FROIO MANAGEMENT GROUP, INC. and WASHINGTON STREET ENTERPRISES, LLC v. BARGAIN DISCOUNT MARKETS, INC.

Introduction

Froio Management Group, Inc. (Froio) and Bargain Discount Markets, Inc. (BDM) each lease a portion of a commercial property in Dorchester. Froio’s lease, executed in 1991 and extended in 2011, gave it a right of first refusal to match any third-party offer to purchase the entire property. BDM’s lease, executed in 2009, gave it an option to purchase the portion of the property it rents beginning in 2017, subject, however, to Froio’s right of first refusal. In 2012, the landlord accepted a third-party offer for the property and communicated the offer to Froio under the right of first refusal. Froio exercised its now-ripened option and agreed to purchase the property, entering a purchase and sale agreement with the landlord. At closing, Froio assigned its rights to a new entity created by its principals, Washington Street Enterprises, LLC (WSE), which took title to the property with Froio and BDM remaining tenants.

In this action, Froio seeks a declaration that its right of first refusal remains in existence, even after its exercise, as Froio is still a tenant, and that BDM’s option is therefore still subject to Froio’s right of first refusal. BDM argues that the right of first refusal, having been exercised, no longer exists. On Froio’s motion for summary judgment, the court finds that a right of first refusal, when triggered, ripens into an option, and that an option, once exercised, is no longer of any force and effect. Thus, Froio’s right of first refusal is no longer effective and BDM’s option is no longer subject to the right of first refusal.

Procedural History

Froio and WSE filed their Complaints on September 21, 2015, seeking a declaratory judgment that Froio has a valid right of first refusal to acquire the property of WSE that trumps the option held by the BDM. BDM filed Defendant’s Motion to Dismiss (Memorandum of Law Incorporated) on October 19, 2015, which was heard on November 24, 2015, taken under advisement, and denied by the court’s Memorandum and Order Denying Defendant’s Motion to Dismiss entered December 15, 2015. BDM filed its answer on January 14, 2016. The case management conference was held on January 19, 2016.

On May 27, 2016, Froio and WSE filed their Motion for Summary Judgment, Memorandum in Support of Motion for Summary Judgment (“P-Memo”), Concise Statement of Material Facts (“P-SOF”), and Record Appendix Submitted in Support of Plaintiffs’ Motion for Summary Judgment (“P-App”). On June 27, 2016, BDM filed Defendant Bargain Discount Markets, Inc.’s Cross-Motion for Summary Judgment (BDM Summary Judgment Cross- Motion), Defendant’s Opposition to Plaintiff’s Motion for Summary Judgment and Memorandum of Law in Support of its Cross-Motion for Summary Judgment (“D-Memo”), Defendant Bargain Discount Markets, Inc.’s Responses to Plaintiffs’ Concise Statement of Material Facts and Concise Statement of Additional Material Facts (“D-SOF”), and Record Appendix Submitted in Support of Defendant’s Cross-Motion for Summary Judgment and in Opposition to Plaintiff’s Motion for Summary Judgment (“D-App”). On July 11, 2016, Froio and WSE filed their Memorandum in Opposition to Cross-Motion for Summary Judgment and in Reply to Plaintiff’s Motion for Summary Judgment (“P-Reply”), Plaintiffs’ Response to Defendant’s Concise Statement of Additional Material Facts in Support of its Cross-Motion and in Opposition to Plaintiff’s Motion for Summary Judgment, and Supplemental Appendix in Support of Plaintiff’s Motion for Summary Judgment and in Opposition to Defendant’s Cross- Motion for Summary Judgment. The cross-motions were heard on July 27, 2016 and taken under advisement. This Memorandum and Order follows.

Summary Judgment Standard

Generally, summary judgment may be entered if the “pleadings, depositions, answers to interrogatories, and responses to requests for admission . . . together with the affidavits . . . show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Mass. R. Civ. P. 56(c). In viewing the factual record presented as part of the motion, the court draws “all logically permissible inferences” from the facts in favor of the non-moving party. Willitts v. Roman Catholic Archbishop of Boston, 411 Mass. 202 , 203 (1991). “Summary judgment is appropriate when, ‘viewing the evidence in the light most favorable to the nonmoving party, all material facts have been established and the moving party is entitled to a judgment as a matter of law.’” Regis College v. Town of Weston, 462 Mass. 280 , 284 (2012), quoting Augat, Inc. v. Liberty Mut. Ins. Co., 410 Mass. 117 , 120 (1991).

