A First Right of Refusal is one of the most common requests a church hears during lease negotiations — and one of the easiest to grant without understanding the cost. On its face, a First Right of Refusal sounds harmless: if the church ever decides to sell the property, the tenant gets first crack at buying it. What those four words don’t settle is the price, or how that price gets calculated. Most people assume it’s simply fair market value at the time of sale — but that assumption is where the real complications start.
What a First Right of Refusal Actually Does
A First Right of Refusal is a contract right, not an obligation to sell. Under California law, it’s triggered only by a voluntary decision to sell — a public agency condemning the property through eminent domain does not trigger it. Campbell v. Alger (1999) 71 Cal.App.4th 200, 203, confirms this: an involuntary taking does not activate a cotenant’s or tenant’s First Right of Refusal.
Once a bona fide offer is received from a third party, the holder of the First Right of Refusal typically gets the option to buy on the same terms and conditions, or to decline and let the third-party sale proceed.
Why Tenants Ask for a First Right of Refusal
Tenants request this right because it gives them security without locking them into a purchase. They can wait and watch the market, and if a third party makes a good faith offer below what they’d be willing to pay, they can step in and buy at that lower price. In practice, the tenant usually benefits more from a First Right of Refusal than the landlord does.
The Fair Market Value Problem
Most First Right of Refusal clauses default to “fair market value” without defining it, which is where disputes begin. The federal standard, set out in 26 CFR §20.2031-1, defines fair market value as the price a property would sell for between a willing buyer and a willing seller, neither under any compulsion to act, both reasonably informed. That definition sounds simple. Applying it to a leased church property is not.
Consider a church with an educational component — classrooms, a preschool, a school lease — where the highest and best use is another church or school. A third-party buyer who wants to use the property for that purpose, and not simply collect rent from the existing tenant, may be willing to pay a premium to get vacant possession. Once that offer is presented to the tenant holding the First Right of Refusal, the tenant may not want to match that premium price.
The tenant’s own appraiser will likely value the property differently. A long-term lease depresses appraised value because it limits the buyer’s ability to actually use the property — the appraiser has to assume the lease continues. Meanwhile, a different school or church that can’t use the property while the tenant remains in place has little reason to bid at all. The result: a First Right of Refusal can shrink the pool of realistic buyers to almost no one but the tenant itself, at a price the tenant effectively sets.
This isn’t a hypothetical. A commercial appraisal for a church and school property valued near three million dollars can lose several hundred thousand dollars in appraised value once a long-term lease with a First Right of Refusal is factored in — because the lease itself becomes the dominant factor a buyer has to price around.
Open Questions a First Right of Refusal Clause Should Answer
Most disputes trace back to a clause that never addressed what happens in edge cases. Before granting a First Right of Refusal, the agreement should say what happens if:
- The church wants to sell only part of the property, not the whole parcel
- The transaction is a land trade or property exchange rather than a cash sale
- The property reverts to the church’s denomination under a denominational trust clause — does that trigger the right?
- The tenant is acquired by or merged into another organization — is the right transferable?
- The tenant declines to exercise the right and a third party buys the property — does the right terminate, or does it bind the new owner if they resell?
A buyer who learns the property is subject to an unresolved First Right of Refusal, with no clear answer to any of the above, has a real reason to walk away from the deal or renegotiate the price downward.
Alternatives to Granting a First Right of Refusal
If a tenant insists on a First Right of Refusal, the church has a few practical options. One is to avoid long-term leases entirely when a tenant is asking for this right — a shorter term limits how long the property’s marketability is affected. Another is to require that if the tenant does not exercise the right when it’s triggered, they must vacate rather than remain as a tenant under the new owner. A third is to have the property appraised on the front end and offer the tenant that price directly, rather than waiting for a third-party offer to set the value — though special-use appraisals for church and school properties can run into the thousands of dollars, and both sides typically want their own appraiser.
None of these fully eliminates the tension. Granting a First Right of Refusal is ultimately a tradeoff between tenant goodwill and long-term flexibility to sell the property on the open market.
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Disclaimer: Every situation is different and particular facts may vary thereby changing or altering a possible course of action or conclusion. The information contained herein is intended to be general in nature as laws vary between federal, state, counties, and municipalities and therefore may not apply to any given matter. This information is not intended to be legal advice or relied upon as a legal opinion, course of action, accounting, tax or other professional service. You should consult the proper legal or professional advisor knowledgeable in the area that pertains to your particular situation.
