Understanding the First Right of Refusal in Real Estate

When an owner is selling property, someone may hold a right of first refusal (ROFR). The ROFR holder can make the first offer before other interested parties. What is the first right of refusal in real estate?

An experienced real estate attorney in Scottsdale, AZ, from Anthony Law Group is integral for protecting the rights of both the buyer and seller. Read our guide about ROFR agreements to ensure a favorable purchase or sale outcome before entering into a real estate contractual agreement.

What Is the First Right of Refusal in Real Estate Transactions?

The right of first refusal refers to the clause or stipulation within a contract, such as a commercial lease or residential lease agreement, that gives the holder the first opportunity to make an offer on the property.

Unlike lease-option contract terms, ROFR holders are not required to make payments. The property owner does not even have to list the home on the market for a first refusal holder to submit their first offer.

How Does the First Refusal Agreement Work?

If a contract includes a right of first refusal, and the property owner decides to sell, they must give the right holder the first chance to make an offer. In most cases, the parties involved in the agreement will establish a predetermined purchase price and allow the option holder to make the offer at that specific purchase price.

If the owner sells their property through the market, they cannot negotiate prices or accept offers from other potential buyers until after they notify the option holder. The contract will specify the time limit the right holder has to submit their offer.

The ROFR holder will have the first chance to make an offer, which the owner may accept. If the property owner receives no notice or a holder’s offer before the clause’s expiration date, they can resume pursuing other buyers.

When Is a First Refusal a Good Idea?

After learning the answer to “What is the first right of refusal in real estate?” you may wonder if the process is beneficial to the buyer or seller. The answer depends on each party’s goals.

Buyers can enjoy a right of first refusal in competitive markets. It grants people the opportunity to place bids on a property before others, regardless of the property’s value.

In a seller’s market, the ROFR ensures a committed buyer if the seller decides to offload the property. A potential downside would be the seller’s inability to secure a higher offer from the open market.

Typical ROFR Situations

Shareholders’ agreements often include ROFR clauses. The agreement would give existing shareholders the option to match a third-party offer for property or shares before a sale to an external party could occur.

While common, first refusal agreements are not automatic additions to contracts between a property owner and other parties. People in the following situations often have to request the inclusion of the clause.

Owner and Renter

Landlords and tenants may have a right of first refusal clause in their lease agreements. If the landlord decides to sell their property, the stipulation in the lease agreement would require them to notify the tenants, giving them the option to honor the binding contract terms, make a bona fide offer ahead of potential buyers, and secure financing.

Homeowners’ Associations

HOAs may require homeowners within their communities to include the right of first refusal stipulation in their contracts. In this case, the ROFR would limit the seller’s ability to maintain control. The HOA board can retain the right to review any purchase offers the seller receives and reject bids from certain buyers.

Family Members

A right of first refusal could include stipulations that give family members the first choice to their property ahead of other offers. Even if a tenant resides on the property and the owner decides to sell it, the named relative will have priority over other buyers, including the existing tenant.

Tips on Voiding a Right of First Refusal Clause

What is a first right of refusal in real estate, and can one be voided? An ROFR is legally binding, but buyers and sellers can end the agreement in the following ways:

• Run the clock: The holder must respond to the potential sale within the allotted time frame.
• Negotiate a buyout: Both parties can mutually agree to terminate the right of first refusal.
• Take the legal route: The courts may deem a right of first refusal stipulation to be overly restrictive, unfair, or improperly executed.

The Difference Between Right of First Refusal and Right of First Offer

Both a right of first refusal and the right of first offer are contractual terms that grant one party preferential treatment in the event of a potential sale. However, they function differently.

For example, the right of first refusal activates when the seller is interested in listing their property. The holder can match the predetermined offer or decline the sale, allowing the seller to move on to other interested buyers.

However, with a right to first offer, the seller is ready to sell, but they have no offers from buyers. The holder has the opportunity to make the first offer and negotiate a purchase price above or below market value. The seller can agree to the holder’s offer under certain conditions or decline it.

Real Estate Agent Versus Real Estate Attorney: Seek Legal Counsel for Your ROFR Situation

After learning the answer to “What is the first right of refusal in real estate?” you may wonder if you should contact a real estate team or a real estate lawyer to draft or review your agreement. You would need the knowledge of a skilled real estate attorney to provide the legal counsel you seek.

Our attorneys at Anthony Law Group in Scottsdale, Arizona, are knowledgeable about the right of first refusal, causes of real estate litigation, contingency clauses, purchase agreements, and other related topics. We believe in advocating for our clients’ legal rights in and out of the courtroom. We are here to provide peace of mind, so contact Anthony Law Group today at (602) 362-2396 to request a consultation.