree does not deliver a valid Acceptance Notice, then at Offeror’s request, Offeree shall promptly deliver to Offeror and Third-Party Buyer a recordable confi rmation: (a) of that waiver; and (b) that the Third- Party Contract met the Third-Party Closing Conditions that apply to the Third-Party Contract and does not entitle Offeree to another ROFO Notice. If Offeror requests that confi rmation but Offeree believes it would be inaccurate, then Offeree shall promptly Notify Offeror, specifying in reasonable detail the basis for that belief. Offeror and Third-Party Buyer may modify the Third-Party Contract to seek to eliminate any issues Offeree raised. If they do that, then they shall give Offeree a copy of the modifi ed Third-Party Contract and this Article shall again apply. M. ROFO Disputes. If a party disagrees about the other’s rights, obligations or actions under this Article (includ- ing the validity, form, or terms of any ROFO-related document, delivery or Notice), then the parties shall resolve that dispute by Arbitration.28 Any dispute arising under a ROFO Contract shall, however, be resolved through litigation in accordance with the ROFO Contract.29 If the parties disagree about whether a dispute arises under the ROFO or under the ROFO Contract, or if a dispute relates to both the ROFO and the ROFO Contract, then they shall proceed through [litigation under the ROFO Contract] [Arbitration]. N. Miscellaneous. Notwithstanding anything to the contrary in this Article, no ROFO, ROFO Notice, ROFO Con- tract, or Third-Party Contract, or any exercise of rights, (non)performance of obligations, or dispute about any of the foregoing shall impair any Mortgage or any rights of any Mortgagee or entitle anyone to any rights senior or prior to any Mortgage.

24 NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 EXHIBIT A

TERMS OF ROFO CONTRACT Any ROFO Contract shall provide for at least these terms, subject to the requirements in this Lease on any ROFO Contract: (a) Timing. A closing date, no earlier than 90 days after Offeree elects to purchase Offeror’s Interest30 (and, for ROFO Contracts that contemplate assumption of Mortgages, commercially reasonable periods to meet customary lender requirements, consistent with the loan documents and the Mortgagee’s ordinary operating procedures, with full contact information for the Mortgagee included in the ROFO Contract); (b) Cash Price. The purchase price, payable in cash at closing except to the extent the Offeror’s Mortgagee approves assumption of existing Mortgages; (c) Overfi nancing. If Offeror’s Mortgages exceed the purchase price, then: (1) the Mortgagees’ consent to the trans- action; and (2) commercially reasonable arrangements to assure payment of that excess at closing; (d) Deposit. A deposit of up to 5% of the purchase price, to be held in escrow by a licensed title insurance company; (e) Transaction Costs. Responsibility for transfer taxes and other transaction costs; (f) Operations. Operation and leasing only in the ordinary course pending closing, with no major leases to be signed; (g) Representations and Warranties. Ordinary and customary representations and warranties on: (1) this Lease and the Interest, in each case limited to customary authority to assign, lack of prior assignment and similar representations; and (2) if Tenant is Offeror, the Tenant Due Diligence Package and other customary matters about the Premises; (h) Breaches. A statement of any existing breaches of representations and warranties, and Offeror’s agreement to notify Offeree of any later breach; (i) Material Notices. Offeror’s obligation to give Offeree copies of any material notices received and to update repre- sentations and warranties at closing; (j) Attachments. Completed schedules and exhibits; (k) Remedies. Only ordinary and customary remedies for default, with any disputes resolved through litigation subject to a confi dentiality stipulation substantially in the form promulgated by the New York City Bar Association; (l) Post-Closing. Neither purchaser nor Offeror shall perform or bear any material post-closing obligations or de- liver any guaranty;31 (m) Assignable. Assignable to any Person at [or before] closing;32 (n) Interaction. No cross-default between the ROFO Contract and this Lease; and (o) Permitted Exceptions. Conveyance subject only to Permitted Exceptions designated in the ROFO Contract and Mortgages encumbering the Interest (with credit against the purchase price).

Endnotes 1. A ROFO will sometimes not apply at certain times, for example if: (a) Tenant has not yet completed initial development; (b) Offeree is in Default, either before or after expiration of notice and cure periods; or (c) Offeree has previously committed chronic monetary or material Defaults, even if cured, over some extended time. Limitations like these should not worry Leasehold Mortgagees, as Leasehold Mortgagees will not attach much value to a ROFO. 2. “Exempt Transfers” would generally match Transfers that a party can consummate as of right, by satisfying only certain limited conditions, such as a Foreclosure Event or transfers of passive minority interests. In a 99-year Lease, Offeror’s Interest will probably change hands many times. Thus, Exempt Transfers should adequately cover both the initial parties (specifi cally) and their successors, whoever they may turn out to be (generically). This concern arises in all types of Transfer-related restrictions, though the parties may want to tailor it for a ROFO. For example, if a Foreclosure Event generally constitutes an Exempt Transfer, Offeror will prefer to terminate the ROFO completely at that point, to preserve Offeror’s ability to obtain a Mortgage. Mortgagees hate ROFOs. If a transfer of a passive minority interest is an Exempt Transfer, Offeree may want the ROFO to still apply to those transfers. 3. Offeror may favor a less sequential process. Why can’t Offeror defer the ROFO Notice until Offeror has an offer in hand (subject to the ROFO) or at least until Offeror has tested the market a bit?

NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 25 4. Later language in this model ROFO suggests Transfers that should terminate the ROFO. Offeror can reasonably take the position that Offeree gets “one chance” and then the ROFO, a huge burden for Offeror, goes away. To the extent that the parties agree to limit or terminate the ROFO after certain Transfers, edit this sentence. 5. It may make sense to list those material economic terms. A generic reference to “material economic terms” leaves some uncertainty, but a purchase and sale is not all that complicated. This ROFO later requires a full ROFO Contract when Offeror gives a First Right Notice, though the parties may not like that idea. 6. Most ROFOs do not require a ROFO Contract, leaving the actual terms of the Transfer to be negotiated (fought about) later if Offeree exercises its ROFO. The requirement to include a ROFO Contract seems burdensome to Offeror, but that burden will, among other things, give Offeror an incentive to work cooperatively with Offeree rather than activate the ROFO. 7. Perhaps fl ip this around. Instead, obligate Offeree within a certain time to acknowledge receipt of the ROFO Notice and acknowledge that it complies with the Lease. If Offeree fails to give that acknowledgment, then the parties would go straight to Arbitration. Either process serves Offeror’s interest in not having to “wait to the last minute” to see if Offeree claims to have found some basis to object to the ROFO Notice. 8. This sounds reasonable but could provoke a dispute, hence Arbitration for all disputes. 9. ROFOs often say very little about the actual terms of any ROFO Contract, as if the only relevant term of the transaction is its price. This paragraph makes an effort to plug that gap by attaching an Exhibit with the terms for any ROFO Contract. Once one has gone to all that trouble, though, perhaps one should go to the additional trouble of attaching a form of ROFO Contract to the Lease itself. That does not seem typical. Also, a sale of real estate is really not all that complicated a transaction. We just make it complicated. All the protracted negotiations of a purchase and sale typically relate to no more than a low single-digit percentage of the effective value of the entire transaction. 10. The author’s experience handling ROFO-related disputes inspired this paragraph, which is not “standard.” Deletion of this paragraph would also require conforming changes in requirements for the ROFO Notice. 11. This sounds like good protection for Offeror, but it means Offeror’s Purchaser and any title insurance company will force Offeror to obtain a recordable confi rmation of any Deemed Approval. They may demand that anyway. 12. If Offeree does not give a timely Acceptance Notice, Offeror may want the right to require Offeree to confi rm that in recordable form, acknowledging it has received a valid ROFO Notice and chose not (or at least failed) to timely exercise it. Third-Party Buyers and their title company will like to see confi rmations like these. They eliminate uncertainty. Offeree may also worry about an Offeror’s possible withdrawal of a ROFO Notice. If Offeror does that, Offeree will perhaps have spent considerable time and resources—on an emergency basis—trying to decide whether to exercise its ROFO and trying to fi nd a loan. Offeree may wish to negotiate that if Offeror withdraws a ROFO Notice, then Offeror: (a) cannot send another ROFO Notice for a certain period; and (b) must pay Offeree some amount. One could also prohibit a withdrawal. 13. Usually the Deadline is 30 days—much too short. Sixty days seems reasonable. Optional language allows Offeree to extend the Deadline by paying a daily extension fee. 14. Again, Offeree wants the ability to “fl ip” the ROFO Contract. This language allows Offeree to designate a third party to enter into the ROFO Contract, which usually works better than assigning the ROFO Contract, either before or at closing. With or without a fl ip, consider whether Offeree should be entitled to a deal more favorable than whatever Offeror intends to take to market. For example, perhaps Offeree should receive a 2% discount off the price in the ROFO Contract. This would compensate Offeree for its trouble and trauma of dealing with a ROFO Notice, and incentivize Offeror to do anything other than activate the ROFO. 15. Without the previous sentence, the possibility of a default under a ROFO Contract could create signifi cant concerns for a Leasehold Mortgagee. If the Leasehold Mortgagee cannot control the pricing under a ROFO Contract, then a default under that ROFO Contract might create a Lease Default that a Leasehold Mortgagee would have no appetite to cure. 16. Think about other rights and remedies. For example, perhaps deny Offeror the right to initiate any Transfer or ROFO for several years. 17. The parties can negotiate any fee they want, but it should be substantial, perhaps matching the Fixed Rent, as Offeror will fi nd the Deadline extension to be extremely burdensome and diffi cult. The potential of enduring that extension will give Offeror another incentive to have a conversation with Offeree rather than trigger the ROFO. Any such incentive is probably a good thing. 18. This optional paragraph applies only if Offeror is willing to extend the Deadline for a fee. Any such extension is nonstandard but makes a lot of sense. 19. This allows Offeree to confi rm the Third-Party Contract complies with the ROFO. Offeror may want to provide for a Deemed Approval process. 20. Should any inaccuracy in that certifi cate constitute a Default under the Lease? 21. Offeror may want the ability to sign and close simultaneously, a common occurrence. Offeree, on the other hand, will want the ability to see the Third-Party Contract and have a chance to object to it. 22. Words like these often appear in ROFOs. They leave lots of room for interpretation, i.e., litigation or Arbitration. Also, when the Third-Party Buyer obtains title insurance, the title insurer may worry about uncertainty on compliance with the ROFO. Thus the title insurer might require Offeree to deliver a recordable release, acknowledgment, or estoppel certifi cate. 23. This paragraph gives Offeree a “second bite” at purchasing the Interest at the lower price than the original ROFO Contract contemplated. 24. Offeree would prefer the ROFO continue in this case, burdening the next holder of Offeror’s Interest. 25. Don’t assume this clause is enforceable. On the other hand, the bankruptcy courts may enforce a ROFO against an Offeror subject to an Insolvency Proceeding, as long as the ROFO applies to Transfers generally, not just Transfers through Insolvency Proceedings. The IT Group v. The Shaw Group Inc. (In re The IT Group, Inc., Co.), 302 B.R. 483 (D.C. Del. 2003). 26. Offeree will want the ROFO to continue to apply to all future possible Transfers of Offeror’s Interest. Offeror will want to limit the ROFO by having it go away permanently in as many circumstances as possible. This paragraph represents Offeror’s “wish list.” Offeree will not necessarily agree to any or all of these items. The parties might compromise by saying that if certain of these events occur, the ROFO is suspended for a certain period.

26 NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 27. This allows Offeree to “fl ip” Offeror’s Interest, with or without Offeree’s Interest, with no need to give a new ROFO Notice. 28. For any dispute on the ROFO, the parties will typically choose Arbitration. That Arbitration should probably take the form of an expedited “baseball” Arbitration with an experienced commercial real estate attorney acting as arbitrator and required to select only either Landlord’s or Tenant’s “last and fi nal” proposal for resolution of the disagreement (“baseball” arbitration). 29. Ordinarily the parties to a purchase and sale agreement will not want to arbitrate disputes. 30. Consider making time is of the essence 30 days after the required closing date. 31. This prohibition seeks to prevent Offeror from “gaming the system” by coming up with a sale that Offeree or purchaser cannot match or could not reasonably match. What if Offeror wants to undertake a more complicated transaction in good faith? For example, Offeror might stick around after the sale to fi nish capital improvements or help with re-leasing. 32. If Offeree receives a ROFO Notice, Offeree may have no interest in buying, but may want to “fl ip” the deal to someone else, either to assure a friendly counterparty or to make a profi t. The timelines in a typical ROFO make that process diffi cult or impossible. The ROFO Contract should, perhaps, at least allow it. And, as suggested elsewhere, perhaps Offeree should have the right to an extension of time by paying for it.

