In California, a holdover tenant (a tenant who remains in possession after the expiration of the written lease) has fewer rights than a tenant operating under a lease. Recently, the Second Appellate District of California, in Smyth v. Berman decided whether a holdover tenant could assert a right of first refusal to purchase a leased property.

In Smyth, James Smyth operated a recording studio on premises he had leased since the mid-1990’s. The last time he signed a lease with his landlord was in 2011 that contained a right of first refusal to purchase the premises and a three year option to extend. That lease expired in 2012 without exercise of the right of first refusal or the option to extend.

By 2016, the lease had expired and Smyth remained in possession as a holdover tenant.

In June 2016, a third party submitted a written offer to buy the property. Smyth objected to the sale, and submitted his own offer to purchase the property pursuant to the expired lease’s right of first refusal.

The Lessor rejected Smyth’s offer and sold the property to the third party. Smyth sued. The trial court sustained demurrers without leave to amend to Smyth’s Complaint and dismissed the case. Smyth appealed.

The Court of Appeal affirmed the trial court’s judgment. The court held that, when a written lease expires and the tenant remains in possession as a holdover tenant, the relationship of the landlord and tenant “changes.” Specifically, “the only terms from the expired lease that are presumed to carry forward into a holdover tenancy are the ‘essential’ terms of that lease” such as the “amount and time of payment of rent.”

The court noted that other decisions have held that an option to purchase property set forth in a lease was a “separate and distinct right and power that was not an essential covenant of that lease” and did not carry forward into the holdover tenancy, and that a right of first refusal “is a species of option to purchase.” Unless the evidence shows that the parties intended such a right to carry over into the holdover tenancy, it will expire with the lease.

If you have a right of first refusal in your existing lease and the lease is coming up for renewal, you should check with your legal counsel to make sure the right will continue or you may lose it.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.