Dear Monty: A “right of first refusal” threatens million-dollar sale
By Richard Montgomery
Reader Question: I am in negotiations to sell off a portion of my property. The buyer is simultaneously asking for a right of first refusal on a contiguous parcel. The wording in the right of first refusal clause the agent drafted in the offer is one short sentence and leaves many unanswered questions. My attorney advises the clause is poorly written and could lead to future arguments as it stands, and she says the time to clarify the right of first refusal is now.
My concern is that I do not want the sale of the large parcel to collapse negotiating over a different piece of property I may, or may not, sell in the future. The large plot they want to buy is in the low eight-figure range and the right of first refusal parcel is well under 100K. I am leaning toward accepting the deal as it stands now. What would you do? Roger G.
Monty’s Answer: The information provided is not adequate to deliver a quality answer to your question. The property location, the reason the buyer is seeking the right of first refusal (ROFR), the ability of each party to fund ongoing litigation expense, and the reason you are entertaining the large parcel offer are just some of the questions you and your attorney are aware of that are missing from your question. The right of first refusal doctrine, often confused with an option, is a rather complicated part of real estate. Implementation of a sound solution requires intimate knowledge of the circumstances.
Additional information may help
Because property owners’ circumstances can be distinctly different, there are different types of ROFR agreements. For example, the most common type of ROFR is a document that requires the property owner to produce a third-party buyer, which then gives the holder of the ROFR the right the match the offer of the third-party buyer. The theory driving this type of ROFR is that a third-party buyer will “set the value” of the property based on other current comparable sales.
The ” third-party first ” ROFR is harder to manage today due to additional laws and rules over agency relationships. It may be illegal in many states for a real estate company to disclose the terms of a third-party offer to a ROFR holder without the permission of the third-party buyer. The timing of disclosures regarding the existence of a ROFR has become crucial.
Another type of ROFR requires the property owner to notify the holder of the ROFR to act on the ROFR before placing the property on the market for sale. This type of ROFR is likely to come to the forefront in the future if it has not already overtaken the ” third-party first ” ROFR. As an example, the State of Colorado now identifies the potential existence of an ROFR in the state approved, pre-printed offer to purchase form and the agent’s responsibility to determine upfront if a ROFR exists.
Critical ROFR considerations
- Do the terms require the seller to obtain a ” third-party first ” offer?
- Do the terms require the seller to offer the property to the ROFR holder first?
- Are the terms of the sale set up in the ROFR?
- Are the terms of the deal to be negotiated at the time of an offer?
- Did the holder pay for the ROFR?
- The names of the parties
- The legal description of the property
- The deadlines by which each party must act if a third-party offer is received
- The term of the right of first refusal (forever? Ten years?)
- Does the ROFR bind heirs?
- Should the ROFR be recorded on the title?
- If the ROFR holder matches the third-party buyer’s offer, can the owner multiple-counter for a best and final offer?
The two choices
Your attorney is correct about the potential liability of accepting the poorly written offer. A wise person once told me that contractual problems are far easier and less costly to fix before the transaction closes.
You can knowingly set yourself up for a misunderstanding because the fear of losing the large transaction is overriding your counselor’s advice.
Consider re-visiting the subject with your attorney to seek a tactic or tactics that can minimize the likelihood that the buyer will bolt from the entire transaction. Demonstrating to them that restructuring the terminology in the ROFR works to their benefit may be a good start.
“Richard Montgomery gives no nonsense real estate advice to readers most pressing questions. He is a real estate industry veteran who has championed industry reform for over a quarter century. Send him questions at DearMonty.com.”