Undisputed Facts

The following facts are undisputed or deemed admitted for the purpose of summary judgment:

1. Froio and BDM are tenants of WSE at the property at 80-100 Washington Street, Dorchester, Massachusetts (the Property). Froio leases the portion of the Property at 100 Washington Street (Froio Parcel) and BDM leases the portion of the Property at 80-90 Washington Street (BDM Parcel). Froio operates a Burger King on the Froio Parcel, adjacent to the BDM Parcel. P-SOF ¶¶ 1, 2, 5.

2. Before 2013, the Property was owned by Dunn River Associates (Dunn). On November 14, 1991, Froio entered a lease with Dunn for the Froio Parcel; that lease was extended by a First Amendment to Lease dated December 24, 2011 (collectively, the Froio Lease). P-App ex. A.

3. The following provision appears in the Froio Lease:

Landlord agrees that during the term of this Lease and any extensions hereof, it will not sell the Dunn River Office Center or any proportion thereof to any third person or entity of any type (excluding an entity which is substantially owned by one or more of the General Partners or by immediate family members of one or more of the General Partners or by employees of the Long Bay Management Company, provided any such entities or individuals agree to be bound hereby) unless, in the case of an unsolicited offer where the Landlord has not previously notified Tenant of Landlord’s intention to actively market the sale of the Dunn River Office Center, (i) Landlord has received a bona fide offer to purchase the same; (ii) Landlord has given Tenant written notice stating the name and address of the offeror and all terms and conditions of said offer, and containing an offer by Landlord to Tenant to sell the same upon the same terms and conditions of the bona fide offer, net of any broker’s commission to be paid by Landlord in connection with said bona fide offer; and (iii) Tenant has not, within thirty (30) days of receiving said offer, responded to Landlord that it agrees to purchase the same in accordance with terms of said offer.

P-SOF ¶ 3; P-App ex. A, ¶ 10.11. This provision was expressly negotiated. P-SOF ¶ 4.

4. The right of first refusal applied to the entire Property. P-SOF ¶ 9.

5. On March 27, 2009, BDM entered a ten-year lease with Dunn for the BDM Parcel (BDM Lease). P-SOF ¶ 5; P-App ex. B.

6. The following provision appears in the BDM Lease:

During the ninth and tenth year of the lease, the Tenant shall have the option to purchase the Building and related Premises for the greater of the following two amounts:

(a) Ten Million Dollars ($10,000,000), or

(b) appraised value pursuant to an agreed upon appraisal process described in Exhibit B of this Lease. This option is subject to the prior right of first refusal to purchase the entire parcel of land owned by the Landlord (including the subject Premises) and which prior right of first refusal is held by the Tenant of the Burger King restaurant located adjacent to the Premises.

P-SOF ¶ 7; P-App ex. B, § 14.13. This provision was expressly negotiated. See P-SOF ¶ 6.

7. Dunn received an offer to purchase the Property from the Grossman Companies which it accepted on June 29, 2012. P-SOF ¶ 10; D-SOF ¶¶ 35-38; D-App ex. S. Dunn informed Froio of the proposed sale by letter on July 2, 2012. D-App ex. S. Froio informed Dunn by letter dated August 1, 2012, that it was exercising the right of first refusal under the Froio Lease. P- SOF ¶ 10; D-SOF ¶ 39; P-App ex. J.

8. A purchase and sale agreement between Dunn as seller and Froio “or its assigns” as purchaser (P&S) was executed in September of 2012. D-SOF ¶¶ 42-43; D-App ex. V.

9. Froio determined that it did not want to hold title to the Property after the closing under the P&S. WSE was created as a limited liability company formed under Massachusetts law on December 11, 2012, to take title to the Property. P-SOF ¶¶ 11-12; P-App ex. C.

