Right of first refusal didn’t roll over with lease

A store owner who had held a right of first refusal to purchase the shop from which it operated lost that right when it failed to renew its multi-year lease and the lease reverted to a year-to-year tenancy by law, a divided North Carolina Court of Appeals has ruled in a case of first impression.

Jackson’s General Store began leasing a building in Sylva in 1999. Jackson’s lease was for seven years, with an option to extend it for an additional seven years, and included a right of first refusal to purchase the property should the owner, Sylva Supply Co., wish to sell. When the initial lease term expired in 2006, Jackson’s provided no written notice to renew the lease but continued to occupy the building and pay rent. By law, this meant that the store became a holdover tenant under a year-to-year tenancy.

Jackson’s remained in the space until 2015, when Sylva Supply sold the property to Jay and Irene Balls, who proceeded to eject the business. While fighting the ejectment action, Jackson’s and its owner, Crystal Cogdill, sued, alleging that it had been wrongfully denied its right of first refusal under the lease. In April 2018 a trial court judge granted the defendants’ motion for summary judgment.

North Carolina’s appellate courts had never squarely addressed whether a right of first refusal carries over to a year-to-year tenancy created after the expiration of a written lease, but in a May 7 opinion a Court of Appeals panel voted 2-1 to affirm the dismissal.

Judge Allegra Collins, writing for the majority, said that the idea of holdover tenancies came about as a way to protect tenants from having their landlords abruptly dump them out into the streets. Such tenancies were never intended to prolong the existence of legal rights, such as a right of first refusal, which are unrelated to maintaining their presence in the property. Further, Collins wrote, extending the right of first refusal in such situations would make little sense since the landlord could simply evict the tenant first and then sell the property immediately thereafter.

“The terms of the Lease specifically did not provide for incorporation of the Right of First Refusal as the renewal terms were to be determined by the parties at least ninety days before the expiration of the first, seven-year lease period,” Collins wrote. “Accordingly, Defendants’ obligation to offer Plaintiffs the Right of First Refusal contained in the written Lease was no longer in effect when, approximately nine years thereafter, they were called upon to do so.”

Judge John Tyson dissented from the ruling, arguing that any questions about whether the right of first refusal should apply to the year-to-year tenancy or was a wholly independent, stand-alone agreement between the parties would rest upon the intent of the parties and thus would raise genuine issues of material fact that would entitle Jackson’s to a trial on the merits.

Diane Sherrill of Sylva represented Cogdill and Jackson’s. Sherrill said, and the court noted in its opinion, that although a majority of the states that have considered this issue have ruled the same way the North Carolina court did, other jurisdictions have been much divided on the question, and several states have held that rights of first refusal, or other purchase options, presumptively carry forward into holdover tenancies.

“It is a question of first impression, and because we had such a strong dissent we felt like there was probably quite a bit of debate over the decision, and obviously it opens up the door for us to go to the Supreme Court with it, which we’re still considering at this point,” Sherrill said.

Andrew Buckner, then of Coward, Hicks, & Siler in Sylva, represented the Balls and Sylva Supply Company. Buckner is now an assistant district attorney in Jackson County and could not be reached for comment on the decision.

The 32-page decision is Cogdill v. Sylva Supply Co. (Lawyers Weekly No. 011-109-19). The full text of the opinion is available online at nclawyersweekly.com.

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