Renters Beware

 In Real Estate

1. There is a Presumption That a Right of First Refusal in a Written Lease Expires When the Initial Leasehold Term Expires, Even Though the Tenant Holds Over on a Month-to-Month Basis.

In the case of Smyth v. Berman, the California Court of Appeal has denied Smyth a right of first refusal to purchase the commercial property he had occupied for a number of years.

The initial term of the lease was for one year, with a right of first refusal to purchase. At the expiration of the one-year period, the parties agreed that the lease would then go to a month-to-month basis. This would be deemed to be a holdover tenancy from month-to-month. However, the landlord and Smyth did not include a provision stating that all the terms and provisions of the initial 12-month lease would carry forward into the new month-to-month lease.

The landlord decided to sell the property, and Smyth sued, claiming he had the right of first refusal. Smyth loses the case.

The Court of Appeal determined that the only terms from the expired lease that are presumed to carry forward into a holdover tenancy on a month-to-month basis, are the “essential” terms of a lease. The essential terms have been defined as the amount and the time of the payment of rent.

In Spaulding v. Yovino-Young, our Supreme Court held that an option to purchase property set forth in a lease is not “an essential covenant” of a lease. Thus, the option was not carried forward into the holdover tenancy. The parties to a lease have the power to rebut this general presumption by expressing a contrary intent by stating specifically in writing and signed by both parties that the terms of the lease would carry forward into the holdover month-to-month tenancy, which would include the right of first refusal.

The court further determined that the rule presuming that rights of first refusal do not carry forward into holdover tenancies furthers the public policy favoring stability of commercial tenancies. Otherwise, it “creates an incentive for landlords to evict holdover tenants as soon as possible” in order to sell the property to a third party.

All the tenant needed to do was to make sure that the terms of the original 12-month lease carried forward into the holdover month-to-month lease. This would only require a writing signed by both parties to that effect or having that term contained in the original 12-month lease.

About the Author

  • Scott Souders
    Scott Souders Attorney & Author


Scott Souders is a real estate attorney who has practiced real estate law in excess of 42 years in Southern California. The Real Estate Law Update cites cases or statutes which are summarized and should not be relied upon without fully reading the cases or statute in the advance sheets and shepardizing the same and consulting with your own attorney.

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