When Has a Neighbor Waived His Right to First Refusal?

Rabbi Itamar Rosensweig^[1]

I. The Law of the Abutter

1. Right of First Refusal

When a property is put up for sale, Jewish law provides the owner of the abutting lot with the right of first refusal. Under this principle, known as Dina de-Bar Metzra, the abutter has the right to match any third-party offer for the property and take title for himself.^[2] In addition to granting the abutter the ex-ante right to purchase the property when it goes up for sale, Jewish law also confers upon the abutter the power to dispossess a third-party buyer ex post facto, after the sale has been executed. In such a case, the third-party buyer is viewed as an agent of the abutter; the abutter can remunerate the buyer for his costs and take title of the property.^[3]

2. Economies of Scale

At the heart of Dina de-Bar Metzra is the idea that the abutter stands to gain a substantial benefit from owning adjacent properties while the cost to the seller and the would-be buyer is generally negligible.^[4] Consider the case of agriculture. The abutter benefits from “economies of scale.” By owning adjoining lots, he is able to spread his costs over a larger number of goods, making production more efficient. Rather than having to plow, plant, water, protect, and harvest two geographically separated fields (note the costs of having to transport the equipment between the properties and having to hire separate watchmen for each field), the landowner can now produce double the amount for only a marginal additional cost.^[5]

3. Agricultural and Residential Properties

Many poskim hold that the benefit of owning abutting properties is not limited to agriculture. Comparable benefits apply to owning contiguous residential lots. Accordingly, Dina de-Bar Metzra applies with equal force to homes and apartments.^[6] Consider the economy of scale benefits that would apply to residential lots, such as spreading the cost of maintenance, landscaping, utilities, fencing and security over combined lots compared to the costs that would be incurred over separated ones. Also consider the benefit of residing with one’s family in a single, larger apartment unit rather than spreading the family out over separate, detached units.^[7]

4. Costs to the Seller and Buyer

Dina de-Bar Metzra assumes that the substantial benefit to the abutter comes at zero or negligible cost to the seller and would-be buyer. In this sense, Dina de-Bar Metzra can be understood as a Pareto improvement: The Bar Metzra rule facilitates a change in the allocation of resources that harms no one and helps at least one person. Dina de-Bar Metzra generally comes at no cost to the seller because the seller is usually indifferent between the two buyers, so long as he receives his asking price.^[8] Similarly, Dina de-Bar Metzra assumes that the would-be buyer can find a comparable property elsewhere, so the buyer is not harmed by the abutter’s benefit.

When these assumptions fail–when the abutter’s benefit imposes a significant cost on the seller or buyer–Dina de-Bar Metzra may not apply. Let’s first consider the case where Bar Metzra would impose significant costs on the seller. Suppose the property is being sold because the seller needs immediate access to capital (e.g., to pay off an overdue tax liability or to purchase a property elsewhere that will be sold to someone else if he delays). Suppose further that allowing the abutter to interfere with the transaction by asserting his right of first refusal will delay the sale and thereby the seller’s access to capital. In such a case, Dina de-Bar Metzra is suspended because of the costs it would impose on the seller.^[9]

Or suppose that both the abutter and buyer are unable to pay for the property upfront, such that whoever purchases the property will have to “borrow” from the seller by paying in installments. Here the seller can argue that he trusts the buyer’s credit over the abutter’s. In cases such as these, where the abutter’s benefit would impose a significant cost on the seller, Dina de-bar Metzra is suspended.^[10]

The same is true when the right of the abutter would impose significant costs on the buyer. Consider a case where housing inventory is scarce and the buyer does not yet own a home. Here rishonim rule that the abutter, already a homeowner, is denied the right of first refusal. This is because the marginal economic gain to the abutter of owning adjoining lots is outweighed by the substantial cost it would impose on the buyer by forcing him to remain homeless.^[11] Likewise, if the buyer is the type of person for whom it is difficult to navigate the real estate market (e.g., the buyer is financially illiterate and uneducated), the abutter is denied the right of first refusal, since the buyer would be unable to find a comparable property elsewhere.^[12]

