A recent decision by Supreme Court, Kings County Justice Carolyn E. Demarest in Lester’s Activewear, Inc. v. Combine Distributing Inc.1 is a useful primer on issues that can arise in connection with a tenant’s exercising a right of first refusal. In that case, the lease gave the tenant a right of first refusal with respect to any sale by the landlord of the building where the tenant’s store was located. Specifically, the lease granted the tenant the “privilege of purchasing the demised premises for the same price and upon the same terms as offered by a third party for a period of thirty (30) days after the Notice is sent, time being of the essence against the Tenant.”

By letter dated Dec. 16, 2009, the landlord notified the tenant that it had entered into a contract for the sale of the building to an unidentified third-party. The landlord provided the tenant with a redacted copy of the contract of sale. In addition to a sale price of $1,625,000, the contract of sale also provided that, within six months after the closing, the purchaser would lend the seller up to $400,000 in connection with the closing of the seller’s anticipated purchase of a replacement property for the property being sold, as part of a “like-kind” exchange pursuant to Section 1031 of the Internal Revenue Code. (As explained by the court in Lester’s Activewear, Inc., that tax provision “defers … tax consequences on capital gains when the proceeds of a sale are invested in like property within six months (180 days) of the sale of the exchanged property.”) The loan was to be secured by a first mortgage on the replacement property.

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