What is right of first refusal?
Right of first refusal (ROFR) is a real estate term that may be worth bookmarking if you're on the market as a buyer — especially if there's a property you already have your eye on. Simply put, right of first refusal can help a buyer get priority over other potential buyers. You might be wondering how. Let's find out!
Right of first refusal in real estate
In real estate, the right of first refusal is a clause in a contract that gives a prioritized, interested party the right to make the first offer on a house before the owner can negotiate with other prospective buyers.
A right of first refusal agreement is typically made between the property owner and the interested buyer, and it may specify a potential sale price. The sale price could also be negotiated later if the owner receives competitive offers, which the owner is required to share with the interested buyer.
If the owner receives an outside offer that’s higher than what’s in the ROFR clause, the owner may ask if the prioritized buyer will match it or renegotiate. The interested buyer with the right of first refusal can either agree to the new price and proceed with the sale or decide to refuse the purchase, in which case the owner can then negotiate with other buyers.
The right of first refusal clause may include a timeline for events after the owner decides to sell the property, such as how quickly the prioritized party must agree to buy or how soon they must respond to price negotiations.
When a right of first refusal might be used
Right of first refusal is common for renters who may want the option to buy their current rental property at the end of their lease. With ROFR, they get the opportunity to make an offer on the property before the landlord starts accepting public offers. Landlords may offer the option to their tenants in the event they sell the property, which could be in the near or distant future.
In estate planning, the right of first refusal may be used to help family members avoid future conflict when dealing with inheritances. It's in their best interest to seek legal and real estate advice.
In other cases, a real estate agent might approach a homeowner and ask if they’re willing to make a deal with an interested buyer when and if they decide to sell their property.
How to get a right of first refusal
To draft a right of first refusal clause, lawyers are typically involved due to the legalities of the contract. You’ll likely see one lawyer representing the owner and one lawyer representing the prospective buyer. As mentioned, the selling price is typically predetermined in a right of first refusal clause — so both lawyers will take time on this detail to ensure a fair starting point for the potential buyer and a fair, potentially locked in, selling price for the owner.
Right of first refusal vs. right of first offer
A right of first offer (ROFO) is similar to right of first refusal in that they both provide a prioritized party with first dibs. But a right of first offer does not require the seller to negotiate with the primary party. The owner must tell the interested buyer that the property is for sale and allow them to make the first offer. The owner can then either accept or refuse the offer, in which case they are free to negotiate with outside parties.
In summary
Right of first refusal in real estate is a clause that gives a potential buyer the first opportunity to purchase a piece of property. It’s common with, but not limited to, renters looking to buy from their landlords and families prepping for estate inheritances. Lawyers are typically involved in drafting right of first refusal contracts and determining a potential purchase price. Right of first refusal and right of first offer are both agreements that give a certain party priority but differ when it comes to timelines and negotiation requirements.