5. Waiver of Right

Even when the abutter is assigned the right of first refusal, Jewish law provides that the abutter can waive his right.^[13] For example, if the abutter fails to object to the sale within a reasonable time frame, the abutter is deemed to have waived his right.^[14] Similarly, if the seller and buyer secure an explicit, binding waiver from the abutter by having him execute a kinyan (a formal act evidencing the abutter’s intent), the abutter is estopped from later changing his mind and asserting his right under Bar Metzra.^[15] Moreover, by performing certain actions, such as encouraging the seller to proceed with the sale to a third-party buyer, the abutter may be deemed to have waived his right.^[16]

II. Mizrahi v. Ben-David

1. The Facts

The Beth Din of America recently published a decision involving Dina de-Bar Metzra in the matter of Mizrahi v. Ben-David.^[17] Mizrahi and Cohen owned abutting properties and were neighbors for over 18 years. Mizrahi had repeatedly expressed his interest in buying Cohen’s property, but Cohen was never willing to sell.

In September of 2010, Mizrahi offered to pay $3.6 million for the property, but Cohen replied that he would not sell for less than $5 million. About a week later Cohen received an offer from Ben-David, a third-party buyer, for $5 million. Without revealing Ben-David’s identity, Cohen asked Mizrahi if he wanted to match the buyer’s offer and exercise his right under Dina de-Bar Metzra. Mizrahi declined, saying that he did not believe that the buyer offering $5 million was serious.

Sometime later, Mizrahi discovered that Ben-David was the interested buyer. Mizrahi knew that Ben-David was a serious player in the real estate market and realized that the $5 million offer was legitimate. Immediately following that discovery, Mizrahi contacted Cohen and told him that he wanted to match Ben-David’s offer. Cohen responded that Mizrahi had already declined to match Ben-David’s offer, and therefore he would move forward with the sale to Ben-David.

All of the parties–Cohen, Mizrahi, and Ben-David–agreed to bring their case to a din Torah before the Beth Din of America. At the hearing, Mizrahi argued that he is entitled to exercise his right under Dina de-Bar Metzra and purchase the property. Ben-David countered that Mizrahi had waived his right when he told Cohen that he was not interested in matching the $5 million offer, which bars him from asserting a later claim under Dina de-Bar Metzra.

2. Waiver of Right

The dayanim considered several factors in determining whether Mizrahi’s initial refusal to match the buyer’s price constituted a binding waiver of right. These factors include: whether a waiver is valid without a kinyan, whether a party can waive a right that has not yet vested, whether the right was waived to the buyer or to the seller, and whether the abutter can retract his waiver before the sale has been executed.

The Talmud discusses a case where the abutter encourages a third-party buyer to purchase the property from the seller.^[18] The Talmud concludes that this does not constitute a valid waiver of right so long as it was not accompanied by a formal kinyan. The underlying theory, Rashi explains, is that the abutter may have encouraged the buyer to pursue the property only so as to expose the seller’s true asking price.^[19] Were the abutter to approach the seller directly about purchasing the property, the seller would raise the price, exploiting his knowledge that the abutter is willing to pay a premium to own neighboring lots. Thus, Rashi explains, the abutter strategically directed the buyer to pursue the property so that he can later exercise his right of first refusal and capture it at fair market value–the amount that a third-party buyer would pay for it.^[20] Returning to Mizrahi v. Ben-David, the Talmud’s ruling suggests that Mizrahi’s waiver was not valid, as it was not accompanied by a formal kinyan.

