How Does a Right of First Refusal Work in NYC Real Estate?

A Right of First Refusal is a typical procedure in a Condominium’s By-Laws which allows the condominium corporation to purchase an apartment at the same terms as a prospective buyer who has already signed a contract to purchase a unit.

Condo buildings in NYC rarely exercise their Right of First Refusal. However, buyers and sellers must still follow a condo building’s procedure for obtaining a waiver of Right of First Refusal prior to closing.

Condo buildings also have the Right of First Refusal when it comes to rentals. If you are renting out your apartment, you must follow the building’s procedure for obtaining a waiver of the Right of First Refusal.

The procedure for obtaining the waiver of the Right of First Refusal for both sales and rentals typically involves the submission of an application by the prospective purchaser or tenant.

The application varies by building. While some condos may simply ask for a handful of forms to be filled out, other condo buildings may require a more extensive application which resembles a co-op board application.

What Is a Right of First Refusal by Condo Boards in NYC?

Sample Waiver of the Right of First Refusal by a Condominium Board in NYC

Sample Right of First Refusal Clause and Contract Language in NYC

Can Condo Boards Abuse Their Right of First Refusal in NYC?

Have Condo Boards Ever Exercised Their Right of First Refusal in NYC?

The Right of First Refusal is a privilege that is rarely exercised by condo boards primarily because it is exceedingly difficult to raise funds either through a special assessment or a loan to be able to purchase a multi-million dollar condo in NYC.

Remember, a Right of First Refusal is simply the seller giving the condo board a “first look” to purchase their apartment on the same contract terms as their purchaser. This is not to be confused with a co-op board’s right of approval.

Furthermore, even if it were possible to raise the funds, there would likely be severe opposition against the board from most condo owners in the building.

This could result in unnecessary litigation within the building which costs everyone money, uses the building’s reserves and destroys the marketability of the building!

The Right of First Refusal exists to protect condo owners in the building from non “arms length” transactions at off market prices between friendly parties.

For example, no owner would be happy if one of their neighbors decided to sell their apartment at half its market value to their family member. Doing so may legitimately confuse future buyers that the deal was a real comparative transaction which would lower potential sale prices for everyone’s apartments in the building!

Pro Tip: Exercising a condo board’s right of first refusal is even more rare because most condo by-laws require a supra-majority of condo unit owners to agree, i.e. often 2/3 (two-thirds) or more of all unit owners

Here is an example of a typical notification a condo buildings sends out upon issuance of the waiver of the Right of First Refusal:

You will receive a waiver of the Right of First Refusal from the condo board after you’ve submitted the condo’s purchase application and before closing. Not all condos require a purchase application, and even those who do typically only require a short form to be filled out in contrast to lengthy co-op purchase applications.

Pro Tip: It would be unprecedented for a condo board and/or the managing agent to breach the by-laws by refusing to issue a waiver. Unless there was some sort of natural disaster where the board could invoke force majeur, it would be a breach of the board’s fiduciary duty to prevent re-sales from happening in the building. Even worse, the board member and the building is at massive risk of litigation if it was revealed that the non-compliance was due to selfish, personal reasons, such as a board member not liking the prospective buyer.

A standard purchase contract in NYC includes language that requires the buyer and seller to abide by the Right of First Refusal procedure in the condominium by-laws.

The contract typically allows for cancellation of the transaction and a refund of the buyer’s earnest money deposit in the event the condo building does not issue a waiver of the Right of First Refusal; however, this time limit isn’t typically an issue because most condo bylaws only permit the board 30 days to decide before the waiver is automatically issued.

As you can see from the sample purchase contract language above, there is no way around the Right of First Refusal.

However, it’s important to point out that unlike a co-op board, a condo board does not have the power to reject you for any reason.

Just because your veteran buyer’s agent negotiated a great deal for you does not mean the condo board can reject you. The only way they can deny you your deal is if they muster the funds to purchase the apartment themselves.