Copyright © 2014 Joshua Stein, www.joshuastein.com. All rights reserved. Permission is granted only to adapt and use for transactions, provided that the user forwards to the author any comments, improvements, suggestions or cor- rections. For acknowledgments of assistance, please see the accompanying article by the author. Blame only the author for any errors, excessive complexity or length, or missed insights.

NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 27 Options and Related Rights and the Rule Against Perpetuities* By John C. Murray

Introduction ies, many courts have held that the In Martin v. Prairie Rod and Gun 8 If they are not careful, parties to rule against perpetuities applies to Club, the Illinois appellate court legal documents creating or transfer- both commercial and non-commercial stated that: 4 Also, the majority of courts ring real property interests (includ- options. We fi nd the distinction have refused to adopt the “wait and ing leases and purchase agreements) between an option and a see” approach regarding the vesting who wish to incorporate options to pre-emptive right of fi rst of options and related rights.5 purchase (as well as rights of fi rst refusal insignifi cant as refusal or similar rights) can create Rights of First Refusal— both have the effect of fet- unwanted and unanticipated prob- tering the marketability of The Majority View lems when negotiating and drafting property with the differ- such provisions. Options and related A majority of jurisdictions fi nd ence being only the degree rights should never be taken lightly, that rights of fi rst refusal are interests of restriction. Generally and should be clearly and compre- in property and not mere contract the rule against perpetuit- hensively negotiated and drafted to rights, and recognize that these in- ies has been applied to refl ect the intentions and expectations terests are subject to the rule against pre-emptive rights of fi rst of the parties, including how and perpetuities. For example, the Dela- refusal as well as to the when the interest vests. ware Supreme Court, in Stuart Kings- typical option.9 ton, Inc. v. Robinson,6 stated the scope The common-law rule against of the rule’s application to rights of perpetuities provides that an inter- Rights of First Refusal— fi rst refusal: est is void for remoteness if by any The Minority View possibility an interest cannot vest or Although the rule is most Courts adopting the minority fail within the twenty-one-year limit often applied in the con- view postulate that an interest should after some life in being at the creation struction of testamentary not be subject to the rule against of the interest.1 Traditionally, the rule devices, it applies equally perpetuities unless the interest consti- against perpetuities sought to prohib- to rights of fi rst refusal, tutes a restraint on alienation.10 Based it remote vesting—that is, an owner’s also known as preemp- on this distinction, the minority right to control title to property tive rights, to acquire view contends that, unlike ordinary indefi nitely. The underlying objective interests in land. Despite options, at least some rights of fi rst of the rule is to protect the alienability the view of some courts refusal do not restrain alienation: 2 that preemptive rights of property. An option creates in the are merely contract rights optionee a power to com- Options to Purchase and and not direct interests in pel the owner of property property, a vast majority Related Rights to sell it at a stipulated of courts and commenta- The rule against perpetuities price whether or not he tors view such rights as is clearly an issue with respect to is willing to part with equitable claims suffi cient options and related rights; as such ownership. A pre-emption to support an action for rights are generally subject to the does not give to the pre- 3 specifi c performance if the rule against perpetuities. If an op- emptioner the power property owner attempts tion to purchase does not comply to compel an unwilling to sell to someone other with the rule against perpetuities, a owner to sell; it merely than the owner of the right court could hold that the interest is requires the owner, when of fi rst refusal. Because the invalid because the right could be and if he decides to sell, to holder of the right of fi rst exercised (that is, become vested) at offer the property fi rst to refusal acquires merely a time remote to the right’s acquisi- the person entitled to the an equitable interest, it tion—especially if, for example, an pre-emption, at the stipu- remains inchoate until the option to purchase granted the holder lated price. Upon receiving owner decides to sell thus an unlimited right to buy the owner’s such an offer, the pre-emp- triggering the right of fi rst land at any time. Although some tioner may elect whether refusal.7 commentators have proposed that he will buy. If he decides states exempt commercial transac- not to buy, then the owner tions from the rule against perpetuit-

28 NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 of the property may sell to Perpetuities is to facilitate perpetuities, because the right of anyone.11 the alienability of property refusal contained express language [citations omitted]. Con- naming a father and son as holders Dissenters have harshly criticized trary to the minority view, of right of fi rst refusal and therefore the minority position.12 For example, however, the Rule Against was personal to the father and son in Ferrero Construction Co. v. Dennis Perpetuities is not simply and would terminate upon the death Rourke Corp.,13 the Maryland Court a rule against restraints on of either. The court reasoned that of Appeals held that the rule against alienation [citation omit- the agreement did not specifi cally perpetuities is implicated by a right ted]. Instead, the Rule provide for the assignability or trans- of fi rst refusal to purchase real estate, Against Perpetuities is ferability of the right of fi rst refusal, because lawmakers designed the rule concerned with restrictions stating that “[c]learly, the [contract not only to facilitate the alienability of that render title uncertain provision] did not allow the right to property but also to prevent restric- [citation omitted]. Without be conveyed, by devise or sale or in tions that render title to land uncer- the Rule Against Perpetu- any matter, to anyone.”16 tain. The court stated that: ities, it would be possible However, this view was harshly Even assuming the validity at some distant point for a criticized in First Illinois National Bank of the distinction between remotely vesting future in- v. Knapp17 where the court stated that: rights of fi rst refusal and terest to divest the current other options, the minority owner’s estate. Because To the extent that Marcy view errs in assuming that of this threat of divest- would dictate that the an interest should not be ment, the owner might be right of fi rst refusal in this subject to the Rule unless deterred from making the case was not assignable, the interest constitutes a most effective use of the we choose not to follow restraint on alienation. property, even if he never that decision. The court in In making this assump- has any desire to alienate Marcy fails to explain how tion, courts adopting the his estate. Thus, by void- the right of fi rst refusal minority view confuse the ing certain remotely vest- was personal to plaintiffs Rule Against Perpetuit- ing future interests, the or how defendants’ ability ies with the rule against Rule Against Perpetuities to choose with whom they unreasonable restraints eliminates this deterrent contract would be thwart- on alienation. Admittedly, both for owners who wish ed if plaintiffs assigned both rules belong to “a to alienate their estates their right of fi rst refusal to family of related rules that and for owners who have a third party. We know of regulate the devolution of no intention of ever doing no case which holds that a wealth from generation to so [citation omitted]. Con- contract must specifi cally generation” [citation omit- sequently, from the stand- provide for the assignabil- ted]. These two rules are point of the Rule Against ity of an otherwise assign- nonetheless distinct. The Perpetuities, it is irrelevant able contract right.18 Rule Against Perpetuities whether a particular future prevents property inter- interest imposes a light Statement of Parties’ Intention ests from vesting remotely burden, a heavy burden, It is obviously important to [citation omitted]. The or no burden at all upon clearly state the intention of the par- rule against restraints on the alienability of property ties with regard to how and when an alienation, on the other [citation omitted].14 interest in an option or related right hand, prevents grantors vests to avoid application of the rule from unreasonably depriv- Assignment of Right of First against perpetuities. For example, in ing grantees of the power Refusal Fitzpatrick v. Mercantile-Safe Deposit to alienate their estates 19 With respect to the application of & Trust Co., the Maryland Court of [citations omitted]. the rule against perpetuities in con- Appeals held that the rule against The policies underlying nection with the assignment or trans- perpetuities does not invalidate “in- these two rules are like- ferability of a right of fi rst refusal, the terests which last too long, but inter- wise not identical. Obvi- case of Marcy v. Markiewicz is instruc- ests which vest too remotely; in other ously, the rule against tive.15 In this case, which involved an words the [r]ule is not concerned restraints on alienation action for a breach of an alleged right with the duration of estates, but the 20 serves to facilitate the of fi rst refusal, the Illinois appellate time of their vesting.” alienability of property. court held that the trial court erred in The purposes of the rule against Similarly, one of the pur- fi nding that the right of fi rst refusal perpetuities include the facilitation of poses of the Rule Against was void as violating the rule against

NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 29 alienation of property and the main- part of the leased prem- interests determined to violate the tenance of certainty of title. Where ises; or(b) to obtain a new common law rule.29 the language is ambiguous, courts are lease or an extension of In a New York Court of Appeals likely to rule in favor of upholding his former lease, then such decision, Bleecker Street Tenants Corp. the rule. See, e.g., Emerson v. Camp- option is effective, in ac- 21 v. Bleeker Jones LLC, the court held bell, in which the Delaware Chan- cordance with the terms of that the rule against perpetuities does cery Court stated that “If there be the limitation, even when not apply to options to renew leas- two constructions as to each of which it may continue for longer es.30 The Bleecker Street court reasoned there is doubt, one consistent and the than the maximum period “an option to renew, like a purchase other repugnant to the law, the former described in § 374 [Permis- option appurtenant to a lease, fur- will be adopted; but, if the meaning is sible Period under Rule 26 thers the policy goals of the rule clear, it must be adopted regardless of against Perpetuities]. against remote vesting.”31 The court its effect.”22 In Stuart Kingston, Inc. v. 23 The court in Ferrero Construction also noted that certain options appur- Robinson, the court stated that: Co. v. Dennis Rourke Corp.27 stated the tenant do not violate the rule against If there are two doubtful following with respect to exceptions perpetuities if the option “‘originates constructions of the mean- to the rule against perpetuities: in one of the lease provisions, is not exercisable after lease expiration, and ing of an instrument, one In the area of options, is incapable of separation from the consistent and the other courts in the 300 years lease.’”32 repugnant to the law, the since the High Court of former will be adopted, Chancery decided the The Bleecker Street decision may but if the meaning is clear Duke of Norfolk’s Case… be limited in its general applicabil- the rule must be observed have developed three ity because the court relied primarily since it is founded upon a exceptions to the Rule on a specifi c New York statute33 to sound principle of public Against Perpetuities. The support its conclusion, and the case policy and must be rigidly Rule does not apply to a included a strong dissent and a con- enforced…. In projecting lessee’s option to renew a curring opinion that disagreed with the prospect of vesting lease…. It does not ap- much of the majority’s reasoning. But [i]t is not enough that the ply to a lessee’s option the Bleecker Street decision received future interests may, or to purchase all or part of strong support from another New even will in all probability, the leased premises…. York Supreme Court decision, Folio vest within the limits; it And it is inapplicable to House Inc. v. Barrister Realty Partners.34 must necessarily so vest…. a usufructuary’s option If there is any possibil- The case law in this area is very to extend the scope of an often fact-specifi c in this area. For ex- ity that the interest will easement or profi t…. All vest beyond the period of ample, in Kaiser-Haidri v. Battery Place options may violate the Green, LLC,35 the New York Supreme the rule, then it is void ab Rule Against Perpetuit- initio.24 Court, Appellate Division, stated as ies. Nevertheless, courts follows: Recognized Exceptions have justifi ed these three narrow exceptions because The parties agree that, Courts (and statutes) have often these three types of op- as to that branch of [the carved out specifi c exceptions to the tions yield social benefi ts defendant’s] motion which rule against perpetuities when op- that offset the consequenc- was with respect to the tions to purchase and similar rights es of that violation. [Cita- plaintiffs’ fi rst and second with respect to real property are tions omitted.]28 causes of action, there involved.25 are no questions of fact In Atlantic Richfi eld Co. v. Whit- Options contained in leases of to be resolved and that ing Oil and Gas Corp., which involved the only issue is a ques- real estate are most often exempted a 25-year option to repurchase an from the rule. For example, Section tion of law with respect to interest in real estate, the Colorado whether the rule against 395 of the RESTATEMENT OF PROPERTY Supreme Court held that because perpetuities is applicable (FIRST) states as follows: the option was fully revocable at any to the subject purchase When a lease limits in fa- time and for any reason and posed agreement. While EPTL vor of the lessee an option no practical restraint on alienation, 9–1.1(b) applies to com- exercisable at a time not it did not violate the common law mercial options contained more remote than the end rule against perpetuities and was not in purchase contracts (see of the lessee’s term(a) to subject to the Colorado perpetuities Symphony Space v. Per- purchase the whole or any statute, which allows reformation of gola Prop., 88 N.Y.2d at