Ramah, however, limits the Talmud’s ruling to a case where the abutter directed the buyer to purchase the property.^[21] In Mizrahi v. Ben-David, however, it was the seller (Cohen) who consulted the abutter whether he wanted to exercise his right of first refusal, which the abutter (Mizrahi) declined. Furthermore, the seller’s consultation with Mizrahi was in the context of a bona-fide offer on the property, after having revealed the buyer’s offer amount. As commentators explain, this case is distinguishable from the Talmud’s because Rashi’s theory of the abutter strategizing to expose the buyer’s asking price does not apply, since the seller has already revealed the offer amount to the abutter.^[22]  Consequently, the abutter’s waiver would be effective even without a kinyan.^[23] Shulchan Arukh rules in accordance with Ramah, which would imply that Mizrahi’s waiver was valid and that he can no longer assert his right under Dina de-Bar Metzra.^[24]

But even this does not resolve the issue at bar in Mizrahi v. Ben-David. The dayanim note that Rav Yosef Karo writes in his Responsa Avkat Rokhel that even though the abutter’s waiver to the seller is valid according to Ramah, it does not fully vest until the sale is executed. In other words, Ramah may be correct that the abutter’s declining to match the buyer’s offer constitutes a valid waiver of right. But that waiver can be retracted any time before the sale goes into effect. Thus, it is true that if the abutter fails to retract his waiver, and the property is sold to the buyer, the abutter can no longer exercise his right of Dina de-Bar Metzra to remunerate the buyer and take title to the property ex post facto. But the abutter is free to retract his waiver before the property is sold and to reassert his right of first refusal.^[25] Because Cohen and Ben-David had not yet executed the sale, Mizrahi would have the power to retract his waiver.

Based on Rav Yosef Karo’s analysis, the dayanim concluded that even though Mizrahi had initially waived his right when he declined to match Ben David’s offer, Mizrahi subsequently revoked his waiver prior to the sale. Accordingly, they ruled that Dina de-Bar Metzra remained in force.

3. Seller’s Discretion

The dayanim also cite the Chemdat Shlomo, quoted in the Pitchei Teshuvah, who argues that when the abutter communicates his waiver to the seller, the seller has the right to choose whether to enforce it.^[26] The third-party buyer (Ben-David) has no power to enforce a waiver communicated to the seller (Cohen). At the din Torah, Cohen expressed that he is indifferent between selling to Mizrahi and selling to Ben-David and that he is not committed to enforcing the waiver per se.

4. Choice of Law

It is also interesting to note that the parties in Mizrahi v. Ben-David agreed on a choice of law clause, asking the dayanim to decide the case according to Sephardic Jewish law. Section 3(d) of the Beth Din of America’s rules and procedures provides that “In situations where the parties to a dispute explicitly adopt a ‘choice of law’ clause, either in the initial contract or in the arbitration agreement, the Beth Din will accept such a choice of law clause as providing the rules of decision governing the decision of the panel.” Choice of law clauses typically center on Jewish law versus the law of the jurisdiction. In Mizrahi v. Ben-David, however, the choice of law clause was applied to have the dispute governed by Sephardic rather than Ashkenazic Jewish law.

In any event, there does not appear to be a significant difference between Sephardic and Ashkenazic Jewish law with respect to the facts of Mizrahi v. Ben-David.

The Beth Din of America’s published decision in Mizrahi v. Ben-David can be accessed here.

NOTES

[1] Rabbi Itamar Rosensweig is a dayan and chaver beth din at the Beth Din of America and a maggid shiur at Yeshiva University.

[2] Bava Metzia 108a.

[3] Rambam Shekhenim 12:5; Shulchan Arukh Choshen Mishpat 175:6.

[4] Rashi Bava Metzia 108a s.v. ve-Asita.  Dina de-Bar Metzra assumes that the seller is usually indifferent between the two buyers so long as he gets his asking price. Since the abutter has to match the third-party buyer’s offer, Dina de-Bar Metzra typically comes at no cost to the seller. As we shall see below, when this assumption fails–-wherever the seller will incur a loss–the abutter is generally denied the right of first refusal. See, e.g., Shulchan Arukh Choshen Mishpat 175:23, 175:25, 175:43.

