Reported / Citable
Background
Shefman owned commercial real estate in New Braunfels consisting of a strip center with three storefronts. Shefman leased one storefront to Los Gallos to operate a Mexican restaurant under a Commercial Lease containing two critical provisions: Section 5 granting Los Gallos a right of first refusal (ROFR) to purchase the property on the same terms as any bona fide third-party offer, and Section 19 providing that Los Gallos would become “a tenant from month to month” if it remained in possession after the lease terminated without a new lease being executed.
When the original lease term expired, the parties did not execute a new lease, but Los Gallos remained in possession and became a month-to-month tenant. Subsequently, two third parties made an offer to purchase the property. Los Gallos timely exercised its ROFR and offered to match the third parties’ terms. Shefman rejected Los Gallos’s offer and accepted the third parties’ offer, though ultimately decided not to complete that sale. Los Gallos sued for breach of contract seeking specific performance of the ROFR. Both parties moved for summary judgment.
The trial court granted Los Gallos’s motion and denied Shefman’s motion, holding that the ROFR remained valid and enforceable during the month-to-month tenancy and that Shefman was required to accept Los Gallos’s matching offer. Shefman appealed by permission.
The Court’s Holding
The controlling legal question was whether a ROFR contained in a commercial lease survives lease expiration and remains enforceable when the tenant becomes a month-to-month tenant under a holdover provision. The Court of Appeals answered affirmatively and affirmed the trial court’s order.
Shefman argued that the majority rule adopted in other jurisdictions holds that a ROFR presumptively does not apply to a subsequent month-to-month or tenancy-at-will because a ROFR is not an essential lease term. Los Gallos contended that month-to-month tenancy means the original lease terms continue to apply on a month-to-month basis, including the ROFR. The court held that the outcome is the same under both interpretations. Under Texas law, whether Los Gallos’s status is characterized as a month-to-month tenancy with original lease terms continuing or as a common law tenancy-at-will, the ROFR remains valid and enforceable. The Texas Supreme Court has established that in a tenancy-at-will, “the terms of the prior lease will continue to govern absent an agreement to the contrary.” The court therefore declined to adopt the majority rule from other jurisdictions and held that Shefman’s ROFR obligation under Section 5 continued during Los Gallos’s month-to-month tenancy under Section 19.
Key Takeaways
- Rights of first refusal in commercial leases remain enforceable during month-to-month holdover tenancies in Texas, contrary to the majority rule in other jurisdictions.
- Lease terms presumptively continue to govern holdover tenancies in Texas unless the parties agree otherwise, and this presumption applies to ROFRs despite their not being essential lease terms.
- A tenant exercising a ROFR during a month-to-month tenancy can enforce the landlord’s duty to accept the tenant’s matching offer if the landlord receives a third-party purchase offer.
Why It Matters
This decision protects long-term commercial tenants in Texas by ensuring that rights of first refusal survive lease expiration and the transition to month-to-month tenancy. Tenants who remain in possession after lease termination retain valuable purchase rights without need for affirmative renewal or amendment. The decision also establishes that Texas will not follow the majority rule from other states, creating a durable framework that favors the continuation of negotiated lease provisions into holdover periods.
For commercial landlords and tenants negotiating leases in Texas, this holding clarifies that ROFR provisions are not temporary protections limited to the initial lease term. Landlords who wish to eliminate ROFR obligations upon lease expiration must do so explicitly in the lease language. This affects commercial real estate transactions and sale negotiations, particularly in situations where tenants remain in possession and holdover tenancies are common.