30 NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 477–478, 646 N.Y.S.2d 641, State Statutes Affecting Rule against perpetuities.42 The Illinois 669 N.E.2d 799; Dimon Against Perpetuities Appellate Court in this case de- v. Starr, 299 A.D.2d 313, Several states have abolished or scribed the rule against perpetuities 749 N.Y.S.2d 78; compare amended the rule against perpetuit- in effect in Illinois as follows: Bleecker St. Tenants Corp. ies or have pending legislation that In 1969, the Illinois legisla- v. Bleecker Jones LLC, 16 would eliminate or amend the rule ture passed an act known N.Y.3d 272, 920 N.Y.S.2d (including greatly extending the time as the Statute Concerning 291, 945 N.E.2d 484 [rule period within which the right must Perpetuities (Act). Sec- against perpetuities does vest).37 In July 1990, the National tion 2 of the Act provides not apply to options to re- Conference of Commissioners on that the common-law rule new leases]), the Supreme Uniform State Laws approved and against perpetuities shall Court properly determined recommended the Uniform Statutory remain in full force and that it does not apply to a Rule Against Perpetuities (with 1990 effect except as modifi ed purchase agreement such Amendments) (“USRAP”) for enact- by the Act. Ill. Rev. Stat. as the one at bar. While ment in all the states.38 The USRAP 1971, ch. 30, par. 192 (now the purchase agreement validates non-vested interests that 765 ILCS 305/2 (West included language that would otherwise be void as violating 2004)). The common-law the agreement was to bind the common law rule if that interest rule against perpetuities and inure to the benefi t of actually vests within 90 years of its operates to prevent remote the successors and assigns creation39 Twenty-nine states, the Dis- vesting of contingent inter- of the plaintiffs and [the trict of Columbia, and the U.S. Virgin ests in property. Marcy v. defendant], there was no Islands have enacted the USRAP, Markiewicz, 233 Ill.App.3d intention that the parties’ and it is under consideration in New 801, 810, 175 Ill.Dec. 37, rights under the purchase York.40 599 N.E.2d 1051 (1992). Ac- agreement would last cording to the rule against indefi nitely since, even The USRAP is a model act, with the express purpose of eliminat- perpetuities, no interest though a closing date was in property is valid unless not specifi ed, the purchase ing the application of the common law rule against perpetuities going it vests within 21 years of agreement provided that a life or lives in being at time was of the essence forward with respect to nondonative transfers. The comment to Section 4 the time of the creation with respect to the plain- of the interest. Marcy, 233 tiffs’ duty to perform their of USRAP clearly indicates that the statutory rule against perpetuities re- Ill.App.3d at 810, 175 Ill. obligations (see Reynolds Dec. 37, 599 N.E.2d 1051. v. Gagen, 292 A.D.2d 310, quirements exclude options, rights of fi rst refusal, and related transactions When lives in being form 739 N.Y.S.2d 704; compare no part of the postponed Dimon v. Starr, 299 A.D.2d (unless they are of a donative nature, which is rare): period, the limit within 313, 749 N.Y.S.2d 78). The which an estate must vest purchase agreement also In line with long-standing is 21 years. Smith v. Renne, provided that the clos- scholarly commentary, 382 Ill. 26, 29, 46 N.E.2d ing of title would occur [Section 4(1)] excludes… 587 (1943). “It is also the after or concurrently with nonvested property rule that if by any possibil- compliance with certain interests and powers of ity the estate will not vest prerequisites set forth in appointment arising out within the time required the offering plan, which of a nondonative trans- by the rule the devise is was incorporated by refer- fer. The rationale for this void.” Renne, 382 Ill. at 29, ence and made a part of exclusion is that the Rule 46 N.E.2d 587. However, the purchase agreement. Against Perpetuities is “[n]o interest which is Moreover, the law pre- a wholly inappropriate vested at the time of the sumes a reasonable closing instrument of social policy creation of the interest is date where no closing date to use as a control over subject to the [r]ule.”43 is specifi ed (see Omar v. such arrangements. The Rozen, 55 A.D.3d 705, 867 period of the rule—a life in The court further stated that: N.Y.S.2d 458). Accord- being plus 21 years—is not We agree with the cases ingly, the Supreme Court suitable for nondonative of other states, that like properly granted [the transfers.41 restrictive covenants and defendant’s] motion…for common-law easements, summary judgment.36 In Illinois, statutory and case law has dealt specifi cally with the rule the covenant of assess- ments is not subject to the

NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 31 rule against perpetuities this particular case, under Illinois law Exhibit A because it is a present, an option to purchase a portion of not a future, interest in the surface estate contained in a deed Sample Assignment Clauses— property.44 of minerals was not subject to rule Right of First Refusal against perpetuities.50 Illinois courts generally have 1) Assignment. This right of fi rst refusal: (1) is not assignable by ruled that an option to purchase real Conclusion estate is subject to the rule against Grantees, except that each may perpetuities (with certain limited In those states where options assign it to the other; (2) shall not exceptions). In Warren v. Albrecht,45 and related rights are subject to the survive the deaths of both of the the Appellate Court of Illinois stated rule against perpetuities, drafting Grantees, or, if assigned by one as follows: around the probl em may be possible Grantee to the other, the death of to some extent. For example, it may the assignee; (3) shall terminate Interests subject to the rule be benefi cial to record the option or upon the fi ling of a petition in [against perpetuities] are related agreement, recite the statutory bankruptcy by or against Grant- contingent remainders, recording authority, and claim the ees or either of them; and (4) is executory interests (or de- priority of the statute with the same not exercisable by only one of vises), options to purchase language as set forth in the option the Grantees if such one Grantee land not incident to a lease or related agreement. The option or has not had the right of fi rst for years, and powers of related agreement also should be refusal assigned to him or her by appointment. Interests specifi c with respect to the rights and the other Grantee. Any assign- not subject to the rule are obligations of the parties and how, ment as permitted by the terms present interests in pos- when, and under what circumstances hereof shall not be effective un- session, reversions, vested the right holder may exercise or less and until notice thereof has remainders, possibilities of transfer the option or related right to been delivered to Grantor in the reverter, powers of termi- another party. The option or related manner specifi ed herein for the nation, charitable trusts, agreement further should state that it delivery of notices. and resulting trusts.46 lapses and ceases to constitute record 2) No Assignment of Right. The In Martin v. Prairie Rod & Gun notice in any event after a certain Refusal Right is personal to Club,47 the Appellate Court of Illinois date. In addition, as is common with Tenant and may not be assigned held that a preemptive right con- trusts, attorneys might consider by Tenant in connection with an tained in a recorded collateral agree- inserting a savings clause in the op- assignment of this Lease or oth- ment, which purported to allow the tion document or right of fi rst refusal erwise. The Refusal Right may vendors’ heirs to purchase a farm if affecting real property. Parties have not be exercised by anyone other the purchaser ever chose to sell, was used savings clauses with real estate than Tenant. Any attempted void because it violated the common- contracts to ensure that they cannot assignment of the Refusal Right law rule against perpetuities, since close beyond the perpetuities period, shall be of no effect and the Re- the preemptive right under the and an option agreement or right of fusal Right shall become forever agreement could remain contingent fi rst refusal likewise should be pro- null and void as of the date of ad infi nitum. The court found that the tected if the document clearly states the purported assignment. perpetuities rule exception pertaining that the right holder must exercise the to a preemptive right to purchase by a option or right of fi rst refusal within lessee during the term of a lease was the applicable time limit imposed by Exhibit B 51 not applicable, notwithstanding that the particular state rule. Sample Term-Limitation the vendors became lessees, because *Nothing contained in this Article is to Clauses—Right of First Refusal the preemptive right was not exer- be considered as the rendering of legal 1) Term. This Agreement and the cised by the vendors as lessees and advice for specifi c cases, and readers are the vendors’ heirs were not lessees.48 rights herein granted will expire responsible for obtaining such advice at midnight on the one hundred 49 In Arclar v. Gates, the court from their own legal counsel. This Article eightieth (180th) day after the stated that the only exceptions to the is intended for educational and informa- date of execution of this Agree- rule in Illinois were (i) an option to tional purposes only. The views and opin- ment by all parties. purchase land that is part of a long- ions expressed in this Article are solely term lease of that land, and (ii) an op- those of this Author, and do not necessar- 2) Term. This right of fi rst refusal tion to purchase an overlying surface ily refl ect the views, opinions, or policies shall be and remain in effect estate provided that the option was of this Author’s employer, First American from the date the same is execut- granted for the purpose of mining the Title Insurance Company. ed by the Grantors until the date mineral estate. The court held that in that is twenty (20) years after the date of death of the survivor of the Grantors.