In contrast, co-op boards frequently reject applicants because they feel that a deal’s price is too low and that it won’t be helpful as a comparative transaction for future sellers in the building!

Pro Tip: Condo boards will typically quickly issue their waiver of their right of first refusal because not doing so only delays the inevitable, and causes hostility between the board members and the seller and buyer. Furthermore, a condo board invites litigation if they maliciously delay issuing the waiver in order to try to jeopardize the seller’s transaction.

Though extremely rare due to the massive litigation risk, we have heard of instances where condo boards in NYC have abused their right of first refusal to effectively discourage a potential buyer from completing their purchase.

Per most condo by-laws, the board typically has 30 days to respond after a purchase application has been submitted, after which they automatically waive their right of first refusal.

However, if a malicious condo board looking to discourage a sale is able to instruct the managing agent before the purchase application has been officially submitted to the condo board to ask for additional, missing information, then the managing agent can keep kicking the application back to the buyer due to incompleteness until the buyer gives up.

For example, the condo board can devilishly asks for something trivial that was missing from the application. By doing this, they can frustrate a potential condo buyer and perhaps even force the buyer to abandon the deal due to a rate lock expiring or just pure frustration.

This extremely malicious and obvious tactic won’t work if the purchase application has already been submitted to the board by the managing agent, often through services such as BoardPackager, meaning that the managing agent has signed off on the application as being complete and ready for review.

Here is an interesting real world example we’ve encountered of a condo board abusing its right of first refusal in New York City:

Some condo board members who pretend, either knowingly or unknowingly that they hold the power of approval like that of a co-op board, may think they can derail a prospective transaction by asking for additional information right before the typical 30 day waiver period expires, and that they’ll get another 30 days of time simply because they asked for more information.

Unfortunately for these board members hoping to deprive their fellow unit owners of their right to sell their unit freely, most condo by-laws don’t allow for such a scheme, and any such scheme would be very easy to see through and would quickly be struck down in court with damages awarded to the seller and/or buyer.

For example, here’s the language from a sample condo’s bylaws which state clearly that the board only has 30 days to consider exercising their right of first refusal, after which it is automatically waived without any opportunity to extend the review window:

If the Board or its designee shall fail to accept such offer within thirty (30) days after receipt of notice, as aforesaid, the Board shall be deemed to a have waived its right of first refusal, but such waiver shall only be effective if Common Charges through and including the date of closing of title to such Unit have been paid, and such Offeree Unit Owner may consummate the sale or lease to the Outside Offeror.

Pro Tip: If a condo board and its managing agent refused to obey the condo bylaws and issue a waiver in order to scuttle a deal, then not only will the board and managing agent have violated its fiduciary duty to carry out its duties per the by-laws, which includes freely allowing unit owners to sell their properties, but they would devastate re-sale prices for all owners once it becomes known that the building has a rogue condo board that thinks it’s a co-op board.

Yes, although the chances of a condo board being able to scrape together enough funds to purchase the average $2 million New York City condominium are exceedingly slim.

The only case we’ve heard of a condo board actually exercising its right of first refusal was for an Upper Manhattan condo that was priced just under $1 million so buyers could avoid the Mansion Tax in NYC.

The buyer put an offer in of $920,000 and for some reason the board was able to scrape together the funds to buy the apartment. Perhaps the board felt that the price was too low, or that it was undervalued for some reason. The buyer ended up raising his offer to $990,000 in order to stave off this exercise of the condo board’s right of first refusal (remember that the condo board can only exercise it and buy it at the same terms as the prospective buyer of a condo unit).

However, the condo board raised the funds and exercised its right of first refusal anyway. In the end, the condo board ended up flipping the condo a few months later for around $1,100,000. However, with closing costs in NYC as high as they are, the condo board did not make a profit. Talk about a strange exercise in futility! What a waste of time and energy by that condo board!