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Watch Out for the Complications of Right of First Refusal Clauses

November 17, 2014

Business Dictionary.com defines a "right of first refusal" as a "contractual right under which a seller must give a party...an opportunity to match...a price at which a third party agrees to buy a specified asset...on the same terms offered to the third party. So in real estate, this sort of arrangement would require you to give the person with the right of first refusal an opportunity to match any offer you receive on your real property. Real estate agents sometimes encourage right of first refusal clauses for sellers. But you need to be aware of the possible complications arising from such arrangements.

How Rights of First Refusal Work in Real Estate

There are three people involved in a real estate right of first refusal: the owner of the property, the holder of the right of first refusal, and a third party. The owner gives the holder the right of first refusal which gives the holder the right to match any offer made by any third party.

What Needs to be Covered in These Clauses

A large variety of issues can arise with these clauses. This list is by no means all inclusive, but these are a few issues that need to be covered when drafting any sort of right of first refusal.

  • Exactly what real estate is covered: You need to be very specific. If you are going to make your property subject to a right of first refusal, it should define exactly what property is covered, and what will happen if an owner wants to sell only a portion of the property.
  • Purchases by exchange: You need to address what happens if a third party offers to exchange the property for something other than cash, and how that affects the right of first refusal holder.
  • Timing Issues: You need to lay out exactly how and how quickly the owner will notify the holder of any offers, and then how long the holder will then have to exercise his or her right of first refusal. You will want to be specific about the number of days and the notice mechanisms allowed.
  • Transfer: You need to specify whether the holder has the right to transfer his or her right of first refusal to another person.
  • What Sort of Sales/Transfers are covered: Does the right of first refusal apply to all transfers, or is the owner allowed to transfer the property to family members without the right kicking in?
  • Does the Right Survive the Owner: When the owner of the property dies, does the right survive? If so, then your heirs will be bound by the right.
  • What happens when the holder chooses not to exercise the right, or fails to exercise it. The agreement should say whether or not the right of first refusal terminates whether the owner notifies him or her of an offer and the holder chooses not to match that offer. It should also state what happens where the holder says he or she will match the offer, but then is unable to do so.
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