A right of first refusal is a contractual right granted by an owner of real property. The owner gives the holder of the right an opportunity to match an offer to purchase property before the owner may sell to a third party. Although a right of first refusal may appear simple, many issues can arise from such a right. Below is a list of issues which, if not addressed, may cause problems for a property owner.
- Specification of Real Estate: Property subject to a right of first refusal should be particularly defined. It should address what will happen if an owner wants to sell a portion of the property.
- Non-Cash Offer: A right of first refusal should address what will happen if an offer to purchase is not for cash, but an exchange.
- Timing and Delivery: Provisions regarding timing of rights of first refusal should be carefully drafted. The owner should provide notice of an offer within a certain number of days, and the holder must exercise the right within a number of days. Notice mechanisms (delivery, certified mail, etc.) should be described.
- Transferability: A right of first refusal should state whether it is transferable, or personal to the original holder.
- Exceptions: Certain transactions, such as transfers to family members, typically may be excepted from a right of first refusal.
- Death: What happens upon death of the owner holder should be expressly set forth. Otherwise, the right may continue to the individual who inherits the property.
- Declining the Right: A right of first refusal should state what will happen if the owner extends an offer and the holder declines. It may state that the right of first refusal terminates.
- Extinguishment – Failed Exercise of Right: Some rights of first refusal provide that, if the holder of the right accepts the right but is unable to purchase, the right is forever extinguished.
- Variations: Typically, slight non-material variations to the offer by the owner and the holder who exercises the right are acceptable. Materiality may become a disputed issue.
A carefully drafted right of first refusal addresses most of the issues set forth above, and more. Even the best agreements suffer the risk of disputes, as do most agreements that address the future.