Law Updates


Bona Fide Offer of Sale Under D.C. Tenant Opportunity to Purchase Act Cannot Be Based on Projected Future Value of Property After Reconstruction

Parcel One Phase One Associates, LLP v. Museum Square Tenants Association, Inc., Case No. 15-CV-609 (District of Columbia Court of Appeals, September 22, 2016) | View pdf

(September 4, 2016) Caroline E. Willsey, Law Clerk.

For more information, contact Robert E. Scott, Jr., EsquireFor more information, contact Robert E. Scott, Jr., Esquire.

In Parcel One Phase One Assocs. v. Museum Square Tenants Assoc., the D.C. Court of Appeals considered an appeal from Parcel One Phase One Associates, LLP (“Parcel One”) arising from the trial court’s grant of summary judgment in favor of Museum Square Tenants Association (the “Tenants Association”). Parcel One argued that (1) the Tenants Association lacked standing under the Tenant Opportunity to Purchase Act (“TOPA”) to bring suit and that (2) its offer of sale to the Tenants Association was bona fide under TOPA. The D.C. Court of Appeals affirmed the trial court’s grant of summary judgment in favor of the Tenants Association.

Museum Square is an apartment building in Washington, D.C. Parcel One, the owner of the building, sought to demolish the building and build a mixed density housing containing apartments, condominiums, and commercial space. TOPA requires that a landlord provide its tenant(s) with a bona fide offer of sale prior to selling a rental dwelling. Parcel One accordingly offered to sell the Museum Square building to the tenants for $250 million, “as is,” cash payment. The Tenants Association formed to devise a response to Parcel One’s offer of sale. The Tenants Association ultimately elected to bring an action in D.C. Superior Court seeking a declaratory judgment that the offer by Parcel One was not a bona fide offer under TOPA, as it did not reflect a fair and objective value of the property. Parcel One challenged the action on the ground that the Tenants Association lacked standing under TOPA. The Tenants Association subsequently filed a motion for summary judgment.

In opposition to summary judgment, Parcel One argued that TOPA merely required a good faith, honest offer. In the alternative, Parcel One argued that whether an offer was bona fide was a material issue of fact sufficient to defeat the Tenants Association’s motion for summary judgment. The Tenants Association argued that Parcel One’s offer was not a bona fide offer, as there was no unique value to the owner (Parcel One) that justified a deviation from the market value.

The trial court granted summary judgment for the Tenants Association, reasoning that it would be impossible to determine whether an offer was bona fide, under the TOPA, without comparing the offer to the market value of the property. Because Parcel One’s $250 million offer was based on the future value of the property after the new construction was completed, and because the property did not have a unique value to Parcel One, the trial judge determined that Parcel One did not qualify for an exception to the fair market value rule. Parcel One filed an appeal.

The D.C. Court of Appeals first addressed the issue of standing. In order to have standing to bring suit under TOPA, the plaintiff must be a “tenant organization.” This is defined as “an organization that represents at least a majority of the heads of household in the housing accommodation excluding those households in which no member has resided in the housing accommodation for at least 90 days and those households in which any member has been an employee of the owner during the preceding 120 days.” Parcel One argued that to obtain standing, the Tenants Association also had to (1) bargain in good faith with Parcel One and (2) adopt bylaws prior to filing an application for registration of the tenant association with the Mayor of D.C. As to Parcel One’s first argument, the Court of Appeals ruled that TOPA grants tenants an unconditional right to receive a bona fide offer. Therefore, the Tenants Association was not required to bargain in good faith with Parcel One prior to bringing suit. As to Parcel One’s second argument, the Court of Appeals ruled that the D.C. Code, by its plain language, only requires tenants’ organizations to have adopted bylaws when the tenants seek to make a contract of sale with the owner. The Tenants Association’s failure to adopt bylaws had no bearing on its ability to file suit under TOPA, especially where, as here, the Tenants Association had not attempted to enter into a contract of sale with Parcel One.

Next, the D.C. Court of Appeals turned to the issue of whether summary judgment was proper. In order to resolve this issue, the Court had to determine whether Parcel One’s offer to the Tenants Association was bona fide. Typically, the Court noted, the benchmark for determining whether an offer is bona fide is to determine whether the terms of the offer to the tenant are “roughly equal” to the terms of the contract for sale to a third-party. Here, the Court had to determine whether the offer was bona fide in the absence of a third-party contract.

The D.C. Court of Appeals relied heavily on its earlier opinion in 1618 Twenty-First St. Tenants’ Ass’n v. Phillips Collection, 829 A.2d 201 (D.C. 2003). In Phillips, Phillips purchased an apartment building for $1.4 million. At the time of Phillips’ purchase, the tenants declined to exercise their rights under TOPA. Three years later, Phillips sought to demolish the apartment building and build an art center. Phillips offered to sell to the tenants for $7.8 million, based on what it thought it would have to pay to obtain a comparable piece of real estate nearby if the tenants exercised their purchase rights. The Court of Appeals ultimately determined that Phillips’ offer of sale was bona fide because it was “based upon an objectively fair analysis of the value of the property to Phillips based on its intended use.”

In the instant case, the D.C. Court of Appeals faced a situation that was analogous to that in Phillips. Parcel One contended that Phillips set forth a general rule applicable in all TOPA cases – namely, that a bona fide offer of sale simply required an objectively good faith, honest offer of sale. The Tenants Association argued that Phillips was a “special circumstances” exception to the general rule that a bona fide offer must be based on current market value. Ultimately, the Court of Appeals reaffirmed its holding in Phillips that a bona fide offer of sale simply requires an objectively good faith, honest offer of sale. The Court further held that an offer of sale need not be based on current market value to be bona fide. Here, however, the Court ruled that asking the tenants for $250 million in exchange for the property “as is” was not a bona fide offer. The $250 million valuation was based largely on Parcel One’s intended future use of the lot, but, according to the Court, the right to receive a dollar in the future is not worth a dollar today. The building as it stood at the time of Parcel One’s offer, was only worth $68 million, in “as is” condition – far less than the $250 million offer of sale. No reasonable third-party purchaser would have been willing in 2014 to pay the 2019-2021 projected value of $250 million. Therefore, the Court held that Parcel One’s offer of sale was not bona fide under TOPA and the Court did not err in granting the Tenants Association summary judgment.