32 NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 Endnotes draconian effect of this rule with the wait property for the original consideration); and see doctrine”). See generally William Fallschase Development Corp. v. Blakey, 696 1. See RESTATEMENT (FIRST) OF PROP. § 374 Berg, Jr., Long-Term Options and the Rule So.2d 833, 836-37 (Fla. Dist. Ct. App. 1997) (1944). Against Perpetuities—Part III, 37 CAL. L. (“[T]he fi rst refusal right here at issue The First Restatement of Property states: REV. 419 (1949); see also W. Barton Leach, was void ab initio because it violates the The maximum period allowed Perpetuities in a Nutshell, 51 HARV. L. REV. common-law rule against perpetuities.”). under the rule against perpetu- 638, 639 (1938); see also George T. Dunlap Park Station Ltd. P’ship, LLLP v. Bosse, ities is (a) lives of persons who III & Frederic G. Levin, Note, Options 378 Md. 122, 134 (2003) (“[T]he [r]ule are (i) in being at the com- and the Rule Against Perpetuities, 13 U. [against perpetuities] applies to an option mencement of such period, and FLA. L.R. 214 (1960); Annot., Independent contract to purchase land…and to a right (ii) neither so numerous nor so Option to Purchase Real Estate as Violating of fi rst refusal to purchase an interest in situated that evidence of their Rule Against Perpetuities or Restraints on property” (internal citation and quotation deaths is likely to be unreason- Alienation, 66 A.L.R. 3d 1294 (1975); 49 marks omitted)); Lake of the Woods Ass’n ably diffi cult to obtain; and (b) AM. JUR. 2D, Landlord and Tenant §159 v. McHugh, 238 Va. 1 (1989), 8-9 (rejecting twenty-one years; and (c) any (2006); 61 AM. JUR. 2D, Perpetuities and request to treat fi rst-refusal provision as period or periods of gestation Restraints on Alienation §6 (2002) (stating procedural right that could be saved by involved in the situation to that property interests tend to restrain the retroactive application of “wait and see” which the limitation applies. free alienability of property and interfere doctrine); Pathmark Stores, Inc. v. 3821 with its benefi cial use); 3 L. Simes & A. Associates, L.P., 663 A.2d 1189, 1191-92 2. See, e.g., Symphony Space, Inc. v. Pergola Smith, THE LAW OF FUTURE INTERESTS (Del. Ch.1995) (fi nding no distinction Props. Inc., 88 N.Y.2d 466, 475, 699 §1244 (3d ed.) (discussing rule against between rights of fi rst refusal and options N.E. 2d 799, 803, 646 N.Y.S.2d 641, 645 perpetuities with respect to option rights to purchase for application of rule against (1996) (noting that, both in their early and examining applicable case law). perpetuities). and modern forms, rules restricting future dispositions of property were 4. See, e.g., Symphony Space, Inc. v. Pergola 10. For examples of case law following the founded on “the principle that it is Props. Inc., 88 N.Y.2d 466, 475, 699 N.E. 2d minority view, see Continental Cablevision socially undesirable for property to be 799, 803, 646 N.Y.S.2d 641, 645 (1996) of New England, Inc. v. United Broad. Co., inalienable for an unreasonable period 5. See Id. at 468-69, 699 N.E. 2d at 804, 646 873 F.2d 717, 722, n. 10 (4th Cir. 1989) of time”); see also Otis Marshall Farms, N.Y.S.2d at 646: (“Of all options, a right of fi rst refusal is Inc. v. Snyder Constr. Co., 189 Misc.2d one of the least obnoxious to the policy The “wait and see” approach 784, 788, 735 N.Y.S.2d 374, 378-79, concerns of the rule.”); In re Wauka, Inc., to the Rule against Perpetuit- 2001 Slip Op. 21515 (N.Y. Civ. Ct. N.Y. 39 B.R. 734, 737 (N.D. Ga. 1984) (holding ies (EPTL 9-1.1)—an interest County 2001) (discussing evolution of that because right of fi rst refusal included is valid if it actually vests rule against perpetuities and noting its in sales contract and warranty deed was during the perpetuities period, intention “‘to ensure the productive use personal to individual holder of the right, irrespective of what might and development of property’ and allow it did not violate rule against perpetuities have happened—is rejected. the property to remain unfettered by and holder would be permitted to The law of New York is settled unknown or embarrassing impediments exercise that right); Selig v. State Highway that the validity of a provi- to alienability”); RESTATEMENT (THIRD) Admin., 861 A.2d 710, 724-26, 383 Md. sion under the Rule against OF PROP.: SERVITUDES § 3.3 (2000) (stating 655, 678-81 (Md. 2004) (holding that Perpetuities be judged by the that: “The rule against perpetuities was rule against perpetuities does not apply circumstances existing at the developed to curb excessive dead-hand to right of fi rst refusal in contract and time of the grant. Moreover, control of property retained in families deed where state statute mandates the language of EPTL 9-1.1 through intergenerational transfers”). applicable language); Park Station Limited itself that an interest is invalid Partnership, LLLP v. Bosse, 835 A.2d 3. See RESTATEMENT (THIRD) OF PROP.: “unless it must vest, if at all, 646, 656, 378 Md. 122, 138 (Md. 2003) SERVITUDES § 3.3 (2000) (“[u]nder the not later than twenty-one years (ruling that contract or other instrument, common law, options to purchase land after one or more lives in be- including right of fi rst refusal, “should are subject to the rule against remote ing.” EPTL 9-1.1 [b] precludes be interpreted if feasible to avoid the vesting”). See also Emerson v. Campbell, 32 a determination of the validity conclusion that it violates the Rule Del. Ch. 178, 188, 84 A.2d 148, 153 (Del. of an interest based upon what Against Perpetuities[.]”) (quoting Stewart Ch. 1951) (holding that “[o]ptions are actually occurs during the v. Tuli, 573 A.2d 109, 113, 82 Md. App. regarded as having the effect of creating perpetuities period. 726, 735-36 (Md. Ct. Spec. App. 1990). a future interest, depending upon the 6. Stuart Kingston Inc. v. Robinson, 596 A.2d contingency of the exercise of the option. 11. THOMAS E. ATKINSON ET AL., 6 AMERICAN 1378, 1384 (Del. 1991). If it is possible that the option might not LAW OF PROPERTY 507 (A. James Casner be exercised within the limits of the time 7. Id. at 1384 (citing L. Simes & A. Smith, The ed., 1952). allowed by the Rule Against Perpetuities, Law of Future Interests, § 1154, at 61 (2d ed. 12. See generally Heather M. Marshall, Note, the option is void. Since in this case no 1956); Ferrero Constr. Co. v. Dennis Rourke Instead of Asking “When,” Ask “How”: time is given for the expiration of the Corp., 311 Md. 560, 536 A.2d 1137, 1139 Why the Rule Against Perpetuities Should option, it is void as against the Rule (1988); Estate of Johnson v. Carr, 286 Ark. Not Apply to Rights of First Refusal, 44 369, 691 S.W.2d 161, 162 (1985); 5A Powell Against Perpetuities”). But see First NEW ENG. L. REV. 763 (2010) (arguing Apostolic Lutheran Church v. Bekkala, No. on Real Property, ¶ 771[2] (1987); Wilgus that Bortolotti v. Hayden, 449 Mass. 193, 252866, 2005 WL 2086137 (Mich. Ct. v. Salt Pond Inv. Co., 498 A.2d at 156. 866 N.E.2d 882 (2007), which held, as App. Aug. 30, 2005), at *2 (stating that 8. Martin v. Prairie Rod and Gun Club, 39 Ill. matter of fi rst impression, that rule where option did not specify particular App.3d 33 (Ill. App. 1976). against perpetuities did not bar right time period for exercise, but limited it by 9. Id. at 36-37. See also Webb v. Reames, 326 of fi rst refusal contained in deed, was reference to grantee’s ceasing to use the S.C. 444, 446-47 (S.C. Ct. App. 1997) decided correctly and that other courts property for specifi c purposes, option was (invalidating right of fi rst refusal in should follow the minority rule); Milton not an invalid restraint on alienation); deed where contingent, nonvested Friedman, FRIEDMAN ON LEASES §15:6.2 see Murphy Exploration & Production Co. interest attempted to reserve to holder (2004) (“A right of refusal in a lease does v. Sun Operating Limited Partnership, 747 of preemptive right, i.e., the grantor, not violate the Rule Against Perpetuities, So.2d 260, 265 (Miss. 1999) (“Mississippi, a perpetual option to repurchase the at least in commercial transactions. like many jurisdictions, has modifi ed the

NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 33 Where the right of fi rst refusal is in gross, defendants’ argument that…the rule 28. Id. at 567-68. that is, not connected with the lease, the against perpetuities applies in this case 29. See Atlantic Richfi eld Co. v. Whiting Oil and cases are divided on whether the Rule and invalidates the rights of plaintiffs. Gas Corp., 320 P.3d 1179, 1191 (Colo. 2014). Against Perpetuities is applicable.”). Assuming, without deciding, that the rule does apply, because the agreement was 30. See Bleecker Street Tenants Corp. v. Bleeker 13. Ferrero Constr. Co. v. Dennis Rourke Corp., Jones LLC, 16 N.Y.3d 272 (2011). 311 Md. 560, 573-76, 536 A.2d 1137, 1143- not made binding on plaintiffs’ heirs and 44 (1988). assigns the right of fi rst refusal would 31. Id. at 277. necessarily terminate upon the deaths 14. Id. at 573, 536 A.2d at 1143. See generally 32. Id. at 276, quoting Symphony Space, Inc. v. of plaintiffs. Therefore, the rule is not Pergola, supra n. 2, 88 N.Y.2d at 480. J. A. Bryant, Jr., Annot., Pre-emptive violated inasmuch as the right could not 33. See N.Y. Est. Powers & Trusts Law § Rights to Realty as Violation of Rule Against be exercised ‘later than twenty-one years 9–1.1(b) Perpetuities or Rule Concerning Restraints after one or more lives in being’”). on Alienation, 40 A.L.R. 3d 920 (1971); 34. See Folio House Inc. v. Barrister Realty 25. See, e.g., Symphony Space, Inc. v. Pergola Richard E. Macey, Comment, Rule Against Partners, 927 N.Y.S.2d 816 (Table), 2011 Properties, Inc., supra n. 2, 88 N.Y.2d at Perpetuities: Interests Subject to the Rule: WL 1467646 (N.Y. Sup., March 21, 2011), 480 (“Generally, an option to purchase Option Contracts: Preemptive Rights, at *1 and *3 (stating that “the underlying land that originates in one of the lease 28 CORNELL L. Q. 121 (1942); Joshua complaint, based upon a claim that provisions, is not exercisable after lease Stein, It Seemed Like a Good Idea at the renewal option provisions in this expiration, and is incapable of separation Time: Rights of Offer and First Refusal, 30 commercial lease violates the rule against from the lease is valid even though NO. 2 PRAC. REAL EST. LAW. 43 (March perpetuities, simply cannot stand, and the holder’s interest may vest beyond 2014) (explaining in detail the practical that “The Court of Appeals ruling [in the perpetuities period.”); Arclar Co. v. and legal aspects of rights of fi rst offer Bleecker Street]…applies to all options to Gates, 17 F.Supp.2d 818, 822-23 (S.D. Ill. and rights of fi rst refusal, and offering renew leases, and a fortiori, to the lease in 1998) (“[T]he right to purchase surface negotiating and drafting suggestions); this particular case”). John C. Murray, Options and Related Rights rights is not subject to the rule against 35. See Kaiser-Haidri v. Battery Place Green, With Respect to Real Estate: An Update, perpetuities when the owner of the right LLC, 925 N.Y.S. 2d 557 (N.Y. App. Div. 47 REAL PROP. TR. & EST. L.J. 63 (Spring requires the surface in order to remove 2d Dept., 2011). See also RESTATEMENT 2012) (examining the characteristics that minerals already owned…. Courts have SERVITUDES § 3.3 (Rule Against differentiate options, rights of fi rst refusal, held that an option to purchase land Perpetuities Inapplicable) (“The rule and other related rights and describing is valid as part of a long-term lease of against perpetuities does not apply how these rights interact with each other that land.”); Warren v. Albrecht, 213 Ill. to servitudes or powers to create and with other law, including the statute App.3d 55 (Ill. App. Ct. 1991) (“Interests servitudes.”). Comment a. to this section of frauds, the rule against perpetuities, subject to the rule [against perpetuities] states that such interests “are immune and bankruptcy law, and including are contingent remainders, executory from invalidation under the rule against several form documents). interests (or devises), options to purchase land not incident to a lease for years, and perpetuities, even though they create 15. See Marcy v. Markiewicz, 233 Ill. App. 3d powers of appointment.”); III Lounge, specifi cally enforceable contingent rights 801, 599 N.E.2d 1051 (1st Dist. 1991). Inc. v. Gaines, 217 Neb. 466, 471-72 (Neb. to acquire land or interests in land in the 16. Id. at 810. 599 N.E.2d at 1057. 1984) (holding that, absent words of future. However, servitudes are subject to 17. 246 Ill.App.3d 152 (1993). express limitation, option to purchase the rules against restraints on alienation leased property at any time during term set forth in §§ 3.4 [Direct Restraints on 18. But see First Illinois National Bank v. Knapp, of lease was exempt from rule against Alienation] and 3.5 [Indirect Restraints 246 Ill.App.3d 152 (2nd Dist. 1993). See perpetuities and that because lease on Alienation and Irrational Servitudes].” generally Jonathon F. Mitchell, Comment: was extended upon same terms and But the authors acknowledge that Can a First Right of Refusal be Assigned? conditions as original lease, option to although the rule stated in this section is supra, 68 U. CHI. L. REV. at 996 (“The purchase contained in original lease was “supported by leading commentators” courts have not yet devised a coherent extended for additional term of lease); El and “recent legislation,” it is still framework for deciding when a right Paso Production Co. v. PWG Partnership, “contrary to a few recent cases and the of fi rst refusal can be assigned, and the 116 N.M. 583, 588-89 (N.M. 1993) majority of older decisions.” See generally varied contexts in which such rights arise (holding that option to purchase leased Jonathon M. Vecchi, Repulsed by RAP? greatly complicate the problem.”). See premises was exempt from rule against Renewal Options Are Singing a Different also Exhibit A attached hereto for sample perpetuities because court could “infer a Tune: Bleecker Street Tenants Corp. v. Bleeker clauses that address the ability of the reasonable time limit in the agreement”); Jones, LLC, 29 TOURO L. REV. 205 (2012) holder of a right of fi rst refusal to assign Citgo Petroleum Corp. v. Hopper, 245 Va. (analyzing court’s reasoning in Bleecker the right. 363, 365-66 (Va. 1993) (holding that rule Street for exempting all lease-renewal 19. See Fitzpatrick v. Mercantile-Safe Deposit & against perpetuities does not apply to “an options from rule against perpetuities); Trust Co., 220 Md. 534 (1959). option to purchase that is appendant to a 61 AM. JUR. 2D, Perpetuities and Restraints 20. Id. at 541-42. commercial lease and exercisable during on Alienation §61 (2002) (“Options for the term of the lease”). But see First renewal in leases are generally held to be 21. Supra n. 3, 32 Del. Ch. 178 (Del.Ch. 1951). Huntington National Bank v. Gideon-Broh valid even though the covenant may be 22. Id. at 191. Realty Co., 139 W.Va. 130, 148 (W.Va. 1953) for perpetual renewal.”). 23. Supra n. 6, 596 A.2d 1378 (Del. 1991). (“There is…no difference in principle 36. Id. at 560. between an option in a lease that permits 24. Id. at 1383 (citations and internal 37. See, e.g., COLO. REV. STAT. §15-11-1102.5 or may permit the remote vesting of title quotation marks omitted). See also (2001) (providing that under Colorado to real property and an option contained Curtis v. Maryland Baptist Union Ass’n, law a nonvested property interest is in any other document which would 176 Md. 430, 438 (1939) (“[T]he word invalid unless it either vests or terminates produce the same result”). vest as used in the law of property within 1,000 years after its creation); S.C. signifi es the fi xation of a present right 26. Section 395 (Option Limited in Favor of CODE ANN. §27-6-20 (1987) (providing to the immediate or future enjoyment a Lessee) of the RESTATEMENT (FIRST) OF that a nonvested property interest is of property. [Internal quotations and PROPERTY (1944; Database updated June invalid unless “(1) when the interest is citation omitted.]); Bloomer v. Phillips, 2014). created, it is certain to vest or terminate 562 N.Y.S.2d 840, 842 (N.Y. App. Div. 27. Supra n. 13, 311 Md. 560 (Md. 1988). no later than twenty-one years after the 1990) (“[W]e note our disagreement with death of an individual then alive; or (2)

