OVERVIEW by: Ralph Mark Maupin
Rights of first offer and first refusal can be thought of as types of options which base the term as starting upon some event happening (usually an offer on the subject property by a third party) and acceptance being based on the acceptance of the terms and provisions of sale presented upon the inception of the term, rather than at the signing of the original agreement. A point to keep in mind with both of these agreements that is often overlooked, is that payment of consideration to the seller is necessary if the agreement is to be truly binding and enforceable. Lacking consideration, performance by the seller is at the whim of the seller.
RIGHT OF FIRST REFUSAL DEFINITION
DEFINITION
A right of first refusal agreement is one generally in which the owner of property agrees to offer it to a particular person or company (the party that obtained the right of first refusal) for sale upon receiving an offer for the property acceptable to them from a third party. The party that has the right of first refusal is then generally given a brief period of time in which to either agree to purchase the property under the terms and conditions presented or decline, in which case the third party's sale would take place and the holder of the right would lose their rights under the agreement.
A right of first refusal is usually a hindrance to the seller and the sale of the property. When the seller markets the property, he must give notice to perspective purchasers of the right of first refusal held by another. Any offers accepted by the seller must be subject to the rights of the holder of the first refusal. This process is likely to discourage serious offers by third parties, as it represents a delay, possibly substantial, in their finding out if they will be able to purchase the property. Further, even if they are to make a full price and terms offer, it still does not mean they will end up with the property.
It is also highly unlikely that a broker or salesperson would list and actively market a property that had a right of first refusal agreement on it, where the party holding the right was excluded from their listing. The listing broker or salesperson would have to market the property with no guarantee of compensation for their services. Broker agent compensation for presenting a qualified buyer triggers a first right of refusal sale, must be in writing with the seller of the property
In a sense, this discouragement to parties desiring to offer to purchase the property could be thought of as a detriment to the holder of the right of first refusal as well, since it is unlikely that the climate created by the existence of the agreement would involve any truly competitive offering. Since the terms of the sale would be based on a third parties offer only, it would likely be someone extremely interested in the property and therefore offering full price and terms. Further, the existence of the agreement could be sufficient to discourage any others from making any offers at all, and quite possibly the right of first refusal could expire without the holder of the right even getting the chance to purchase the property.
Right of first refusal agreements do however have an advantage when there exists a situation of a few interested parties in the property and one is willing to pay for the right to be able to be the first to accept or decline and there is no intention of actively marketing the property to the public at large.
Such an example might be the situation of where a few parties all have an extraordinary interest in a particular parcel because it adjoins property they own. It's of greater value to one of those parties than any outside purchasers.
Also, in situations where the owner of property has no present intentions of selling, a right of first refusal will grant a party who has interest in the property some security to be able to purchase it and usually with little objection from the seller due to the restrictions placed upon the seller. Hence, most commonly one sees right of first refusal agreements entered between landlords and tenants, where the tenant would possibly be disadvantaged by the sale of the property to another.
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