Can someone provide a good explanation of a Right of First Refusal?

Asked by Aubrey Manning, Fort Collins, CO Wed May 7, 2008

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9
Keith Grebe, , Littleton, CO
Wed May 7, 2008
When a Buyer makes an offer on a home for sale, and the offer is contingent upon the Buyer's home selling and closing before the sale of the new home, the Seller may accept the offer with the contingency by giving the Buyer a 48 hour of "First Right of Refusal." So if the Seller receives a better offer on the home and they would like to accept it, they would then notify the First Buyer that they have accepted another offer as a back up to the First Buyer's offer. The First Buyer then has 48 hours to remove the contingency upon the sale and closing of their home. If the First Buyer fails to remove the contingency within the 48 hours, the first contract becomes null and void and the second contract goes into first position. The First Buyer loses his contract and the Second Buyer now becomes the new buyer for the home.
It is very important that both Realtors and Sellers and Buyers are very clear in their communications so that no misunderstanding occurs in this process.
Web Reference:  http://www.keithgrebe.com
4 votes
Bill Gassett, Agent, Hopkinton, MA
Thu Dec 16, 2010
Contingent offers and right of 1st refusal do NOTHING to benefit a home seller. For a complete understanding of these scenarios see: http://massrealestatenews.com/massachusetts-home-sale-contin…
2 votes
Suzanne Walk…, Agent, Oklahoma City, OK
Wed May 7, 2008
Here is my experience with first right of refusal in CO and my experience is not to replace legal or agency advice that you should seek prior to writing a first right of refusal. The other answers given are applicable too so details to your specific transaction will change the exact meaning and terms of a first right of refusal.

The CO contract allows for a first right of refusal and has a provision in it to do so. Typically there are additional provisions to the first right of refusal. Here is a typical scenerio I've dealt with:

Buyer A wants to purchase 123 ABC ST. but for whatever reasons cannot fully execute the deal immediately. Buyer A approaches the seller with a contract that has a first right of refusal plus all other applicable terms in the contract including price. The seller may continue to actively market the property and if the seller receives another offer that is more appealing to the seller then Buyer A then has so much time, as stated in the contract, to either meet or beat the second offer. Otherwise, the seller may proceed with Buyer B.

Essentially Buyer A is being giving the first right of refusal to make good now on purchasing the property or they loose the option to buy the it to Buyer B.

Again, there are many different facets to a first right of refusal so getting professional/legal advice before writing one is your best bet.

Good luck!
Susan Walker
2 votes
Ute Ferdig, Agent, Auburn, CA
Wed May 7, 2008
Hello Aubrey. The right of first refusal is a contract between a property owner and a third party that gives the third party the right to purchase a property when someone else makes an offer on a property. The contract should be specific as to how long the third party has to decide and how many times the third party may exercise the right of first refusal. For instance, let's say the property owner receives an offer and he gives the third party who has the right of first refusal notice of the offer. The third party decides that he does not wish to purchase. Then the buyer who made the offer decides not to purchase. Then another buyer comes along and makes a new offer. Unless the contract regarding the right of first refusal limits how often the third party may exercise the right to first refusal, the owner has to give the third party the option to exercise the right to purchase ever time an offer is presented, which can become a pain. The contract granting the first right of refusal should also specify financing terms and the third party should be required to show the financial ability to exercise the right to purchase the property. As you can see, it's important that the contract be drawn up properly. Otherwise, the right of first refusal can turn into a nightmare.
1 vote
Leigh York, Agent, Fort Worth, TX
Wed May 7, 2008
Hi Aubrey. I can give you a good answer with experience to back it up...in Texas. I have no idea about your state laws. In Texas, the First Right of Refusal is drawn by an attorney and filed of record at the county courthouse. It essentially lays out the terms of the agreement. A basic example would be that owner Smith promises to notify prospect Jones if he intends to sell the subject property. If owner Smith receives an offer for the subject property that he wishes to agree to, he must contract with a contingency. He then notifies Jones and Jones has a pre-specified amount of time to make the purchase or lose the property to the other buyer. I have dealt with this situation twice and both times it worked smoothly. Good luck!
1 vote
Mack McCoy, Agent, Seattle, WA
Mon Dec 14, 2009
Yeah, it means that before you can buy it, somebody else gets a chance.
0 votes
Mike Fitzger…, , Atlanta, GA
Mon Dec 14, 2009
Sometimes also referred to as a First Right of Refusal is a right granted by the owner of the property to another entity (the Holder). The Holder has the right to purchase the property in question in the event the owner receives an acceptable offer to buy.

Some common situations where you find Rights of First Refusal include:

•Landlords may grant one to a tenant who wants to buy the property when the landlord is not ready to sell immediately.
•When a property owner sells a portion of his property and retains the rest, he may grant a right of first refusal to the buyer on the seller’s remainder tract.
•In partnerships, each partner may grant a right of first refusal to all other partners requiring him to offer his partners the right to buy his interest in the partnership before allowing some new entity to buy in. (Also see “Shotgun Clause” on wikipedia for a more interesting arrangement.)
In the event the property owner receives an offer that he plans to accept, he must notify the Holder usually by delivering a copy of the purchase offer. Certified Mail Return Receipt Requested is what I’ve used in the past to create proof of delivery along with a letter for the Holder to sign acknowledging notification. The Holder then has a period of time (defined when the right of first refusal is granted) to elect to purchase the property under the exact same terms as the written offer or release the right of first refusal. Sometimes a this release requires a Quit Claim deed and sometimes the expiration of the time limit on the right is sufficient depending on the requirements of the title company and the parties involved in the transaction.

The response period is usually 30-60 days and can make any property with a right of first refusal very difficult to market because a potential buyer has to wait for a month or two without any certainty that they will actually get the property. Sometimes rights of first refusal specify a price trigger such that the seller only has to contact the right holder if the offer to purchase is below a specific price. Sometimes the right expires for example a right may expire at the end of lease if granted by a landlord to a tenant.

The correct way to do a right of first refusal is to record the right on the title of the property in question. This protects the holder of the right because anyone trying to buy the property would most likely do a title search and discover the right of first refusal. In practice, the right is written directly into the lease.

What happens if the owner sells property bound by a right of first refusal without notifying the Holder. That’s probably where an several attorneys could rack up fees trying to sort the matter out. My advice is to always have a real estate attorney’s help in creating or exercising a right of first refusal.

Footnote: Rights of First Refusal are one of the best reasons for Brokers not to accept Open Listings.
0 votes
Jed Lane, Agent, Petaluma, CA
Wed May 7, 2008
Simply, it a term put in a contract between a person that owns an asset and might sell in the future. The terms of the right are spelled out in the specific contract that created it.
The price could be set at the time the right is created or it can be set to market conditions at the time the asset is offered.
0 votes
Susie Leavens…, Agent, Westerville, OH
Wed May 7, 2008
Typically, you'll see a right of first refusal in a condo association (can be elsewhere too), whereby the homeowners association (HOA) must be notified when an offer comes in on a property that is for sale, and then the HOA has a certain number of days to match the purchase price and buy the property or waive the right. A right of first refusal can also be used between buyer and seller when, for instance, a buyer must sell another property to complete the transaction, a seller might agree to that "contingency" but keep actively trying to sell the property. Should the seller receive another bona fide offer, the buyer then has an agreed upon time to remove the contingency or terminate the contract, allowing the seller to enter into a contract with the new buyer. I don't know which Rifght of First Refusal you're referring to, but I hope that helps.
0 votes
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