34 NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 the interest either vests or terminates within ninety years after its creation. Joel Sachs Receives 25 Year Continuing Legal The rule has been abolished by statute in Alaska, Idaho, New Jersey, Pennsylvania, Education Award From the New York State Kentucky, and South Dakota. 38. UNIFORM STATUTORY RULE AGAINST Bar Association PERPETUITIES (With 1990 Amendments) (“USRAP”). Joel H. Sachs, senior counsel at the White 39. Id. (“USRAP”). Section 1(a) of the USRAP Plains law fi rm of Keane & Beane, P.C. and a states as follows: former Chair of both the Real Property Law a) [Validity of Nonvested Property Section and the Environmental Law Section of Interest.] A nonvested property the New York State Bar Association, recently interest is invalid unless: received an award from the New York State Bar (1) when the interest is created, it is certain to vest or terminate Association based upon his efforts to further no later than 21 years after the Continuing Legal Education programs for attor- death of an individual then neys throughout the State of New York over the alive; or past 25 years. The award presented to Mr. Sachs (2) the interest either vests or in Saratoga Springs, New York recognized Mr. terminates within 90 years after its creation. Sachs’ signifi cant contributions to the planning 40. The USRAP has been enacted in the and implementing of Continuing Legal Educa- following jurisdictions: Alabama, Joel Sachs receiving his award tion programs which are available to thousands Alaska, Arizona, Arkansas, California, of recognition from Deborah of attorneys throughout the State of New York. Colorado, Connecticut, Florida, Georgia, Scalise, CLE Committee Chair, The award was presented to Mr. Sachs by Hawaii, Indiana, Kansas, Massachusetts, for his 28 years of service on Minnesota, Montana, Nebraska, Nevada, the CLE Committee. Deborah Scalise, the Chairperson of the NYSBA New Jersey, New Mexico, North Carolina, Continuing Legal Education Committee. North Dakota, Oregon, South Carolina, South Dakota, Tennessee, Utah, Virginia, In addition to his affi liation with Keane & Beane, P.C., Mr. Sachs has also Washington, West Virginia, the District served as an Adjunct Professor at Pace Law School in White Plains for 35 of Columbia, and the U.S. Virgin Islands. years. He is also Town Attorney for the Town of Bedford, New York and Vil- Several of the foregoing states, however, have made substantial modifi cations or lage Attorney for the Village of Pleasantville, New York and has also served added major exceptions). The common as a member of the law rule with respect to the rule against House of Delegates perpetuities is presently in effect in New of the New York York and is set forth in N.Y. EST. POWERS State Bar Associa- & TRUSTS LAW § 9-1.1(b) (McKinney 2002): “No estate in property shall be valid tion. By Mr. Sachs’ unless it must vest, if at all, not later than own estimate, he twenty-one years after one or more lives has planned, writ- in being at the creation of the estate and any period of gestation involved.” But ten or spoken at the common law rule remains in effect over 200 continuing in only three states—Alabama, New legal education pro- York, and Texas. Three more states— grams sponsored Iowa, Mississippi and Oklahoma—have retained the common law rule but by the New York with the “wait-and-see” variation that State Bar Associa- determines whether an interest was tion over the past Joel Sachs at the CLE Committee Meeting, which was held on valid based on whether it actually vested 25 years. Friday, July 11 in Saratoga Springs, NY. within the common law period, rather than whether it had to do so regardless of the date of vesting. the agreement, it did not violate the rule the expiration date of a right of fi rst 41. UNIFORM STATUTORY RULE AGAINST against perpetuities). refusal. PERPETUITIES §4, cmt. A(1). U.L.A. 280 47. 39 Ill.App.3d at 33, 35-36 (3rd Dist. 1976). John C. (“Jack”) Murray is (2001). 48. Id. vice president and special counsel 42. 373 Ill. App. 3d 679 (Ill. App. 2nd Dist. 49. 17 F. Supp. 2d 818, 822-23 (S.D. Ill. 1998). 2007). See, e.g., In re County Treasurer and for First American Title Insurance ex Offi cio County Collector. 50. Id. Company, and handles transactional, 43. Id. at 698. 51. See Jesse Dukeminier, et al., PROPERTY 249 underwriting, corporate relation- (6th ed. 2006) (suggesting savings clause 44. Id. at 701. language for trusts); W. Barton Leach & ship and other responsibilities for 45. See Warren v. Albrecht, 213 Ill.App.3d 55 James K. Logan, Perpetuities: A Savings the company’s National Commercial (5th Dist. 1991). Clause to Avoid Violations of the Rule, 74 Services division. He is the author 46. Id. at 58. See also Cronin v. McCarthy, 264 HARV. L. REV. 1141 (1961) (setting forth and co-author of more than 200 suggested form of perpetuities savings Ill.App.3d 514 (1st Dist. 1994) (holding articles, manuals, chapters, texts and that because option right was personal clause). See also Exhibit B attached hereto and terminated on the death of a party to for sample savings clauses that address treatises.

NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 35 EB5: The Intersection of Real Estate and Immigration By S.H. Spencer Compton and Diane Schottenstein

There are many ways for foreign- path to citizenship because, to date, by the EB-5 construction project. This ers to get green cards to work in the that annual limit has never been use of Regional Centers was fi rst in- United States and numerous paths reached. In recent years, two revi- troduced as a pilot program in 1993, to citizenship. The rules are intricate, sions to the law have made the EB-5 and in 2003 President Bush made it a the options vary depending on the visa process a more traveled road to permanent feature.13 applicant’s national origin, and the citizenship. The fi rst provides that the How does the process work? cases tend to be fact sensitive. Unbe- minimum investment amount may be First, the Regional Center obtains knownst to many, the EB-5 Visa has reduced to $500,000 if the investment preapproval for its selected EB-5 become an intersection of real estate is made in a “Targeted Employment projects, then foreigners invest in that and immigration. More and more Area.”8 The United States Citizen & Regional Center. Regional Center cer- foreigners, primarily Chinese nation- Immigration Service (the “USCIS”) tifi cation arguably lends legitimacy als, but also investors from Russia, in essence defi nes Targeted Employ- that helps in marketing to foreign France, and Egypt are attaining citi- ment Area (“TEA”) as either (i) a nationals. These passive investments zenship through the EB-5 programs, rural area, or (ii) an area experienc- have been likened to those in a closed which have become the fi nancing ing unemployment of at least 150% end mutual fund: the Regional Center sources for an increasing number of of the national average rate.9 If the is a third party investment vehicle real estate projects. proposed new business location is which pools capital from multiple not in a TEA, the investor may gather EB-5 investors, then invests in vari- The EB-5 program was estab- the relevant publicly available state ous multimillion-dollar projects and lished in 1990 by the Immigration and or federal statistics and submit them charges an administrative fee for its Nationality Act, found at 8 U.S.C. § with its petition to the USCIS to have management services.14 1153 (b)(5), as a mechanism to encour- a new TEA determination made.10 As of Febru- age foreign investment in the United Increasingly, state business develop- ary 2012, there were 218 Regional States and to create new jobs for U.S ment groups are assisting in designat- Centers, predominately in California, 1 EB-5 stands for “employ- 15 Accord- workers. ing new areas as TEAs. Florida and Washington. ment-based 5th category,” one of ing to the USCIS website (uscis.gov) many categories on which to base a The other popular revision is the in early April 2014, there were 577 green card or citizenship application.2 modifi cation to the EB-5 program that Regional Centers.16 A Regional Cen- Initially, the foreign applicant had to allowed investment into Regional ter being listed on the website does create an entirely new commercial Centers. Initially, real estate was not indicate an endorsement by the enterprise to qualify for EB-5 status. considered inappropriate for an EB-5 USCIS. The EB-5 program has since evolved investment. After all, the construction The EB-5 program has been slow and expanded. Today, if a non-U.S. of a million dollar property typically to evolve. In 2005, a Government Ac- individual invests $1,000,000 in a would be fi nished within two years countability Offi ce report found that business that creates or preserves ten and would not create 10 sustainable investors were not utilizing the pro- jobs or more for U.S. workers (exclud- jobs. However, the modifi cation to gram because of “an onerous appli- ing the investor and his immediate the EB-5 program ameliorated this cation process; lengthy adjudication family),3 and the investor’s applica- concern. periods; and the suspension of pro- tion is approved, the investor and A “Regional Center” is defi ned cessing on over 900 EB-5 cases—some his/her dependents will be granted by the USCIS as “any economic of which date to 1995—precipitated conditional permanent residence.4 entity, public or private, which is by a change in the USCIS’s interpreta- After about two years, if the foreigner involved with the promotion of tion of regulations regarding fi nancial can demonstrate that her investment economic growth, improved re- qualifi cations.”17 has fulfi lled each of the EB-5 job cre- However, in 2011, gional productivity, job creation and ation requirements, the conditions on the USCIS began modifying the increased domestic capital invest- the visa will expire and the applicant program to foster an increase in the ment.”11 Investments within a Re- number of applicants.18 By the end will be granted permanent residence.5 gional Center allow foreign nationals of 2011, over 3,800 EB-5 applications Thereafter, in fi ve years, the applicant to count jobs created both directly had been fi led, compared to under can fi le for U.S. citizenship.6 and indirectly for purposes of meet- 800 applications in 2007.19 To put this Historically, approximately ing the 10 job creation requirement.12 in perspective, remember there are 10,000 EB-5 visas are allocated each For example, if a project is to build a about 10,000 EB-5 visas available each year to foreigners worldwide;7 how- hotel, those hotel jobs subsequently year. ever, the program is an underutilized created can be counted as jobs created