Likewise, Dina de-Bar Metzra is assumed to impose only negligible costs on the would-be buyer, since he can generally find comparable properties elsewhere. See Rashi op. cit. However, when that assumption fails, such as when inventory is scarce and the buyer does not yet own a property or if the buyer is the type of person for whom it is difficult to navigate the real estate market, the abutter is denied the right of first refusal. See Shulchan Arukh Choshen Mishpat 175:47 with Sema 175:83 and Shulchan Arukh Choshen Mishpat 175:49. See the discussion below.

[5] See Sefer ha-Yasher, Teshuvot no. 32. Tosafot Bava Metzia 108b s.v. ar’a.

[6] Responsa Rashba 2:145.

[7] Shulchan Arukh Choshen Mishpat 175:53; Pitchei Choshen Matzranut Chapter 11 n. 61.

[8] Of course the abutter has to match the amount offered by the buyer. Note that the abutter also has to match the quality and type of payment offered by the buyer. See Shulchan Arukh Choshen Mishpat 175:23.

[9] Shulchan Arukh Choshen Mishpat 175:42-43

[10] Shulchan Arukh Choshen Mishpat 175:8, 175:23.

[11]Shulchan Arukh Choshen Mishpat 175:49.

[12] Shulchan Arukh Choshen Mishpat 175:47 and Sema 175:83.

[13] Bava Metzia 108a; Shulchan Arukh Choshen Mishpat 175:29, 175:30.

[14] Shulchan Arukh Choshen Mishpat 175:32. The time frame is generally set at the amount of time it would take for the public to become aware of the sale and for the abutter to file suit.

[15] Shulchan Arukh Choshen Mishpat 175:29, 175:30.

[16] Shulchan Arukh Choshen Mishpat 175:31

[17] The Beth Din of America published the decision with the consent of the parties. All names, places, and other identifying facts have been changed.

[18] Bava Metzia 108a.

[19] Rashi Bava Metzia 108a s.v. Neharda’ei.

[20] This feature may be one of the central ideas animating the halakhic principle of Dina de-Bar Metzra. It effectively secures a neighbor’s ability to purchase the abutting property at fair market value, blocking the seller from charging a premium when selling to his next door neighbor.

[21] Tur Choshen Mishpat 175:47

[22]  Shulchan Arukh Choshen Mishpat 175:31 and Sema 175:56, Responsa Avkat Rokhel no. 123.

[23] ibid. See also Hagahot Ashri Bava Metzia 9:22

[24] Shulchan Arukh Choshen Mishpat 175:31.

[25] Responsa Avkat Rokhel no. 123. Rav Yosef Karo’s position in Avkat Rokhel mirrors the position of Rabbenu Simcha (Mordekhai Bava Metzia no. 393) who holds that a waiver is invalid before the sale is executed, even if it was accompanied by a formal kinyan, because the right of the abutter does not vest until the sale is executed. According to Rabbenu Simcha, a waiver performed before the execution of the sale constitutes a mere kinyan devarim—a mere pledge—and is therefore invalid. Rav Yosef Karo, by contrast, holds that a waiver performed before the sale is valid but does not become binding until the sale has been executed.

Rav Yosef Karo’s theory that allows for the abutter to retract his waiver before the sale flows from his interpretation of the mechanism of Dina de-Bar Metzra. As we saw earlier, Dina de-Bar Metzra conceptualizes the buyer as an agent of the abutter. But an agent cannot act against the express wishes of his principal. Thus, the legal significance of the abutter’s waiver amounts to a declaration of the principal that the buyer is not serving as his agent. That declaration is revocable any time before the sale. What matters, for the purpose of Bar Metzra, is whether the buyer can be conceptualized as the agent of the abutter at the time of the sale.

[26] Pitchei Teshuvah Choshen Mishpat 175:11.