Public Rights of First Refusal.

• Author: Damrosch, Peter

NOTE CONTENTS INTRODUCTION 814 I. PUBLIC RIGHTS OF FIRST REFUSAL 818 A. The Basic Right 819 B. Methods of Acquisition 820 C. Pricing Mechanisms 822 D. Notification Procedures 823 E. Involving the Private Sector 825 II. THE GOVERNMENT'S SUITE OF OPTIONS FOR ACQUIRING PROPERTY 826 A. Regular Purchasing and Eminent Domain 826 B. Public Rights of First Refusal as a Third Path 828 III. WHEN SHOULD THE GOVERNMENT USE A RIGHT OF FIRST REFUSAL? 833 A. Properties with Unique Social Value 834 B. Transformation, Preservation, and the Ability to Wait 840 IV. WHEN SHOULD THE GOVERNMENT AVOID A RIGHT OF FIRST REFUSAL? 844 A. A Cautionary Note: The Hidden Costs of Rights of First Refusal 844 B. Misuse and Abuse 847 CONCLUSION 851 APPENDIX 851 INTRODUCTION

In October 2017, the California State Legislature passed Senate Bill (SB) 50, which voids any sale of federal land in California unless the State Lands Commission has first been provided with an opportunity to purchase the property. (1) Because the federal government owns nearly forty-six percent of the land in California, SB 50 affects a significant portion of the state. (2) The law was a reaction to legislation proposed by Republican members of Congress that would divest the federal government of millions of acres of public lands. (3) To prevent the privatization of public lands, California enacted SB 50, which makes it the official policy of the state to "discourage conveyances that transfer ownership of federal public lands in California from the federal government." (4) If conveyances cannot be discouraged, SB 50 ensures that they can at least be redirected. The law gives California a right of first refusal to purchase any property the federal government offers for sale, as long as the state matches the price the federal government would have otherwise received.

According to the U.S. Department of Justice (DOJ), California's right of first refusal has already had far-reaching consequences. On April 2, 2018, DOJ filed a complaint in the Eastern District of California, alleging that California's right of first refusal has disrupted the market for federal lands, created a cloud on title, increased the risk of litigation, and deterred potential buyers from bidding on federal property. (5) DOJ is seeking a declaratory order that California's right of first refusal violates both the Supremacy and Property clauses of the U.S. Constitution by preventing the federal government from disposing of its property as it sees fit. (6)

While several features of California's law may be unique, including the scope of the law and its explicit targeting of the federal government, California is far from the only public authority to claim a special right to purchase property. The power that California gave itself--a right of first refusal to buy land--is a power that appears at every level of government and in service to a wide array of public programs.

Massachusetts, for example, has a right of first refusal to purchase apartment buildings in order to preserve affordable housing, as do the cities of Denver and San Francisco. (7) Maine has a right of first refusal to buy "working waterfront property," which it employs in economic development plans for coastal towns. (8) In Michigan, cities and towns can exercise a right of first refusal to buy tax-foreclosed properties. (9) The Federal Department of the Interior has a right of first refusal to buy land surrounding a number of national parks. (10) Every state in the Northeast, along with the federal government, has a right of first refusal to purchase railroad corridors, which they use to preserve valuable rights-of-way when a railroad wishes to sell a rail line. (11) And while this Note focuses on domestic cases, rights of first refusal are certainly not unique to the United States. France invokes its droit de preemption to expand green space and build public housing, (12) while city planners in the Netherlands utilize rights of first refusal to develop new commercial areas. (13) First-refusal rights even feature in international treaties and agreements. (14)

Scholars of property law and of local government have largely overlooked the ability of governments to use rights of first refusal to acquire property. The scholarly literature frames the discussion in terms of only two options: either the government can buy property on the open market like any other private party, or it can use eminent domain to compel an unwilling owner to sell. (15) Both options have their defects. Critics argue that eminent domain is used inequitably against disadvantaged communities, (16) that it fails to compensate owners for the true value of their property, (17) and that it leads to political backlash and high administrative costs. (18) Supporters defend the power as a necessary, albeit flawed, means of ensuring that the government has the land it needs to build everything from parks to infrastructure. (19) A right of first refusal (ROFR) represents a third option between these two poles. It gives the government the power to purchase a piece of property as long as it matches the price the owner would otherwise have received.