36 NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 The demand for EB-5 money ing $11 million in administrative fees 11. Id. at (e)(ii). became more popular because of the from more than 250 investors, most 12. Id. at (j)(4)(iii). 22 ongoing recession and commercial of whom were Chinese nationals. 13. President Signs Basic Pilot Extension and banks’ continuing hesitancy to make Believing it was a way to get green Temporary Funding Measure, 80 NO. 47 construction loans. In addition, Dodd cards through the EB-5 immigrant Interpreter Releases 1675, 1675 (Dec. 15, 2003). Frank has put many more restrictions investor program, foreign investors on bank lending, causing developers were allegedly duped into purchas- 14. What to Consider When Selecting a Regional Center, IMMIG RATION DAILY, Jul. 11, 2012, to seek alternative funding sources. ing interests in a company known http://www.ilw.com/articles/2012,0821- Regional Centers are an attractive as “a Chicago Convention Center” eb5investors.shtm. capital provider: they can be more (ACCC) to fi nance the construction 15. Christopher Peng, The EB-5 Visa Market fl exible and offer more reasonable of a hotel/conference center near in China (May 21, 2014), http://www. terms than commercial banks be- Chicago’s O’Hare Airport. The project penglaw.com/eb-5-regional-center-issues. cause their primary objective is not to was to be built on a site once occu- 16. Field Offi ces, http://www.uscis.gov/ make a profi t but rather to safeguard pied by Sethi’s family budget hotel, about-us/fi nd-uscis-offi ce/fi eld-offi ces (follow link and click on the Field Offi ce principal and create jobs which lead where rooms cost as little as $33 a Locator Map graphic). to the issuance of the coveted visa. Al- night and there were weeds at the 17. U.S. Gov’t Accountability Offi ce, GAO- though EB-5 money is used for manu- bottom of an empty swimming pool, 05-256, Small Number of Participants facturing and other projects, real according to the Chicago Tribune.23 In Attributed to Pending Regulations and estate transactions are favored since March 2014, the United States District Other Factors 3 (2005). they involve a tangible collateral asset Court for the Northern District of Illi- 18. Patrick McGeehand & Kirk Semple, Rules and thus are perceived by investors as nois Eastern Division issued the fi nal Stretched as Green Cards Go to Investors, more secure. EB-5 fi nancing has been judgment in this case.24 ACCC con- N.Y. TIMES, Dec. 18, 2011, http://www. nytimes.com/2011/12/19/nyregion/ successfully employed in the con- ducted a fraudulent offering target- new-york-developers-take-advantage-of- struction of numerous hotels, medical ing the EB-5 Immigrant Investors.25 fi nancing-for-visas-program.html?_r=2&. facilities, charter schools, and govern- The judgment included $3.9 million 19. Id. ment infrastructure projects through- civil penalties including $1.45 million 20. Eliot Brown, Towers Rise on EB-5 Funds, out the country. In particular, EB-5 against ACCC, $1.45 million against THE WALL STREET JOURNAL, May 27, 2013, money has been used in connection the regional center entity, and $1 mil- http://online.wsj.com/news/articles/SB with many larger prominent New lion against Sethi individually.26 100014241278873241255045785093824460 57460. York City projects such as the Barclay In conclusion, although some 21. SEC v. Chicago Convention Ctr., LLC, 961 Center in Brooklyn and Durst’s Bank may fi nd the EB-5 program problem- F. Supp. 2d 905, 907 (N.D. Ill. 2013). of America Project at Bryant Park.20 It atic, it has been a source of funds for 22. Id. is contemplated that EB-5 money will many valuable and important proj- be involved in the development of 23. Antonio Olivo, Hotel Proposal Illustrates ects. Its future growth will depend Promise and Peril of Investment Program, part of the Penn Yards project. to some extent on both the economic CHICAGO TRIBUNE, Jul. 15, 2012, http:// articles.chicagotribune.com/2012-07-15/ Not surprisingly, a cottage situation in the United States and news/ct-met-china-investment-visas- industry has grown up around the overseas. Certainly, it is an example sethi-sidebar-20120715_1_eb-5-hotel- EB-5 program as it requires numer- of how local real estate has gone proposal-foreign-investors. ous experts. To name a few, there are global. Who knew real estate lawyers 24. SEC v. Chicago Convention Ctr., LLC, 961 migration consultants who specialize would have to pay attention to im- F. Supp. 2d 905, 907 (N.D. Ill. 2013). in marketing to off-shore agents; mi- migration law? 25. Id. gration agents/brokers who procure 26. SEC v. Chicago Convention Ctr., LLC, Litigation Release No. 22945, (Mar. 19, investors; immigration, corporate Endnotes and real estate attorneys who struc- 2014). ture and consummate the deals; and 1. 8 U.S.C. § 1153 (b)(5) (2006). economists who do the job analysis 2. Id. S.H. Spencer Compton is a and prepare the economic reports. 3. Id. at (b)(5)(A), (C). Vice President and Special Counsel 4. Id. at § 1186b (a)(1) (2002). at First American Title Insurance Although the EB-5 program has 5. Id. at (c)(1), (d). Company. He is also Senior Counsel had many good results, there also 6. 8 U.S.C. § 1427(a) (2006). to First American’s Eagle 9 Coopera- have been disappointments and fraud tive Apartment Insurance Division, claims associated with the program. 7. U.S. Gov’t Accountability Offi ce, GAO- 05-256, Small Number of Participants and Senior Vice President at First One such example is the Chicago Attributed to Pending Regulations and 21 American Exchange Company. Mr. Convention Center case. In Febru- Other Factors 2 (2005). Compton is the Budget Offi cer of ary, 2013, the Securities and Exchange 8. Id. at 1. the New York State Bar Associa- Commission (SEC) charged Anshoo 9. 8 CFR § 204.6(e) (2011). tion Real Property Law Section. He R. Sethi with fraudulently selling over has lectured and published articles $145 million in securities and collect- 10. Id. at (j)(6).

NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 37 about commercial real estate law and nationally known law fi rms Cahill Reprinted with permission from the practice as well as title insurance, Gordon & Reindel LLP and Seward July 2014 issue of The Practical Real UCC insurance and1031 exchanges. & Kissel LLP, as well as the New Estate Lawyer, copyright ALI CLE. Prior to joining First American Title, York City real estate law fi rm Gold- he was a practicing real estate attor- berg Weprin Finkel Goldstein, LLP. Nothing contained in this article is ney, with an emphasis on commer- She received her B.S. from Cornell to be considered as the rendering of legal cial leasing and fi nancing transac- University and her J.D and LL.M. in advice for specifi c cases, and readers are tions, for eleven years in New York Taxation from New York University responsible for obtaining such advice City. School of Law. She is admitted to from their own legal counsel. This article the bar in New York, New Jersey, is intended for educational and informa- Diane Schottenstein has been and Florida. Currently she is mem- tional purposes only. The views and opin- practicing law in New York City for ber of the City Bar Association’s ions expressed in this article are solely over twenty years. Diane has experi- Real Property Law Committee and those of the authors, and do not necessar- ence in leasing, fi nancing, and the the Small Law Firm Committee. ily refl ect the views, opinions, or policies acquiring and selling of real estate. She also teaches a CLE program on of one author’s employer, First American Before embarking on solo prac- negotiating a commercial lease for Title Insurance Company. tice Diane was associated with the the National Law Institute.

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38 NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 Miller-Francis: A Disturbance in the Force By Adam Leitman Bailey and Dov Treiman

When the Empire destroyed notice that the element of bona fi des Hard Cases the planet Alderaan in Star Wars IV, was missing: (i) non-standard prac- Hard cases make bad law.6 The Obi-Wan Kenobi sensed “a great tices or unconventional methods used facts in Miller-Francis are very hard. disturbance in the Force, as if millions at a real estate closing; and (ii) suspi- For some trial judges, the two-part 4 of voices suddenly cried out in terror, cious aspects of the transaction. inquiry of Miller-Francis will likely and were suddenly silenced.” When fi nd application to vastly more the Appellate Division, First Depart- Miller-Francis Facts benign facts in innocent workaday ment, decided Miller-Francis v. Smith- transactions. Some will downgrade While the lender was probably Jackson, there was a great disturbance a requirement to be on guard for not aware of the transaction’s earlier in the Force known as stability in real outrageous irregularities to generally unsavory history, there was enough estate transactions, specifi cally the mandating detailed inquiry, even on 1 at the closing to alert the encum- enforceability of mortgages. ordinary facts. Even allowing Miller- brancer something was amiss. Francis prophylactic virtues, more The Virtue of Stability The borrower fi rst signed the cases must establish the threshold ex- mortgage application at the closing citing a prudent lender’s suspicions. In Holy Properties Ltd., L.P. v. Ken- and made statements there that he neth Cole Productions, Inc., the Court had no intention of buying the prop- of Appeals wrote: Earlier Rumblings erty and did not have enough money Parties who engage in to pay a mortgage. The lender’s While Miller-Francis comes from transactions based on representative never examined the the idea of the “reasonably prudent prevailing law must be borrower’s paystubs, tax returns, or lender” or the “reasonably prudent 7 able to rely on the stabil- credit history before approving his encumbrancer,” Miller-Francis makes ity of such precedents. In application. Further, the lender knew the lender’s obligations under this business transactions, par- the property was patently over- doctrine more pro-active than do any ticularly, the certainty of appraised. The court found that the earlier standards. Consumer advo- settled rules is often more lender should have inquired further cates would claim Miller-Francis to be important than whether about the sale’s and loan’s legitimacy, a logical extension of the earlier hold- the established rule is bet- writing: ings; those favoring stability in real ter than another or even estate would claim it has gone too far. The rights of an encum- whether it is the “correct” brancer for value are pro- While Miller-Francis cites to rule. This is perhaps true 8 tected “unless it appears Fleming-Jackson v. Fleming, for the in real property more than that [the encumbrancer] idea that notice of fraud voids the any other area of the law, had previous notice of the encumbrancer’s bona fi des, Fleming where established prec- fraudulent intent of [its] itself did not void the encumbrance. edents are not lightly to be immediate grantor, or of Miller-Francis introduces the idea of set aside.2 the fraud rendering void constructive notice without citation, 9 Miller-Francis disregards this the title of such grantor.” A and then cites to MERS v. Rambaran, dictum. Under previous law, courts mortgagee will be charged where the lender had actual pos- nullifi ed mortgages written in favor with constructive notice session of mutually contradictory of a mortgagee based on the mort- if it is “aware of facts that documents. MERS required inquiry gagee’s notice of something amiss in would lead a reasonable, when there was actual knowledge of a the transaction. Mortgagees enforcing prudent lender to make contradiction in the deal rather than their mortgages had only to establish inquiries of the circum- mere “constructive notice” as in Mill- the three elements of a “bona fi de en- stances of the transaction er-Francis when the deal looks odd, cumbrancer for value”: (1) bona fi des; at issue.” If a “reasonable but has nothing explicitly crooked on 10 (2) an encumbrance; and (3) value.3 inquiry” would reveal its face. Funding transactions automati- some evidence of fraud, Constructive notice does previous- cally made them encumbrancers for then failure to “make some ly appear in cases like 89 Pine Hollow value. Bona fi des had been nearly as investigation” will divest Rd. Realty Corp. v. American Tax Fund, automatic. Miller-Francis found two the mortgagee of bona fi de where the presence of an outstanding factors that alone or together would encumbrancer status (cita- lis pendens impugned the purchaser’s 5 put an encumbrancer on constructive tions omitted). bona fi des.11 Unlike the “construc-

NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 39 tive notice” that Miller-Francis fi nds paystubs, tax returns, and credit is hard to determine whether the from things like failure to examine history, an inquiry into the dog that encumbrancer had other information pay stubs, by law, a lis pendens puts failed to bark.18 calling the “president’s” credentials the world on constructive notice of a into suspicion or whether the court is In attempting to draw guidance cloud on title. This constructive notice casting a duty on the encumbrancer from the stare decisis, we have to be is a pure common law development, to effect such a challenge on its careful of such cases as Thomas v. and regards entirely private, that is to own.22 The latter would be greater LaSalle Bank, appearing to hold that say, unrecorded, documents.12 precedential support for Miller-Fran- the mortgage can be invalidated for cis, but certainly not direct support as For Miller-Francis, “reasonably the mortgagee’s failure to abide by its it is a question of checking corporate prudent encumbrancer” incorpo- duty of inquiry, without stating what credentials rather than whether a rates not only “knew or should have in the record that gave rise to that so-called purchaser is really buying known,” but also “should have duty.19 More than a lack of recitation 13 the property for which he is giving wanted to know.” Similarly, not of the record, Thomas is on a motion a mortgage. In short, nothing in the reciting its facts, Booth v. Ameriquest to dismiss for failure to state a cause previous stare decisis gives genuine Mtg. Co. rules that if “a purchaser of action rather than after a trial or prior indication of the route Miller- or encumbrancer (who) knows facts trial-equivalent like a motion for Francis is going to take, at least when that would ‘excite the suspicion of an summary judgment. On such a mo- the mortgagor is a natural person, ordinarily prudent person’ and fails tion to dismiss, Thomas is completely especially not the cases to which to investigate, (then) the purchaser or in the mainstream, holding that “the Miller-Francis itself cites. Only two encumbrancer will be chargeable with complaint is to be afforded a liberal very rare and fact-specifi c cases have that knowledge which a reasonable construction, the facts alleged are held that the subject mortgage would inquiry, as suggested by the facts, presumed to be true, the plaintiff is be nullifi ed. would have revealed.”14 Just recently, afforded the benefi t of every favor- the Appellate Division, Second De- able inference, and the court is to partment, reaffi rmed this principle determine only whether the facts as Applying the Standards without setting forth its facts in Wil- alleged fi t within any cognizable legal As is often the case in a new prec- liams v. Mentore.15 theory.”20 Thus the case is allowed to edent with a new rule, Miller-Francis go to the discovery phase for what announces new standards without Reviewing all the historical it may turn out to be, rather than for equipping practitioners with a meth- reported cases revealed only two what it did turn out to be. odology for applying them. The court when the court nullifi ed a mortgage writes, “If an initial submission and as a result of a duty to investigate. In our other LaSalle Bank case, signing of a mortgage application at One, 89 Pine Hollow, supra, held a loan LaSalle Bank N.A. v. Ally, supra, the a real estate closing is not standard extinguishable for the seller’s obvi- validity of a mortgage hinged on practice, then defendants must explain ous fraud.16 LaSalle Bank N.A. v. Ally17 the authority of the so-called presi- why this unconventional method did held a loan inferior in lien priority dent of a corporation.21 The Second not excite Accredited’s suspicion that to a later recorded mortgage due to Department, fi nding that the bank some nefarious activity tainted the constructive notice of fraud. LaSalle had failed to make adequate inquiry transaction.”23 Bank N.A. was the fi rst case to hold of the signer’s actual authority from that a lender will be charged with the corporation, refused to accord to The court assumes, probably constructive notice if it is aware of the encumbrancer bona fi de status. correctly, that something took place facts that would lead a reasonable, Here, the court noted that the would at the Miller-Francis closing that was prudent lender to make inquiries of be encumbrancer “also failed to offer “not a standard practice” and an the circumstances of the transaction. evidence that it lacked knowledge of “unconventional method.” This begs However, these cases build on the facts that would lead a reasonable, two questions: Who determines what idea that one has as a matter of law prudent lender to make inquiries of is standard and what is conventional? constructive notice of the things in the circumstances of the transaction How is that determination made? the public record and cast a duty of at issue. Under the circumstances, inquiring into anomalies to which the (it) possessed facts that would lead Are the conventions and stan- public record points. This is vastly a prudent lender to investigate (the dards matters of fact to be proven at different from the Miller-Francis duty supposed president’s) purported trial, thus eluding summary judg- of inquiry into the purely private phe- corporate status and authority to act ment? Or are the conventions and nomena observed at the closing. on (the corporation’s) behalf, and it is standards common knowledge a undisputed that (the encumbrancer) Court can determine on its own by The Miller-Francis version of the did not do so.” Therefore, the court reference to whatever authority it standard of “reasonable inquiry” is made a rare fi nding that the subject wishes? Or are the conventions and based not only on what was present, mortgage would be inferior to a later standards things that can only be but indeed on what was absent—the recorded mortgage. Parsing this, it proven by expert witnesses? There

