My client (a tenant under a nearly-49-year lease) is negotiating a lease amendment with two parts: one clause simply clarifies the tenant's existing right of first refusal if the landlord decides to sell, and a second clause forces the landlord to offer the tenant the property once a large enough third-party cash offer comes in, even if the landlord doesn't want to sell. Does either part of this amendment turn the lease into a taxable 'transfer of real property' under New York's Real Property Transfer Gains Tax?

Plain-English summary

This tax no longer exists. New York's Real Property Transfer Gains Tax (former Article 31-B of the Tax Law) was a 10% tax on the GAIN from transferring New York real property where consideration was $1 million or more. It was repealed for any transfer occurring on or after June 15, 1996. This 1991 opinion is preserved here for historical and research value, not as current law.

A tenant under a lease signed November 12, 1990, running 48 years and 11 months, with a conventional right of first refusal, negotiated a lease modification agreement adding two new purchase-right provisions. The first: if the landlord received a bona fide third-party offer it wanted to accept, the tenant could exercise its first-refusal right and buy at the LESSER of the third-party's offered price or a base price of $2,250,000 (the parties' agreed current fair market value, subject to capped annual CPI increases). The second: if the landlord received an all-cash, bona fide third-party offer at or above a separately fixed price of $5,000,000 (also CPI-adjusted), the landlord was required to notify the tenant and trigger the tenant's purchase right at that price -- EVEN IF the landlord didn't actually want to accept that third-party offer or sell at all.

The Department's analysis turned on a well-established legal distinction, applied through its own regulations (former 20 NYCRR § 590.30) and a leading legal treatise (77 Am. Jur. 2d): a right of first refusal only lets its holder match a price the property owner has ALREADY decided to accept from a willing third-party buyer -- it never lets the holder force a sale the owner doesn't want to make. An OPTION, by contrast, gives its holder the power to compel an unwilling owner to convey the property whenever the holder chooses to exercise it. Applying that test, the first clause was a genuine right of first refusal -- the tenant could only step in if and when the landlord ALREADY wanted to accept a specific third-party deal -- so it wasn't, by itself, a taxable transfer. But the second clause worked differently: it triggered the tenant's purchase right automatically upon a qualifying THIRD-PARTY OFFER, regardless of whether the landlord actually wanted to sell. That effectively gave the tenant the power to force an unwilling landlord's hand, which is exactly what defines a purchase OPTION rather than a mere refusal right. Since a lease coupled with a purchase option is always a taxable transfer of real property under the gains tax, no matter how short or long the lease term (former § 1440.7, former 20 NYCRR § 590.5(b)), adding that second clause made the whole modification a taxable transfer.

What this means for you

Commercial tenants and landlords negotiating purchase rights in a lease

Under this now-repealed tax, how a purchase clause was WORDED mattered enormously: a right that only activates when the landlord has already decided to sell to someone else is very different, tax-wise, from a right that can be triggered against the landlord's will by an outside offer -- the second is functionally an option and gets taxed as one.

Real estate attorneys drafting or reviewing lease modification agreements

This opinion is a clean, citable template for the option-versus-first-refusal distinction under this specific tax, useful for spotting which drafting choices in a lease amendment could inadvertently create a taxable "option" even when the parties intend to preserve a simple right of first refusal.

Accountants evaluating whether a historical lease amendment triggered gains tax

If you're reconstructing whether an old lease modification was a taxable event, this opinion's clause-by-clause analysis -- treating one provision as exempt and a nearly identical-looking provision in the same amendment as taxable -- shows how granular the Department's review could get.

Common questions

Q: Does this right-of-first-refusal-versus-option distinction still matter today?
A: Not under this specific tax -- it was repealed for transfers on or after June 15, 1996. The underlying legal distinction between an option and a right of first refusal remains a general property-law concept, but this particular tax consequence no longer applies.

Q: What was the key factual difference that made clause 2 an "option" rather than a first-refusal right?
A: Clause 2 required the landlord to sell to the tenant upon a qualifying third-party offer EVEN IF the landlord didn't want to accept that offer -- giving the tenant the power to force an unwilling landlord to sell, which is the defining feature of an option, not a mere right to match a deal the landlord already wants.

Q: Would it have mattered if the lease term were shorter than 49 years?
A: No -- the Department specifically noted that a leasehold coupled with the grant of a purchase option is ALWAYS taxable, regardless of the lease's term, unlike an ordinary leasehold (which is only taxable if it exceeds 49 years combined with other factors).

Q: Can another tenant or landlord negotiating a similar lease amendment rely on this exact ruling?
A: No, apart from the repeal -- an Advisory Opinion binds the Department only as to the petitioner and facts presented, and this result depended on the exact wording of each clause in the proposed lease modification agreement.