While a small, but valuable, body of work has examined rights of first refusal in the context of private parties, (20) the rights of first refusal that governments use--what I call public rights of first refusal--have never been the focus of serious scholarly attention. They appear in the literature primarily in one of two forms. First, researchers occasionally note the existence of rights of first refusal during discussions of other legal or policy issues. (21) For example, in a longer article on mixed-income housing, Robert Ellickson mentions that Montgomery County, Maryland possesses a right of first refusal to buy multifamily apartment buildings, but he does not elaborate further on how the right operates. (22)

Second, commentators at times propose the creation of a right of first refusal to solve a discrete policy challenge, such as increasing the supply of affordable housing (23) or conserving open spaces. (24) For example, in an article on food security and agricultural preservation, Neil Hamilton recommends that the United States create an institution akin to France's Societe d'amenagement foncier et d'etablissement rural, a nonprofit organization that possesses a statutory right of first refusal to buy and preserve farmland. (25) Maria Cristiano Anderson and Paula A. Franzese provide one of the more robust examinations of a public right of first refusal in a study of New York City's right to purchase certain subsidized housing developments. (26) These proposals, however, do not compare public rights of first refusal across subject areas and thus present only a glimpse of a much larger subject. Moreover, they generally omit any discussion of the drawbacks of public rights of first refusal. (27)

This Note contributes to the fields of property law and local government in two ways. First, using a collection of 120 statutes, I document the diverse forms and uses of public rights of first refusal and provide case studies of how these rights operate in practice. Second, I situate public rights of first refusal within the suite of options that governments have to acquire property, comparing rights of first refusal to both eminent domain and regular purchasing.

I argue that in many cases, public rights of first refusal strike a better balance between individual and collective needs than do either regular purchasing or eminent domain. Unlike regular purchasing, a right of first refusal gives the government a guaranteed ability to acquire properties that are critical to public programs. At the same time, these rights leave substantial decision-making power in the hands of property owners, who decide whether to sell their property and at what price. This balancing of individual autonomy and collective flourishing yields several benefits. By avoiding the displacement and unpredictable compensation of eminent domain, public rights of first refusal alleviate some of the opposition that public agencies face when using eminent domain. At the same time, the guaranteed ability to acquire property, when coupled with thoughtful long-term planning, can enable the realization of meaningful social goals. In a case study of the Agua Caliente Tribe of Cahuilla Indians, I show how one tribe has used its right of first refusal to assemble thousands of acres of land, in the process preserving sacred areas and spurring economic development.

I advocate that public rights of first refusal should be used, but used prudently. These rights are most effective when the characteristics of a piece of property--such as location or history--give it unique social value. Conversely, public rights of first refusal are least useful when the government must act quickly or has many suitable alternatives for purchasing property. In these cases, rights of refusal provide little value, and yet the burdens on buyers and sellers (in the form of increased delays, uncertainty, and attorneys' fees) remain.

This Note proceeds as follows. Part I catalogues the different forms of public right of first refusal. (28) Part II compares public rights of first refusal to the two other primary tools for acquiring property--regular purchasing and eminent do-main--and examines how a right of first refusal provides advantages that neither affords. Part III makes the affirmative case for when public agencies should consider using a right of first refusal. Part IV presents the downsides of rights of first refusal and explains when public agencies should avoid using them. I end with a brief conclusion.

1. PUBLIC RIGHTS OF FIRST REFUSAL

   While public rights of first refusal generally share a core structure, the uses and forms of rights of first refusal vary considerably across different governments. This Part first describes how a basic right of first refusal works, then traces the...