In a Cooperative, the Board of Directors has a lot of leeway when approving or rejecting a proposed sale of shares (of course, they can only deny for legal reasons), but in a Condominium, since there is no Proprietary Lease and the apartments are all fee-simple in ownership, the Right of First Refusal plays an important part in how the Board of Managers can impact a pending sale or lease agreement. A Right of First Refusal is the mechanism that gives the Board the option of stepping into the proposed deal on behalf of all unit owners, instead of allowing the deal to go through with the purchaser that has submitted an application to purchase.

Now that we know what the Right of First Refusal is, we can also navigate towards an example or two where it would make sense for the building to execute their Right of First Refusal. An overwhelming majority of time, the Board will waive their Right of First Refusal and allow either the sale of the property of the leasing of the property to commence. One example where it would be in the building’s interest to invoke their Right of First Refusal would be a proposed sale that is between two family members at a severely discounted price. The building, should they wish, could step into the transaction and purchase the apartment to keep for staff, for instance, or they could buy the apartment low and then flip it at a higher price or lease it out to a renter. It’s not in the best interest of the building as a whole to allow for a much lower-than-market value sale to go through because it will affect comps in the building, even if the two parties in the transaction are family members.

Another example of a Board choosing to enforce their Right of First Refusal may be a sale that is with such an unsavory purchaser that letting them into the building would either disrupt the quiet enjoyment of the property or if this purchaser has a proven track record of financial misdeeds, including a recent foreclosure or a multitude other financial issues. The Board could step into the sale to avoid the incoming purchaser from stepping into the building as an owner.

Although both are examples of when a Board could step into squash a sale, they are seldom used – most sales will go through as proposed.

If you’re not sure of where the Right of First Refusal would be noted in the Condominium’s documents, one can check the Offering Plan. For some Condominiums there is no Right of First Refusal at all to be considered. For others, the Right of First Refusal may only be on the commercial units if it is a mixed-use building. The investigation should be done to see what each building’s requirements are. If there is a Right of First Refusal in the building, the purchaser can expect to fill out an application that is similar to a cooperative purchase application that will ask for a variety of financial and personal information. Many developers are placing this mechanism in the Offering Plan prior to conversion or new construction to ensure that the building has more leverage in the future, particularly once the developers sell out (there is usually no Right of First Refusal needed for the developer or sponsor).