40 NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 are hundreds of things that take place is a housing crisis where, for the fi rst 9. 97 A.D.3d 802 (N.Y. App. Div 2d Dep’t in an ordinary mortgage closing that time in our nation’s history, sons and 2012). are completely within the cultural daughters can no longer afford to buy 10. Mortgage Elec. Registration Sys., Inc. v. expectations of the transactional com- a home that their mothers and fathers Rambaran, 97 A.D.3d 802, 804 (N.Y. App. Div. 2d Dep’t 2012), 949 N.Y.S.2d 694, 695. munity, but for an outsider are utterly were able to do under similar fi nan- 11. 96 A.D.3d 995, 998, 948 N.Y.S.2d 617, 620 unknown and unknowable except by cial constraints. The American dream (2d Dep’t 2012). experiencing enough closings to share of saving money to buy that fi rst 12. Id. the expectations that make these home has become more of a dream things “standard” or “conventional.” than a reality. Decisions like Miller- 13. See Miller-Francis v. Smith-Jackson, 113 A.D.3d 28, 35-36, 976 N.Y.S.2d 34, 39-40 Francis have the potential of further (1st Dep’t 2013). Miller-Francis mantles such cul- dampening home ownership. We call tural expectations with serious legal 14. 63 A.D.3d 769, 769, 881 N.Y.S.2d 152, 153 upon our higher courts to revisit this (2d Dep’t 2009). consequences, but does not provide rule of law to come to a more just the connective tissue that gets them 15. 115 A.D.3d 664, 664, 981 N.Y.S.2d 763, result. Or as Yoda famously stated to 764-65 (2d Dep’t 2014). from unspoken expectations to data a young Luke in The Empire Strikes that a litigator can argue, an author 16. The lender knew that seller acquired the Back: “Try not. Do. Or do not. There is property by quitclaim deed at less than can brief, or a judge can decide. no try.” a quarter of its appraised value and that Worse for the free fl ow of commerce lender’s title insurer initially expressed and its growth and expansion, Miller- objections to seller’s title. Also, there was Francis implies that now, even the Endnotes an outstanding notice of pendency on the subject property. most benign introduction of a new 1. 976 N.Y.S.2d 34 (1st Dep’t 2013). 17. 39 A.D.3d 597, 835 N.Y.S.2d 264 (2nd or creative way of handling things 2. 113 A.D.3d 28, 35, 976 N.Y.S.2d 34, 39 Dep’t 2007). means that novelty impugns valid- (1st Dep’t 2013) (expanding scope of 18. Arthur Conan Doyle, Silver Blaze. ity. It is as if Miller-Francis has taken constructive notice). a snapshot of the early 21st Century 3. 87 N.Y.2d 130, 661 N.E.2d 694, 637 19. 79 A.D.3d 1015, 913 N.Y.S.2d 742 (2nd Dep’t 2010). mortgage closing typical methodol- N.Y.S.2d 964 (1995) (citations omitted). 20. Id. at 1017, 913 N.Y.S.2d at 744. ogy and froze it for all eternity as the 4. E.g., LaSalle Bank N.A. v. Ally, 39 A.D.3d 597, 599-600, 835 N.Y.S.2d 264, 266-67 (2d 21. 39 A.D.3d at 600, 835 N.Y.S.2d at 267. standard of all validity. This, taken Dep’t 2007). together with the hazards Miller-Fran- 22. Id. at 600, 835 N.Y.S.2d at 267. 5. See Miller-Francis at 35, 976 N.Y.S.2d at 39. cis places before lenders, can have 23. 113 A.D.3d 28. 976 N.Y.S.2d 34, 39 (1st the effect of forcing banks into highly 6. Northern Sec. Co. v. U.S., 193 U.S. 197, 400 Dep’t 2013) (emphasis supplied). (1904). anti-consumer behavior. 7. 976 N.Y.S.2d at 35. These terms are Adam Leitman Bailey is the functionally synonymous. “Lender” founding partner and Dov Treiman Conclusion looks at the transaction from the point of view of being its loan and is a partner in Adam Leitman Bailey, If other courts follow Miller-Fran- “encumbrancer” from that of the P.C. Messieurs Bailey and Treiman cis, lenders most likely will become mortgage. However, “encumbrancer” can wish to thank New York Law School stingy in granting loans to the middle include a purchaser. third year student Zachary Wender class. Already existing in New York 8. 41 A.D.3d 175 (N.Y. App. Div. 1st Dep’t for his research assistance. 2007).

CHHECKECK US OUUTT OONN TTHEHE WEEBB hhttp://www.nysba.org/RealPropttp://www.nysba.org/RealProp

NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 41 BERGMAN ON MORTGAGE FORECLOSURES: Hidden Danger of the Misindexed Mortgage By Bruce J. Bergman

Even the Underlying the noted peril to the Endnotes perfect mort- holder of an improperly recorded 1. In re Duel, 594 F.3d 1073 (9th Cir. 2010); gage foreclo- mortgage is the rule that a bank- cert. den. 131 S. Ct. 85 (2010); In re sure case in ruptcy trustee is empowered to avoid O’Connor, 2010 WL 8354576 (Bkrtcy. New York is any transfer that a hypothetical bona W.D. Pa); In re Badagliacca, 403 B.R. 288 (W.D.N.Y. 2009); 11 U.S.C. §544(a). A nowadays an fi de purchaser for value could have bankruptcy court relies upon substantive ordeal. So a avoided pursuant to applicable law.1 state law to defi ne a bona fi de purchaser major fl aw Even though state substantive law for value of property which is the subject converts it into precludes one with actual knowledge of avoidance. In re Badagliacca, supra, citing In re. Mosello, 190 B.R. 165 (Bankr. a nightmare from being a bona fi de purchaser, S.D.N.Y. 1995). See also In re Lopez, 2012 or, worse, a bankruptcy law renders a trustee’s WL 566265 (Bkrtcy. E.D.N.Y.) but ruling fatally defective pursuit. One such actual knowledge of an encumbrance to the contrary based upon the facts. scenario is an exquisitely obscure irrelevant.2 This is typically a major 2. In re O’Connor 2010 WL 8354576 (Bkrtcy. principle emerging from the confl u- surprise for state law practitioners. W.D. Pa), citing U.S.C. §544(A)(3); Collier on Bankruptcy, par. 544.02[1] at 544-5. ence of a misindexed mortgage and Thus, when the actual knowledge See also In re Duel, 594 F.3d 1073 (9th Cir. a bankruptcy fi ling—exacerbated by afforded the trustee comes from 2010); cert. den., 131 S. Ct. 85 (2010); In re the inescapable actuality that bank- the bankruptcy schedules fi led by Badagliacca, 403 B.R. 288 (W.D.N.Y. 2009); ruptcy fi lings in the mortgage fore- the debtor, it is of no moment – the 11 U.S.C. §544(a). closure case are commonplace, if not trustee is still the equivalent of a 3. In re Duel, 594 F.3d 1073 (9th Cir. 2010); epidemic. bona fi de purchaser able to avoid the cert. den. 131 S. Ct. 85 (2010); In re O’Connor, 2010 WL8354576 (Bkrtcy. mortgage.3 That is, the trustee can The basic, and standard, maxim W.D. Pa); In re Badagliacca, 403 B.R. 288 sell the debtor’s home (for example) (W.D.N.Y. 2009), 11 U.S.C. §544(a). is that a misindexed mortgage (or free of the faultily recorded mortgage, one otherwise suffering a record- 4. In re Duel, 594 F.3d 1073 (9th Cir. 2010), even though the trustee is actually cert. den., 131 S. Ct. 85 (2010) citing Briggs ing infi rmity), and in the absence of aware that the mortgage exists. Such v. Kent (In re Professional Investment something in the record otherwise is obviously a complete disaster for Properties of America), 955 F.2d 623 (9th Cir. 1992). affording notice, will not provide the hapless mortgage holder. (As an 5. In re Lopez, 2012 WL 566265 (Bkrtcy. constructive notice to a subsequent aside, title insurance, i.e, the mort- purchaser or encumbrancer. That is E.D.N.Y.); In re O’Connor, 2010 WL gage policy, may help.) 8354576 (Bkrtcy. W.D. Pa), citing 5 Collier to say, the holder of such a mortgage on Bankruptcy, par 544.03[2] at 544-7 to 8. will not benefi t from the recording There are, however, two pointed statute (RPL §291). (The subject of a exceptions to the troubling rule just misindexed mortgage is very much a mentioned. One is in the instance of Mr. Bergman, author of the four- topic unto itself and if further explo- an involuntary bankruptcy petition volume treatise, Bergman on New ration might be meaningful, attention where the petition itself gives actual York Mortgage Foreclosures, Lexis- is invited to a more expansive review notice of the encumbrance.4 The other Nexis Matthew Bender, is a mem- at 1 Bergman on New York Mortgage is where there are matters of record ber of Berkman, Henoch, Peterson, Foreclosures §1.20[1], LexisNexis Mat- which provide actual or inquiry no- Peddy & Fenchel, P.C. in Garden thew Bender (rev. 2014).] tice, in which event a trustee is barred City. He is a fellow of the American from employing avoiding powers.5 College of Mortgage Attorneys and This situation can also play a a member of the American Col- shockingly unique role in the context The cases discussing these excep- lege of Real Estate Lawyers and the of a bankruptcy fi ling by a mort- tions are nuanced and well worthy of USFN. His biography appears in gagor—at least prior to the fi ling of separate review. A key is to be aware Who’s Who in American Law and he a notice of pendency in an action to of this seemingly anomalous proposi- is listed in Best Lawyers in America foreclose that mortgage. tion and how it may—sometimes—be and New York Super Lawyers. avoided.

42 NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 NEW YORK STATE BAR ASSOCIATIONION Section Members get 33% discount* From the NYSBA Book Store > with coupon code PUB2282N Counseling Content Providers in the Digital Age A Handbook for Lawyers

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NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 43 Section Committees and Chairs The Real Property Law Section encour ag es members to participate in its programs and to volunteer to serve on the Committees listed below. Please contact the Section Offi cers or Committee Chairs for further information about the Committees.