Citations and references

Statutes and regulations:

• former Tax Law § 1440.7 (the granting of an option with use and occupancy of real property is a transfer of an interest in real property subject to the gains tax, regardless of whether the option is granted simultaneously with the lease's creation)
• former 20 NYCRR § 590.5(a) (creation of a leasehold/sublease is a taxable transfer only if the combined term/renewals exceed 49 years, substantial capital improvements are made, and the lease covers substantially all -- 90% or more -- of the premises)
• former 20 NYCRR § 590.5(b) (a leasehold coupled with the granting of a purchase option is ALWAYS taxable, regardless of the lease term)
• former 20 NYCRR § 590.30 (distinguishes a right of first refusal -- which lets the holder buy at the price the owner has already agreed to accept from a third party, without the power to compel an unwilling owner to sell -- from an option, which does give the holder that power)
• 77 Am. Jur. 2d § 49 (general legal treatise confirming the same distinction between an option and a pre-emptive/first-refusal right)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_prop_tran_ao_1991.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_property/a91_3r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-91 (3) R
Real Property
Transfer Gains Tax
March 22, 1991

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M910115A

On January 15, 1991, a Petition for Advisory Opinion was received from Phillips, Nizer,
Benjamin, Krim and Ballon, 40 West 57th Street, New York, NY 10019.
The issue raised by Petitioner, Phillips, Nizer, Benjamin, Krim and Ballon, is whether a lease
modification agreement (hereinafter the "LMA") entered into by Petitioner's client (the "Tenant")
modifying a right of first refusal constitutes a transfer of real property under the Real Property
Transfer Gains Tax (the "gains tax").
On November 12, 1990, Tenant entered into a lease for a term of 48 years 11 months which
contained a conventional right of first refusal. Pursuant to a proposed LMA, the landlord and
Tenant propose amending the lease so that the right of first refusal will contain the following terms:
(1) In the event that the Landlord receives a bona fide third party offer it desires to accept,
the Landlord must notify the Tenant of such offer and the Tenant shall have the right of exercising
its right of first refusal at a price which is equal to the lesser of: (a) the price offered by the third
party or (b) a base price of $2,250,000 (which the Landlord and Tenant believe is the property's
current fair market value) subject to annual increases based on the percentage increase in the
Consumer Price Index but limited to annual percentage increases of 6%.
(2) Upon Landlord's receipt of an all cash, bona fide, third party offer to purchase the
property at or above a fixed price of $5,000,000, which amount is also subject to annual adjustments
based on the percentage increase in the Consumer Price Index, the Landlord must notify the Tenant
and thus trigger the Tenant's right to exercise the right of first refusal, even if the Landlord does not
wish to accept such third party offer.
Section 590.5 of the Gains Tax Regulations, provides, in part, as follows:
"(a) Question: Is the creation of a leasehold or sublease a transfer of real
property?
Answer: Yes. The creation of a leasehold or sublease is a
transfer of an interest in real property, but only where:
(1) the sum of the term of the lease or sublease and any options for renewal
exceeds 49 years;
TP-9 (9/88)

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TSB-A-91 (3) R
Real Property
Transfer Gains Tax
March 22, 1991

(2) substantial capital improvements are or may be made by or for the benefit of the
lessee or sublessee; and
(3) the lease or sublease is for substantially all of the premises constituting the real
property.
Substantially all is defined to mean 90 percent of the total rentable space of the
premises, exclusive of common areas.
*
*
*
(b) Question: Is the creation of a leasehold for a term of less than 49 years every
taxable?
Answer: Yes. If a leasehold is coupled with the granting of an option to
purchase the property, the transfer is taxable regardless of the term of the
lease." (emphasis added)
Moreover, pursuant to Section 1440.7 of the Tax Law, the granting of an option with use and
occupancy is a transfer of an interest in real property which is subject to the gains tax, regardless of
whether or not the granting of the option to purchase occurs simultaneously with the creation of the
lease.
Section 590.30 of the Gains Tax Regulations provides, in part, as follows:
"Question: Is the term right of first refusal, contained in a lease agreement,
considered an option?
Answer: No. A right of first refusal grants the recipient the right to buy the
real property at the same price that has been offered to the seller and the seller
accepts or proposes to accept from a third-party buyer. The right of first
refusal does not grant the lessee the ability to compel an unwilling owner of
the real property to sell. In contrast, an option gives the optionee the right to
purchase property at an agreed-upon price from the optionor, if he chooses,
at any time within the option period. The optionee may compel an unwilling
optionor to convey the real property upon the exercise of the option.
(emphasis added)
Further, 77 Am Jur 2d, §49 states, in part, as follows:
The distinction between an option and a pre-emptive right to purchase in the event
the landlord should decide to sell is well recognized. Unlike an option, a pre-emptive
right does not give the pre-emptioner the power to compel an unwilling owner to sell;
it merely requires the owner, when and if he decides to sell, to offer the property first
to the person entitled to the pre-emptive right at a stipulated price. There is no doubt
that an agreement based on a consideration to give the promisee the refusal or first
right to purchase in case the landowner wishes to sell at a fixed price or at a price

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TSB-A-91 (3) R
Real Property
Transfer Gains Tax
March 22, 1991

which may be made certain, while of less value than an ordinary option to purchase,
is valid and binding on the landowner. (emphases added)
Accordingly, pursuant to Section 590.30 of the Gains Tax Regulations and 77 Am Jur. 2d,
§49 there's a definite distinction between an option to purchase and a right of first refusal in that an
option gives the lessee the power to compel an unwilling lessor to sell the property being leased,
Paragraph one of the LMA constitutes a right of first refusal since the Tenant has no power to
compel the landlord to sell the property. Therefore, if the lease is modified to only include paragraph
"1", pursuant to Section 590.30 of the Gains Tax Regulations the lease is not a transfer of real
property subject to the gains tax. However, Section 590.5(b) of the Gains Tax Regulations and
Section 1440.7 of the Tax Law provide that a leasehold when coupled with the granting of an option
to purchase is the transfer of an interest in real property. Since paragraph "2" of the LMA gives the
Tenant the power to compel the landlord to sell the property upon the landlord's receipt of a third
party offer, such amendment constitutes the grant of an option to purchase and is, therefore, a
transfer of real property subject to the gains tax.

DATED: March 22, 1991

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.