A right of first refusal can be granted for real estate. A distinction must be made between a real right of first refusal and a personal right of first refusal. It is important to note that one right cannot simply be converted into the other, as demonstrated by a decision of the Federal Court of Justice (BGH) dated January 23, 2025 (Case No.: V ZB 10/24).
The real right of first refusal is granted to the respective owner of a specific property. Accordingly, it can be transferred or inherited. In contrast, the personal right of first refusal is tied to a specific individual who is granted the right. This right is non-transferable, according to the law firm MTR Legal Rechtsanwälte, which advises, among other things, on real estate law.
The BGH has now clarified in its decision that the right of first refusal cannot simply be converted. Rather, it is necessary to first dissolve the existing right of first refusal and then establish a new one. This applies even if the beneficiary is already the owner of the dominant property.
Land Registry Office Rejects Conversion
In the underlying case, the owner of a property had granted the owner of a neighboring property a real right of first refusal for all cases. The two owners agreed, by means of a notarized deed, to change the existing right of first refusal into a personal right of first refusal so that it would belong to the owner of the neighboring property. This new right would neither be inheritable nor transferable.
However, the Land Registry Office thwarted their plans and rejected the application for the change. The Higher Regional Court (OLG) of Munich confirmed the Land Registry Office’s decision and dismissed the owners’ appeal. The OLG justified this by stating that the parties were seeking a legally impermissible conversion. The conversion could only be achieved through the cancellation and re-establishment of the right of first refusal. The BGH confirmed the OLG Munich’s decision.
Cancellation and Re-establishment of the Right of First Refusal Required
The BGH stated that the intended conversion of the right of first refusal does not constitute a modification of the content of a right under Section 877 of the German Civil Code (BGB). A right of first refusal in favor of the respective owner of a property cannot be changed by legal modification into a right of first refusal in favor of a specific individual. Instead, the previous right must be canceled, and a new right of first refusal must be established. It makes no difference if the beneficiary is already the owner of the previously dominant property.
According to the prevailing legal opinion, a modification under Section 877 BGB is ruled out from the outset if the holder of the property right is to be changed. This also applies to the conversion of a real right of first refusal into a personal right of first refusal, as the BGH clarified. In this case, the right would be changed from being tied to the respective owner of the benefited property to a right held by a specific individual. This remains unchanged even if the beneficiary is already the owner of the dominant property. The effects of such a change would become evident upon the sale of the property. Originally, the buyer of the dominant property would also acquire the right of first refusal for the other property. However, if the right were changed to a personal right of first refusal, it would remain with the individual and be detached from the neighboring property, according to the BGH.
No Priority-Preserving Conversion
The real right of first refusal and the personal right of first refusal represent two distinct rights. Therefore, a conversion cannot be considered a mere modification of the content of a right, as further explained by the judges in Karlsruhe. A right of first refusal in favor of the respective owner of a property cannot be separated from the ownership of that property. If the conversion of a real right of first refusal into a personal right of first refusal were permitted, the right of first refusal would lose its connection to the property. This would be incompatible with Section 1103(1) BGB, as emphasized by the BGH.
According to the BGH’s decision, a priority-preserving conversion of the right of first refusal is not possible.
MTR Legal Rechtsanwälte provides legal advice in real estate law.
Feel free to contact us!