Attorney Opinion Letters Condemnation, Certiorari and Real Nicholas M. Ward-Willis Gregory P. Pressman Estate Taxation Keane & Beane, PC Schulte Roth & Zabel LLP Karla M. Corpus 445 Hamilton Avenue, Suite 1500 919 Third Avenue Hiscock & Barclay LLP White Plains, NY 10601 New York, NY 10022-4728 One Park Place [email protected] [email protected] 300 South State Street Syracuse, NY 13202-2078 Land Use and Environmental Law Charles W. Russell [email protected] Matthew F. Fuller Harris Beach PLLC Meyer & Fuller, PLLC 99 Garnsey Road Laureen Harris 161 Ottawa Street Pittsford, NY 14534 Cronin Cronin Harris & O’Brien PC Lake George, NY 12845 [email protected] 333 Earle Ovington Blvd., Suite 820 [email protected] Uniondale, NY 11553 Awards [email protected] Linda U. Margolin Peter V. Coffey Bracken Margolin Besunder LLP Englert, Coffey, McHugh Condominiums & Cooperatives 1050 Old Nichols Road, Suite 200 & Fantauzzi, LLP Dennis H. Greenstein Islandia, NY 11749 224 State Street Seyfarth Shaw LLP [email protected] P.O. Box 1092 620 Eighth Avenue Schenectady, NY 12305 New York, NY 10018 Landlord and Tenant Proceedings [email protected] [email protected] Peter A. Kolodny Kolodny PC Commercial Leasing Steven D. Sladkus 338-A Greenwich Street Robert J. Shansky Wolf Haldenstein Adler Freeman New York, NY 10013 Scarola, Malone & Zubatov, LLP & Herz LLP [email protected] 1700 Broadway 270 Madison Avenue New York, NY 10019 New York, NY 10016-0601 Edward J. Filemyr IV [email protected] [email protected] 11 Park Place, Suite 1212 New York, NY 10007 David J. Zinberg Continuing Legal Education fi [email protected] Ingram Yuzek Gainen Carroll & Lawrence J. Wolk Bertolotti, LLP Rosenberg & Estis PC Law School Internship 250 Park Avenue 733 Third Avenue Stacy L. Wallach New York, NY 10177 New York, NY 10017 Pace Law School [email protected] [email protected] Land Use Law Center 78 North Broadway Commercial Real Estate Financing Joseph M. Walsh White Plains, NY 10603 Frank C. Sarratori Walsh & Walsh, LLP [email protected] Pioneer Bank 42 Long Alley 21 Second Street Saratoga Springs, NY 12866-2116 Ariel Weinstock Troy, NY 12180 [email protected] Katsky Korins LLP [email protected] 605 3rd Ave, 16th Floor Diversity New York, NY 10158-0180 Richard S. Fries Harry G. Meyer [email protected] Sidley Austin LLP Hodgson Russ LLP 787 Seventh Avenue The Guaranty Building Legislation New York, NY 10019 140 Pearl Street Richard A. Nardi [email protected] Buffalo, NY 14202 Loeb & Loeb LLP [email protected] 345 Park Avenue, 21st Fl. New York, NY 10154 Green Real Estate [email protected] Joel I. Binstok York Consulting 570 Lexington Avenue, Suite 2900 New York, NY 10022 [email protected]

44 NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 Samuel O. Tilton Public Interest Garry M. Graber Woods Oviatt Gilman LLP Maggie R. Robb Hodgson Russ LLP 700 Crossroads Building Empire State Justice The Guaranty Building 2 State Street One West Main St., Suite 200 140 Pearl Street, Suite 100 Rochester, NY 14614-1308 Rochester, NY 14614 Buffalo, NY 14202-4040 [email protected] [email protected] [email protected]

Low Income and Affordable Housing Elizabeth S. Woods Gino Tonetti Laura Ann Monte 56 South Main Street 100 Exchange Street, Unit 1704 HSBC Bank USA Rutland, VT 05701-4163 Providence, RI 02903-2619 One HSBC Center, 27th Floor [email protected] [email protected] Buffalo, NY 14203 [email protected] Publications Residential Real Estate Financing William A. Colavito Heather C.M. Rogers Richard C. Singer One Robin Hood Road Davidson Fink LLP Hirschen Singer & Epstein LLP Bedford Hills, NY 10507 28 East Main Street, Suite 1700 902 Broadway, 13th Floor [email protected] Rochester, NY 14614 New York, NY 10010 hrogers@davidsonfi nk.com [email protected] William P. Johnson Nesper, Ferber & DiGiacomo, LLP Title and Transfer Membership 501 John James Audubon Pkwy Gerard G. Antetomaso Harry G. Meyer One Towne Centre, Suite 300 Gerard G. Antetomaso, PC Hodgson Russ LLP Amherst, NY 14228 1674 Empire Boulevard, Suite 200 The Guaranty Building [email protected] Webster, NY 14580 140 Pearl Street [email protected] Buffalo, NY 14202 Marvin N. Bagwell [email protected] Old Republic National Title Insurance Co. Thomas J. Hall 400 Post Avenue, Suite 310 The Law Firm of Hall & Hall, LLP Jaime Lathrop Westbury, NY 11590 57 Beach Street Law Offi ces of Jaime Lathrop, PC [email protected] Staten Island, NY 10304-2729 641 President Street, Suite 202 [email protected] Brooklyn, NY 11215-1186 Vincent Di Lorenzo [email protected] St. John’s University School of Law Joseph D. DeSalvo 8000 Utopia Parkway First American Title Insurance Company Not-for-Profi t Entities and Concerns Belson Hall, Room 4-46 of New York Susan E. Golden Jamaica, NY 11439 633 Third Avenue, 17th Floor Venable LLP [email protected] New York, NY 10017 1270 Avenue of the Americas jdesalvo@fi rstam.com New York, NY 10020-1700 Real Estate Construction [email protected] Kenneth M. Block Task Force on NYSI D TI Regs Tannenbaum Helpern Syracuse & Thomas J. Hall Anne Reynolds Copps Hirschtritt, LLP The Law Firm of Hall & Hall, LLP Copps DiPaola, PLLC 900 3rd Avenue 57 Beach Street 126 State Street, 6th Floor New York, NY 10022-4728 Staten Island, NY 10304-2729 Albany, NY 12207 [email protected] [email protected] [email protected] Brian G. Lustbader Website and Electronic Professionalism Schiff Hardin Communications Patricia E. Watkins 666 5th Avenue, Suite 1700 Susan M. Scharbach Bartlett, Pontiff, Stewart & Rhodes PC New York, NY 10103 D’Agostino, Levine, Landesman One Washington Street [email protected] & Lederman, LLP P.O. Box 2168 345 Seventh Avenue, 23rd Floor Glens Falls, NY 12801-2168 Real Estate Workouts and New York, NY 10001 [email protected] Bankruptcy [email protected] Robert M. Zinman Nancy A. Connery St. John’s University School of Law Michael P. Stevens Schoeman Updike Kaufman & Stern LLP 8000 Utopia Parkway Associate of Edward Joseph Filemyr IV 551 Fifth Avenue Queens, NY 11439 11 Park Place, Suite 1212 New York, NY 10176 [email protected] New York, NY 10007 [email protected] [email protected]

NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 45 Section District Representatives First District Sixth District Sanford A. Pomerantz Nancy A. Connery John E. Jones 7 Jodi Court Schoeman Updike Kaufman Hinman Howard & Kattell, LLP Glen Cove, NY 11542 & Stern LLP 700 Security Mutual [email protected] 551 Fifth Avenue 80 Exchange Street New York, NY 10176 Binghamton, NY 13901-3400 Eleventh District [email protected] [email protected] Joseph J. Risi Risi & Associates Second District Seventh District 35-11 36th Street, Ste. 404 Lawrence F. DiGiovanna Scott A. Sydelnik Long Island City, NY 11106 357 Bay Ridge Parkway Davidson Fink LLP [email protected] Brooklyn, NY 11209-3107 28 E. Main Street, Ste. 1700 [email protected] Rochester, NY 14614 Steven Wimpfheimer ssydelnik@davidsonfi nk.com 166-25 Powells Cove Blvd Third District Whitestone, NY 11357-1522 Alice M. Breding Eighth District [email protected] Law Offi ce of David Christopher Mineo Alice M. Breding, Esq., PLLC Fidelity National Financial Inc. Twelfth District 21 Executive Park Drive 55 Superior Boulevard Martin L. Popovic Clifton Park, NY 12065 Mississauga, ON L5T2X9 Bronx County Surrogate Court [email protected] Canada 851 Grand Concourse, Room 330 [email protected] Bronx, NY 10451-2937 Fourth District [email protected] Michelle H. Wildgrube Ninth District Cioffi Slezak Wildgrube, P.C. Lisa M. Stenson Desamours Thirteenth District 2310 Nott Street East Metlife Toni Ann Christine Barone Niskayuna, NY 12309 1095 Avenue of the Americas, 19th Fl. Law Firm of Barone & Barone, LLP mwildgrube@cswlawfi rm.com New York, NY 10036 43 New Dorp Plaza [email protected] Staten Island, NY 10306 Fifth District [email protected] Frederick W. Marty Tenth District Mackenzie Hughes LLP Daniel J. Baker 101 South Salina Street Sahn Ward Coschign & Baker, PLLC P.O. Box 4967 333 Earle Ovington Boulevard, Ste. 610 Syracuse, NY 13221 Uniondale, NY 11553-3645 [email protected] [email protected] Request for Articles

If you have written an article and would like to have it considered for publication in the N.Y. Real Property Law Journal, please send it to one of the Co-Editors listed on page 47 of this Journal.

Articles should be submitted in electronic document format (pdfs are NOT acceptable) and include biographical information.

www.nysba.org/RealPropertyJournal

46 NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 Section Officers N.Y. Real Property Law Journal Chair Co-Editors David L. Berkey William A. Colavito Gallet Dreyer & Berkey LLP One Robin Hood Road 845 Third Avenue, 8th Floor Bedford Hills, NY 10507 New York, NY 10022-6601 [email protected] [email protected] William P. Johnson First Vice-Chair Nesper Ferber & DiGiacomo, LLP Leon T. Sawyko 501 John James Audubon Parkway Harris Beach PLLC One Towne Centre, Suite 300 99 Garnsey Road Amherst, NY 14228 Pittsford, NY 14534 [email protected] [email protected] Marvin N. Bagwell Second Vice-Chair Old Republic National Title Insurance Co. Mindy H. Stern 400 Post Avenue, Suite 310 Schoeman Updike Kaufman Stern & Ascher LLP Westbury, NY 11590 551 Fifth Avenue [email protected] New York, NY 10176 [email protected] Prof. Vincent Di Lorenzo St. John’s University School of Law Secretary 8000 Utopia Parkway Patricia E. Watkins Belson Hall, Room 4-46 Bartlett, Pontiff, Stewart & Rhodes PC Jamaica, NY 11439 One Washington Street [email protected] P.O. Box 2168 Glens Falls, NY 12801 St. John’s University School of Law [email protected] Student Editorial Board Editor-In-Chief N.Y. Real Property Law Journal Sarah Mannix Submission Guidelines Executive Managing Editor The Journal welcomes the sub mis sion of articles of timely Jack Gamber interest to members of the Section in addition to comments and Associate Managing Editor sug ges tions for future is sues. Articles should be submitted to Dorian Rojas any one of the Co-Editors whose names and addresses appear on this page. Executive Articles and Notes Editors For ease of publication, articles should be submitted via Eric Dobric e-mail to any one of the Co-Editors, or if e-mail is not avail- Matthew Heymann able, on a CD, pref er a bly in Microsoft Word or WordPerfect Jennifer Tierney (pdfs are NOT acceptable). Accepted articles fall generally in the range of 7-18 typewritten, double-spaced pages. Please use Senior Staff Members endnotes in lieu of footnotes. The Co-Editors re quest that all Jane Bacha Linda Kim sub mis sions for con sider ation to be published in this Journal Carmen Borbon Giorgi Toreli use gender-neutral terms where ap pro pri ate or, alternatively, Nicholas Iorio Jennifer Wickers the masculine and feminine forms may both be used. Please Staff Members contact the Co-Editors regarding further re quire ments for the Eric McMahon sub mis sion of articles. Atenedoro Gonzalez Soohuen Ham Veronica Reyes Unless stated to the contrary, all pub lished articles repre- Jonah Blumenthal Rachel Deckterman sent the viewpoint of the author and should not be regarded as Evan Fuerstein representing the views of the Co-Editors, Board of Editors or Molly Full Connor Irish the Section or sub stan tive approval of the contents there in. Cynthia Vella Faculty Advisor Accommodations for Persons with Disabilities: Vincent Di Lorenzo NYSBA welcomes participation by individuals with disabilities. NYSBA is committed to complying with all applicable laws that prohibit discrimination against individuals on the basis of This Journal is published for mem bers of the Real Property disability in the full and equal enjoyment of its goods, services, Law Section of the New York State Bar Association. programs, activities, facilities, privileges, advantages, or accom- We reserve the right to reject any advertisement. The New modations. To request auxiliary aids or services or if you have York State Bar Association is not re spon si ble for typographical any questions regarding accessibility, please contact the Bar or other errors in advertisements. Center at (518) 463-3200. Copyright 2014 by the New York State Bar As so ci a tion. ISSN 1530-3918 (print) ISSN 1933-8465 (online) Cite as: N.Y. Real Prop. L.J.

NYSBA N.Y. Real Property Law Journal | Fall 2014 | Vol. 42 | No. 4 47 NEW YORK STATE BAR ASSOCIATION NON PROFIT ORG. REAL PROPERTY LAW SECTION U.S. POSTAGE PAID One Elk Street, Albany, New York 12207-1002 ALBANY, N.Y. PERMIT NO. 155 ADDRESS SERVICE REQUESTED

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