10. The P&S for the Property was assigned by Froio to WSE. D-SOF ¶¶ 46-47; D- App ex. X.

11. Both Froio and WSE are owned by Ronald Stetler (“Ronald”) and James Froio (“James”). P-SOF ¶ 11; D-SOF ¶ 30. Ronald and James manage and control WSE. D-SOF ¶ 31.

The two companies share office space. D-SOF ¶ 32. Froio operates with 200 to 250 employees while WSE operates with none. D-SOF ¶¶ 33-34.

12. The initial deposit of $150,000 required by the P&S was paid by Ronald and James from their own funds. D-SOF ¶¶ 40-41. Financing for the transaction was obtained from East Boston Savings Bank. D-SOF ¶ 44; D-App ex. W. This financing required a personal guarantee from Ronald and James. D-SOF ¶¶ 45, 53. Ultimately, $450,000 was paid from the personal funds of Ronald and James. D-SOF ¶¶ 48-49.

13. A $5,175,000 mortgage loan, $2,000,000 secured term loan, and a $750,000 revolving line of credit were obtained from East Boston Savings Bank payable to Froio and WSE. D-SOF ¶¶ 50, 52; D-App ex. W. Proceeds were also used to pay off an existing $914,992.51 loan with Brookline Bank. D-SOF ¶ 51.

14. Dunn conveyed title to the Property to WSE by quitclaim deed dated February 1, 2013, and filed with the Suffolk Registry District (registry) on February 6, 2013, as Document No. 00814636, Certificate of Title No. 129834. P-SOF ¶ 14; P-App ex. E. It executed an assignment of “all right, title and interest of [Dunn] in, under or by virtue of the [Froio and BDM] Leases” on February 5, 2013. P-SOF ¶ 13; P-App ex. D, ¶ 1. Subsequently, both parties have recognized WSE as the landlord. P-SOF ¶¶ 15-19 & 21-22.

15. WSE intends to redevelop the Property. P-SOF ¶¶ 20, 23.

16. BDM’s option to purchase ripens March 27, 2017 and expires on March 27, 2019.

P-SOF ¶ 8; P-App ex. B, § 14.13.

17. The BDM option to purchase only applies to the BDM Parcel at 80-90 Washington Street and does not include the Froio Parcel at 100 Washington Street. P-SOF ¶ 9.

18. BDM is planning on exercising its option to purchase the BDM Parcel. BDM does not recognize Froio’s right of first refusal. P-SOF ¶¶ 26-29; P-App ex. I.

19. BDM’s owner has experience with renovating property. P-SOF ¶¶ 24-25.

Discussion

At issue is the continuing validity of the Froio right of first refusal. Froio argues that its right of first refusal remains in effect, even after it exercised the right, and that BDM’s option remains subject to the right of first refusal. Froio reasons that after it exercised the right of first refusal when Dunn received the offer, it did not take title to the Property. Rather, it created a separate entity, WSE, which took title and to which both the Froio and BDM Leases were assigned. Thus, both leases remain in force as written despite the transfer of title, including their terms creating the Froio right of first refusal and the BDM option. P-Memo at 10. As Froio points out, the BDM option is expressly made “subject to Froio’s right of first refusal.” P-Memo at 11. If BDM can now exercise its option to claim title to the premises, Froio argues, its right of first refusal will be made ineffectual. P-Memo at 12. Froio, therefore, requests that summary judgment be entered declaring that the right of first refusal is available for use. See P-Memo at 11.

BDM, on the other hand, posits that the Froio first refusal right is not in force because Froio exercised it to trump the offer to Dunn for the purchase of the Property. BDM argues that Froio in effect purchased the Property, only creating WSE to take title from Dunn. D-Memo at 9-10. In BDM’s view, when Froio exercised the right of first refusal in 2012 to acquire title, “the right of first refusal was extinguished,” and it cannot be revived by the expedient of putting title to the Property in a separate legal entity. D-Memo at 10. Without a right of first refusal, BDM argues, it should be free to exercise its option to purchase. D-Memo at 14.

