Right of First Refusal in Real Estate

What is a right of first refusal? In real estate, a “right of first refusal” (ROFR) is a powerful contract clause that can significantly impact the sale of property. For holders of the right, it’s important to know your deadlines and necessary steps to invoke the right. For parties bound to offer the right of refusal to another, denying the holder the right to purchase can lead to serious legal consequences.

What is a Right of First Refusal?

A right of first refusal is a contractual provision that grants a specified party the first opportunity to purchase a property before the owner can sell it to someone else. In essence, it is a preemptive right that allows the holder to match any bona fide offer received by the property owner from a third party. If the holder of the ROFR chooses not to exercise the right, the property owner is then free to sell the property to the third party on the same terms and conditions.

The ROFR is often used in various real estate scenarios, including residential, commercial, and industrial properties. It serves as a protective measure for tenants, neighboring property owners, or even family members, ensuring they have the first opportunity to purchase a property before it is sold to an outsider. The specific terms and conditions of a ROFR are typically outlined in a legally binding agreement, such as a lease, partnership agreement, or a separate ROFR contract.

How Does a Right of First Refusal Function?

A ROFR functions as a conditional option to purchase. It is conditional because the right is typically only triggered when the property owner decides to sell the property and receives a bona fide offer from a third party.

The Right Language Matters

The effectiveness and enforceability of a ROFR largely depend on the precision of the language used in the contract. A well-drafted ROFR clause will clearly outline the rights and obligations of both the property owner and the ROFR holder. The list below is not conclusive of all ROFR terms and language; however, a strong ROFR term should include the following:

1. Triggering Event: Clearly spell out what constitutes a triggering event, such as the receipt of a bona fide offer or the owner’s intention to sell.
2. Notice Requirements: Specify the type of notice required to inform the ROFR holder of the triggering event. This could include details such as the method of delivery (e.g., certified mail, email), the information that must be included in the notice (e.g., terms of the third-party offer), and the time frame within which the notice must be given.
3. Exercise Period: Define the time frame within which the ROFR holder must exercise the right. This could range from a few days to several weeks, depending on the parties’ agreement.
4. Method of Exercise: Specify how the ROFR holder must exercise the right. This could include providing written notice to the property owner, along with any necessary documentation or earnest money.
5. Consequences of Non-Exercise: Outline the consequences of the ROFR holder declining to exercise the right or failing to respond within the exercise period. This could include a waiver of the right, allowing the property owner to proceed with the sale.

What Can The Holder Do?

The holder of a ROFR typically has three options: (1) exercise the right to purchase the property, (2) decline to purchase the property, or (3) fail to respond, which usually results in a waiver and termination of the right.

Practical Implications of ROFR in Real Estate Transactions

While a ROFR offers significant protection to the holder, it can also introduce complexities into real estate transactions. Property owners, potential buyers, and other stakeholders should carefully navigate the following issues:

1. Impact on Marketability: A ROFR can impact the marketability of a property, as potential buyers may be hesitant to make an offer knowing that the ROFR holder has the first right to purchase the property.
2. Delays in Closing: The exercise period for a ROFR can introduce delays in the closing process, as the property owner must wait for the ROFR holder to decide before proceeding with the sale.
3. Valuation Challenges: Determining the fair market value of a property can be challenging when a ROFR is in place, as the presence of the right may affect the property’s perceived value. Some ROFR terms may also include a pre-determined price for the holder to purchase the property.
4. Dispute Resolution: Disputes may arise if the terms of the ROFR are ambiguous or if the parties disagree on the interpretation of the clause. In such cases, litigation may be necessary to resolve the dispute.
5. Strategic Considerations: Both property owners and potential buyers should consider the strategic implications of a ROFR. For example, a property owner may use the presence of a ROFR to negotiate more favorable terms with a third-party buyer, knowing that the ROFR holder has the first right to purchase the property.

Oklahoma Real Estate Attorneys

A skilled real estate attorney can help you draft a clear and enforceable ROFR clause, ensure compliance with state laws, and provide guidance on the implications of exercising or waiving the right. Contact Avenue Legal Group to discuss your real estate contracts and disputes.