Arden Group, Inc. v. Burk
96 Cal. Daily Op. Serv. 3867, 45 Cal.App.4th 1409, 53 Cal. Rptr. 2d 492 (1996)
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Rule of Law:
When a party exercises a right of first refusal, they are not required to provide a literal, mirror-image acceptance of the third-party offer; instead, courts will consider commercial realities and allow for modifications consistent with the position of the party exercising the right.
Facts:
- In 1973, Jack and Wanda Burk leased real property from Caroline Fabbro to operate a gas station, and the lease included a right of first refusal to purchase the property.
- The Burks operated the gas station on the property for nearly two decades, extending the lease as provided.
- In July 1992, Arden Group, Inc. made an offer to purchase the property from Fabbro, intending to use it as a parking lot.
- The Arden-Fabbro agreement required Fabbro to remove all improvements, including underground gas tanks, and clean up any contamination before the sale closed.
- Fabbro notified the Burks of the offer, and the Burks timely responded that they were exercising their right of first refusal on the terms of the Arden offer.
- In a cover letter, the Burks' attorney clarified their position on contamination liability but explicitly stated it was not a counter-proposal.
- The Burks and Fabbro then entered into a modified agreement that reflected the Burks' status as the existing tenants; it did not require the removal of the gas tanks and adjusted the terms related to contamination cleanup.
Procedural Posture:
- Arden Group, Inc. sued Jack and Wanda Burk and Caroline Fabbro for declaratory relief in the trial court.
- Following a bench trial, the trial court found that the Burks had not properly exercised their right of first refusal.
- The trial court entered a judgment in favor of Arden Group, Inc.
- The Burks, as appellants, appealed the judgment to the Court of Appeal.
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Issue:
Does a tenant's exercise of a right of first refusal require a literal, identical matching of the terms of a third-party offer to be valid?
Opinions:
Majority - Vogel, J.
No. The exercise of a right of first refusal does not require a literal matching of terms, as is required for an option. Unlike an option, which is governed by the strict rules of offer and acceptance, a right of first refusal allows a party to step into a contract made by a third party. Therefore, courts must consider commercial realities and permit modifications that are consistent with the parties' intent and the exerciser's unique position. Here, the modifications made by the Burks and Fabbro—such as not removing the gas tanks and adjusting contamination liability—were necessary consequences of the fact that the Burks were tenants in possession who would continue the existing use of the property. To insist on a literal matching of terms that were only logical for an outside buyer like Arden would be absurd and defeat the purpose of the right.
Analysis:
This decision solidifies the distinction in California law between a rigid option contract and a more flexible right of first refusal. It establishes that the exercise of a right of first refusal is evaluated under a standard of commercial reasonableness, not the strict 'mirror image' rule. This precedent protects holders of such rights, like long-term tenants, from losing their opportunity to purchase due to third-party offers structured with terms that are impractical or illogical for the existing tenant to meet. The ruling requires courts to look beyond the literal text of competing offers and consider the practical context of the transaction.