The question, therefore, is whether a right of first refusal in a lease is extinguished once it is exercised, or whether it may continue in existence if the holder of the right does not take title to the property itself, but creates a separate legal entity that takes title after the exercise and is assigned the lease that contains the right of first refusal. This question does not appear to have been addressed specifically in any Massachusetts appellate decisions, or, indeed, in any decision the court has found or the parties have identified. The parties point to cases from Texas and from the Massachusetts Superior Court as the closest analogies to their respective positions.

Froio relies on Startex First Equip., Ltd. v. Aelina Enters., Inc., 208 S.W.3d 596 (Tex. App. 2006). In that case, Startex’s lease contained a right of first refusal. Startex’s predecessor lessee, which had assigned the lease to Startex, had on the occasion of two prior sales declined to exercise the right of first refusal. When Aelina entered an agreement to buy the property, Startex sought to exercise the right of first refusal. Id. at 597-598. The right of first refusal contained a provision stating that after any sale in which the lessee did not exercise the right, “such sale shall be subject to the terms of this lease or any renewal thereof.” Id. at 597 (emphasis omitted). In upholding Startex’s right of first refusal, the court stated, “If the property is sold ‘subject to the terms’ of the Lease Agreement, and one of the terms of the Lease Agreement is the right of first refusal, then the right of first refusal survives all sales of the property.” Id. at 601. The court further stated that “a right of first refusal provision did not expire the first time the right holder chose not to invoke it and that it continued to apply to each qualifying offer the property owner received.” Id. The Startex case is not exactly on point, as here Froio did not previously decline to exercise the right of refusal, but actually exercised it. Moreover, the right of first refusal in the Froio Lease has no provision stating that a buyer of the Property will take it subject to the terms of the lease.

BDM, on the other hand, relies on a decision of the Superior Court, Super Fitness of Malden, Inc. v. WJG Realty Trust, No. 199901439B (Mass. Super. May 2, 2001), 2001 WL 34038576. In Super Fitness, the tenant held an option to purchase the premises. See id., at *1. The tenant exercised the option, but ultimately failed to close the transaction on the agreed date. See id. at *1-2. Significantly after the date set for closing, the tenant requested that the parties close the transaction, but the landlord indicated that it had been “repudiated.” Id. at *3. Almost two years later, the tenant attempted to re-exercise the option to purchase which the landlord refused. See id. The Super Fitness case is not exactly on point, either. Although the Super Fitness court recognized that the exercise of an option to purchase ripens it into a contract of sale, see id. at *4, it did not decide the case on that basis. When it examined the language that created the option, it noted that “[b]y its plain terms, the lease contemplates a single effective exercise of the option.” Id. at *5. It should also be noted that the tenant in Super Fitness breached the resulting contract of sale after its first exercise of the clause and then attempted to exercise the right again. See id. at *1-3. This kind of breach of contract is not present here.

The court, therefore, is left without controlling authority, and turns to the principles of rights of first refusal and options. “A right of first refusal is not an option to purchase property at a certain price, but a limitation on the owner's ability to dispose of property without first offering the property to the holder of the right at the third party's offering price.” Uno Restaurants, Inc. v. Boston Kenmore Realty Corp., 441 Mass. 376 , 382 (2004); Frostar Corp. v. Malloy, 63 Mass. App. Ct. 96 , 103 (2005). “The owner’s obligation under a right of first refusal is to provide the holder of the right seasonable disclosure of the terms of any bona fide third-party offer.” Uno Restaurants, Inc., 441 Mass. at 382-383. “On notice of receipt of a bona fide offer from a third party, a right of first refusal ripens into an option to purchase according to its terms.” Greenfield Country Estates Tenants Ass'n., Inc. v. Deep, 423 Mass. 81 , 89 (1996); Frostar Corp., 63 Mass. at 103. “[An] option to purchase … is an irrevocable offer by the [property title holder] to the [ultimate purchaser] to sell to him on the terms stated.” Kelley v. Ryder, 276 Mass. 24 , 26–27 (1931). The exercise of an option to purchase constitutes an acceptance of the “irrevocable offer” that the option represents. Stapleton v. Macchi, 401 Mass. 725 , 729 n.6 (1988).

