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Rights of First Refusal and the Purchase and Sale of Rental Facilities

Lerch Early's Legal Update

Portions of the Maryland Condominium Act are designed to protect against the sale of a rental facility for purposes of converting it to a condominium, which in the legislature’s view, would “have an adverse impact on the availability of rental units, resulting in the displacement of tenants.” Sections 11-138 and 11-139 of the Maryland Condominium Act provide that a county or incorporated municipality in Maryland may enact laws, ordinances and regulations giving such county or incorporated municipality the right of first refusal to purchase a rental facility or a rental unit converted to condominium. Section 11-140 of the Maryland Condominium Act permits counties or incorporated municipalities to declare a rental housing emergency and to enact laws, ordinances and regulations granting to tenants meeting certain criteria with respect to income, age or disability, extended leases upon conversion to condominium.

Several Maryland counties and incorporated municipalities have enacted such laws, ordinances and regulations. For example, in Montgomery County, sales of rental facilities automatically are presumed to be a sale for the purpose of condominium conversion. The buyer can rebut this presumption if it signs an agreement not to convert, or signs a rental agreement with the county that prohibits it from converting the rental facility to a condominium for at least five years after the date of transfer of the property. The rental agreement will require that the buyer follow voluntary rent increase guidelines during the five year period, which guidelines may be escalated by the buyer only if the greater increase is justified by unforeseen circumstances, rehabilitation or renovation to the rental facility.

Sales of rental facilities in the county automatically trigger rights of first refusal to purchase the rental facility not only to the county and its designated housing agency, but also to tenant organizations and tenants. Further, in the county, tenants have the right to form a tenant organization to purchase the rental facility, and certain tenants, if they meet certain income, age and/or disability requirements, may be entitled to lifetime tenancies or extended leases in the event the rental facility is converted to a condominium. If the county does not exercise its right to purchase the rental facility, it will execute a recordable certificate of compliance that states that the provisions of the relevant statutes regarding the rights of first refusal have been met. The Maryland and Montgomery County statutes mentioned above do provide for transfers of rental facilities to which the county rights of first refusal are not applicable. Such exemptions include, without limitation:

  • Transfers to a mortgagee in lieu of foreclosure, and
  • Transfers made pursuant to a judicial sale.

If an exemption is applicable, the county will issue a certificate of exemption instead of a certificate of compliance.

What Sellers and Purchasers Need to Know When Negotiating a Rental Facility Sales Contract

Regardless of the location of the rental facility in Maryland, sellers and purchasers who are negotiating contracts for the purchase and sale of rental facilities need to be knowledgeable about the following before entering into such contract:

  1. Rights of first refusal of the county or incorporated municipality in which the property is located;
  2. Various timelines in the relevant statutes for when notice of the sale is required to be given to the county or incorporated municipality, the tenant organization and the tenants;
  3. Process for obtaining a decision from the appropriate persons with the county or municipality as to whether it will be exercising its right to purchase the rental facility;
  4. Process for obtaining the certificate of compliance from the county or incorporated municipality once the decision is made; and
  5. Effect of an agreement not to convert or rental agreement may have on the viability of the project.

Whether or not the county or incorporated municipality will issue a certificate of compliance, a certificate of exemption, or require the buyer to enter into an agreement not to convert or a rental agreement, should all be flushed out during the due diligence period under the contract or be conditions to closing under the contract.

Sharon Nelson Craig is a real estate attorney whose practice includes the sale, purchase and leasing of commercial real estate, condominium formation and conversion, and mixed use project development. For more information about negotiating purchase and sale agreements for rental facilities in Maryland, contact Sharon at (301) 841-3836, or sncraig@lerchearly.com.

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This content is for your information only and is not intended to constitute legal advice. Please consult your attorney before acting on any information contained here.

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