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What is the Right of First Refusal?

By Tabitha Jean Naylor

In terms of a real estate transaction a right of first refusal means that there is a limitation on a property owner's ability to sell the property to a third party, without first offering the property to the holder of the right at the same offering price and terms that are being extended to the third party purchaser. The person holding the right has the choice to exercise the purchase of the property or to refuse the purchase.

A right of first refusal has no bearing on the use of the land or property. It is not a covenant that runs with the land so it is not binding for any future property owners. A right of first refusal is most commonly a personal contractual obligation that only benefits specified people that are identified by name or relationship. It is binding only to the parties to the contract itself. Most rights of first refusal also carry a time limitation. After the time limitation expires the right of first refusal would no longer affect any limitation on the sale or disposition of the property but it should be reviewed by a lawyer to make certain there are no additional clauses that could affect future sale offers.

The most common situations where a right of first refusal is used include divorce where a judge may impose a right of first refusal as part of the divorce settlement where a home is jointly owned or the partners may agree to establish a right of first refusal when the home is sold. Sometimes parents will set up a right of first refusal for children when their family home is sold.

When drafting a first right of refusal or entering into a purchase subject to a right of first refusal you should have it thoroughly reviewed by a legal professional to ensure the language is clear, concise and accurate regarding the right, how the right is triggered and at what point the right no longer affects the sale of the property.

Some issues have arisen around the right of first refusal. There is uncertainty around whether or not the holder of a right of first refusal is entitled to assert the right after declining to exercise the right following a previous offer. What this means is that if the holder refused the right of first refusal on a sale that falls through, let's say because the home fails to appraise for enough money, or receives a bad inspection, and the buyer backs out, does the holder's right of first refusal survive and allow him or her to match a future offer? It is possible that an attorney would advise the seller to make all offers available to the holder of the right of first refusal even if the holder rejected a prior offer.

Speak with your realtor or attorney if you are considering selling or buying a home with a right of first refusal. It is your best protection against possible problems and will make the selling and buying process smoother.

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