October 30th, 2024
Understanding Maryland’s New Tenant Right of First Refusal and the Implication for Landlords
Posted in: Real Estate Law Tagged: Andrew L. Schwartz, Beth M. Irving
Author: Beth M. Irving, Andrew L. Schwartz
Here is what landlord’s and tenant’s need to know about the Tenant Right of First Refusal Provision of the Renters’ Rights and Stabilization Act (“Act”), which went into effect on October 1, 2024.
The primary focus of the Act is to establish, in the State of Maryland, a Tenant Right of First Refusal (“ROFR”). Additionally, the Act establishes the Office of Tenant and Landlord Affairs(“OTLA”) in Maryland. The ROFR will likely slow down how quickly landlords can sell their property and provides tenants with an opportunity to purchase rental properties before the property even goes on the market to the public.
Breaking Down the Provision
With the ROFR, tenants in 1-, 2- and 3- unit properties have the right to make an offer to purchase a rental property before it can be sold to a third party. The owner/landlord is required to offer the property to the tenants before the property is listed for sale or otherwise offered to a third party. During this exclusive negotiation period, the owner/landlord must:
- Notify tenants of their intent to sell the property and the material terms of the sale; and
- Give tenants 30 days to make an offer to purchase.
The owner/landlord may not offer to sell the property to a third party until this negotiation period is terminated. If an owner/landlord receives an offer to purchase from a tenant, the landlord must respond to such offer within five (5) days, by:
- Accepting the offer, if the offer contains the same or more favorable material terms as those contained in the landlord’s notice; or
- Deliver a counteroffer to the tenant with an explanation of the differences in the material terms.
If the tenants decline the owner’s/landlord’s offer of sale or fails to respond within thirty (30) days, then the exclusive negotiation period is terminated, and the owner/landlord can proceed with listing the property for sale or selling it directly to a third party. There are still conditions, however, on the landlord accepting offers to sell the property. If the owner/landlord intends on accepting an offer from a third party that is at least 10% lower than the owner’s/landlord’s original offer to the tenants, then the tenant’s ROFR springs back into life and the owner/landlord must reoffer the property to the tenants at the lower purchaser price. Owners/Landlords are not required to sell for below market value or accept an offer lower than third-party bids.
Certain transfers of property are exempt from the right of first refusal, including transfers to family members, a court-ordered sale, or a transfer to a government entity. It is best to consult with a real estate attorney to understand whether an exemption applies to your property transfer.
Implications for Residential Landlords
Leaving time for compliance: The ROFR process establishes specific time requirements for notifications and response periods, which may impact the speed at which an owner/landlord can sell their property. This may lead to extended negotiations with tenants and necessitate concessions that might not be required with other buyers. Owner’s/Landlord’s should anticipate this additional time requirement in preparing their property for sell and negotiations.
Disclosure requirements: When notifying tenants of the owner’/landlord’s intent to sell, owner’s/landlord’s must make certain disclosures, including:
- Mailing a copy of the owner’s/landlord’s offer to purchase provided to tenants to the newly created OTLA;
- Providing notice to the OTLA of the tenant’s response, or failure to respond, to the offer to purchase;
Owners/Landlords are also obligated to notify any prospective buyers of the existence of a tenants’ right of first refusal.
Guidelines for Evictions Preceding a Sale: An owner/landlord cannot pursue eviction to facilitate a sale. The act stipulates that an owner/landlord may only pursue eviction for just cause when planning to sell the property. The desire to sell the property is not considered just cause.
Violations/Penalties: A landlord who fails to comply could face fines of up to $1,000 for each violation, in addition to complications and delays to the sale process. Furthermore, a title insurance company may refuse to issue an owner’s title insurance policy to the third-party purchaser if the owner/landlord did not comply with the Tenants Right of First Refusal.
The provisions governing the Tenants Right of First Refusal are detailed and complex. For assistance in understanding your obligations as a result of this new Act, please contact one of Stein Sperlings real estate attorneys.