Underlying the principles of rights of first refusal and options is the assumption that an option is only exercised once. The standard chain of events in the life of a right of first refusal in a lease is (a) a bona fide, third-party offer is received by the landlord that triggers the tenant’s right of first refusal; (b) the landlord reports the offer to the tenant; (c) the tenant now has an option to accept the offer without changing its terms, within the time period set under the right of first refusal; (d) the tenant accepts the offer, which is now binding; (e) the tenant and the landlord execute a purchase and sale agreement; (f) the transaction closes and the tenant takes title to the property and is no longer a tenant.

This is what Froio did. It received the Grossman Companies offer from Dunn, triggering its right of first refusal and ripening it into an option to purchase the Property. It exercised this option, thereby accepting the irrevocable offer that the option represented. Id. Froio then executed the P&S with Dunn for the sale. At this point, Froio departed from the scenario set forth above. After it executed the P&S, it assigned its rights under the P&S to the separate entity it created, WSE, and WSE took title. Thus, after the closing, Froio remained a tenant.

Contrary to Froio’s argument, that it assigned its rights under the P&S after exercising its option, thereby remaining a tenant, does not mean the right of first refusal under the Froio Lease survives and will be triggered by a new offer or the exercise of the BDM option. Froio’s right of first refusal was triggered and ripened into an option, and Froio exercised the option by accepting the offer. Once exercised, Froio’s ripened option no longer had any force or effect. Froio was now the buyer under an accepted offer to purchase, and entered into the binding P&S. While Froio no doubt had valid business and tax reasons to create a separate entity to take title to the Property, and had every right to do so, for the purposes of the option, Froio exercised the option, accepted the offer, and bought the Property. The assignment of its rights to WSE and WSE’s taking title to the Property did not undo Froio’s exercise of the option. Froio’s and WSE’s maintaining the proper corporate forms, so that Froio remains a tenant to WSE under the Froio Lease, does not change this.

The Startex decision does not support an opposite conclusion. Importantly, in Startex, unlike this case, the right of first refusal holder had several times declined to exercise its option, and its lease explicitly provided that the right of first refusal continued in effect after a purchase by a third party. Startex, 208 S.W.3d at 597-598. Here, Froio exercised its option, and the Froio Lease contains no provision that the right of first refusal survives a sale. Instead, this case is more like Super Fitness, in which the subject lease, like the Froio lease, “contemplates a single effective exercise of the option.” Super Fitness of Malden, Inc., 2001 WL 34038576 at *5.

The real effect of adopting Froio’s interpretation, and Froio’s reason for bringing this action, would be to render BDM’s option meaningless. In the BDM Lease, Dunn granted BDM an option with two limitations. First, it could not be exercised until 2017, and second, it was subject to Froio’s previously existing right of first refusal. In other words, BDM’s exercise of its option would trigger Froio’s right of first refusal to purchase the BDM Parcel on the terms set forth in the BDM option. Implicit in that condition is the further condition that if Froio exercised its right of first refusal and option in response to a third-party offer and purchased the Property, then the BDM option would no longer be subject that right because Froio would have purchased the Property. This interpretation does not prejudice Froio or WSE, for two reasons. First, when it exercised its option it knew or should have known of the terms of the BDM Lease and the BDM option. Second, the BDM option provides that the purchase price is the greater of $10,000,000 or the appraised value of the BDM Parcel, thus fully protecting WSE for the value of its interest. BDM is entitled to the option for which it bargained.

The BDM Summary Judgment Cross-Motion asks the court only to dismiss the complaint. On a complaint for declaratory judgment, the court is obligated to declare the rights of the parties even if the plaintiff’s relief is denied. City of Boston v. Massachusetts Bay Transp. Auth., 373 Mass. 819 , 829 (1977). Judgment shall enter declaring that the Froio right of first refusal is of no further force and effect and that BDM’s option is not subject to it.

Conclusion

For the foregoing reasons, the plaintiffs’ Motion for Summary Judgment is DENIED, and the BDM Summary Judgment Cross-Motion is ALLOWED. Judgment shall enter declaring that Froio’s right of first refusal is of no further force and effect and that BDM’s option to purchase the BDM Premises is no longer subject to Froio’s right of first refusal.

SO ORDERED