The Right of First Refusal Clause
When entering into a real estate transaction, new investors often encounter terms and legal jargon they’re unfamiliar with. It’s a good idea to familiarize yourself with some of these terms so you feel more secure and confident in your contract.
One such term is the “Right of First Refusal,” or ROFR. This term is used in a variety of contracts, from real estate to the entertainment industry. It essentially extends certain privileges to one party in a transaction and ensures more transaction transparency and security.
Though this article can serve as a place for helpful information about ROFR clauses and contracts, it is not to be used in replacement of professional legal advice. It is always a good idea to consult an attorney before entering any contract. You must protect yourself and your assets from any legal issues that could arise from various clauses and terms outlined in your contract.
Definition and Function of ROFR
The right of first refusal, or ROFR, is a clause included in a contract that gives the buyer an opportunity to either match or refuse to match an offer on a particular asset. If the buyer chooses not to match the outside offer, the seller can then entertain other buyers.
This clause is popular in many industries to ensure preference on assets, with customizable terms specifying the validity period and potential third-party involvement. In real estate, an ROFR clause is included in lease agreements because it gives the current occupant of a property the chance to retain a property rather than be blindsided by another buyer.
For example, imagine that Seller Sam is a property owner and landlord renting one of his units to Buyer Bob. Their rental agreement includes a ROFR clause. If Seller Sam decides to sell this rental property, he would have to offer it to his current renter, Buyer Bob, before listing the property or offering it to outside buyers, due to their first refusal agreement. If Buyer Bob decides to purchase the property, the sale goes to him. If he refuses, Seller Sam can move on to other offers.
Other common applications include venture capitalists who include an ROFR clause in purchase contracts so that their investments are not sold without allowing them to consider matching the outside offer first.
For home buyers, ROFR acts as an insurance policy, competitive edge, and transaction priority. Sellers benefit from having a ready buyer, though negotiations with multiple buyers may be limited, and there’s a chance they won’t get market value for their property. The prospective buyer could also include family members or another interested party who currently occupies the property.
Implementation and Management Guidelines
Implementing and managing the Right of First Refusal (ROFR) in real estate involves careful negotiation and communication between parties.
When negotiating ROFR terms, ensure that both parties are familiar with their responsibilities and rights within the contract. If the owner decides to sell the property, they must inform the ROFR holder before considering other offers to uphold the agreement.
As with any contractual obligation, it’s crucial to be aware of any expiration dates tied to the ROFR, as this can release the seller from obligations to the holder.
Remember, violating the ROFR can lead to legal action and potential damages under contract law. You can always contact a trusted attorney for more clarity on the specific obligations under your contract or ROFR clause.
Usage and Benefits of the ROFR Clause in Real Estate
By having a ROFR in place, you gain the advantage of being first in line to make an offer on a property, giving you peace of mind and certainty in real estate transactions.
This clause can serve as an incentive for lease tenants in buyer’s markets and contingent buyers in seller’s markets, allowing you to prioritize your purchase of a property.
ROFR can also play a crucial role in estate planning, preventing potential family conflicts over inheritance.
Exiting Process and Considerations
When exiting a Right of First Refusal (ROFR) agreement in real estate, there are usually formal procedures put in place that must be followed. By adhering to these formal procedures, you ensure that both parties are released from the obligations set forth in the clause.
Additionally, your exit from a ROFR agreement acts as a planning tool for future property transactions, providing relative certainty in unpredictable markets. This structured approach not only benefits you by facilitating a smooth exit but also encourages tenants to potentially transition into property owners, creating a win-win situation for both tenants and landlords.
Legal Implications and Enforcement
Both parties who sign a contract that includes this clause should understand the legal implications and enforcement of the Right of First Refusal (ROFR) in real estate transactions. Violating the ROFR can result in legal consequences and potential damages.
The enforcement of the ROFR allows the holder to pursue legal action under contract law if their rights are infringed upon.
In lease agreements, the inclusion of the ROFR serves to protect tenants’ interests. While the ROFR offers benefits such as priority in transactions, violating its terms can lead to unintended consequences.
It’s a good idea to consult with an attorney when entering and exiting a contract with an ROFR clause in place—some terms of the clause could be confusing or call for specific steps that are better navigated by a professional.
Conclusion
The Right of First Refusal clause in real estate transactions offers significant advantages to both buyers and sellers. By providing interested parties with the first opportunity to make an offer on a property, this clause promotes transparency, fairness, and efficient negotiations.
