What is the Right of First Refusal?

What is the Right of First Refusal?

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For renters interested in eventually purchasing the property they live in, there is a way to secure the front-of-the-line spot when the home goes on the market. Rather than have to worry about third parties driving up the price in a bidding war, the renter may purchase the house before any other can put in an offer. This situation is made possible by what’s called a Right of First Refusal clause. But what exactly is this clause, and how does it work?

What is a Right of First Refusal?

Also known as a ‘First Right of Refusal’ or by the acronyms ROFR or RFR, a Right of First Refusal is a contractual clause that gives the contract holder first dibs on entering a business contract before other interested parties. While the ROFR can be used with any sort of asset, it is a particularly popular option for real estate lessees as it gives them preference for the properties they live in.

If a party that holds the ROFR decides that they don’t wish to enter into a transaction, then the company or individual that is the obligor is then free to take other offers.

The difference with Right of First Offer

There is a difference between the First Right of Refusal and the clause Right of First Offer. The Right of First Offer is also called the Right of First Negotiation, is a requirement for the obligor to enter into exclusive good faith negotiations with the holder before engaging with other parties. While a ROFR calls for a transaction in either exact or approximate terms, the Right of First Offer is only an agreement to negotiate.

How ROFR in real estate works?

In real estate transactions, the Right of First Refusal real estate contract is held by the person who is leasing a property. Say, for example, they have a contract to lease for seven years. At the end of these seven years, they may choose to buy the property from the owner or to refuse it and move on. Only when they refuse to purchase can the property owner begin negotiations with another party.

Young couple applying for ROFR.

Where can you apply for ROFR?

There are a few scenarios in which the Right of First Refusal is used in real estate transactions. The first is between a tenant and a landlord. This is similar to our previous example, during which the renter had the contractual right to purchase the home they’d been living in before the owner sold to someone else.

The ROFR may also be used between family members in a real estate transaction. If the owner has a family member who wishes to purchase the home, they may submit the first offer when it goes on the market. However, if they decide that they aren’t interested, the owner is then free to do as they wish.

The third scenario in which ROFR applies to real estate is when a homeowners association or condo board adds this clause into their governing documents. They do this so that the board can select from among potential buyers before the homeowner can accept an offer. The governing board may wish to avoid a discount sale or refuse a specific offer.

Advantages and disadvantages of ROFR

There are good and bad aspects of a Right of First Refusal clause for both the buyer and the seller. Here’s a brief rundown of the advantages and disadvantages for both parties.

Right of First Refusal for buyers

Pros

  • The clause gives a potential buyer time to save up money and prepare financially to purchase the property.
  • Lack of competition means that the price won’t be driven up by a bidding war between other potential buyers.

Cons

  • If a third party wants to purchase the property, a buyer must be prepared to make an offer or move out quickly.
  • If they are not yet prepared for purchase, they can lose out.

Right of First Refusal for sellers

Pros

  • In a buyer’s market, a ROFR may make the sale more attractive for interested parties, and allow them to charge a higher price (as the ROFR is a direct benefit for the buyer).

Cons

  • In most cases, a ROFR isn’t ideal for a seller, because it ties their hands when it comes to selling the property. In a good market, the time it takes for the clause holder to decide whether to buy or not, a seller could lose valuable third-party offers due to loss of interest.

Is Right of First Refusal the right one for me?

As with any significant financial decision, consult a lawyer before embarking on a ROFR clause. They can vary in scope, and no two are the same. While the Right of First Refusal generally benefits the buyer, contingencies may be added to your disadvantage. Before signing, make sure that all parts of the clause are suitable to you.

If you have a ROFR clause on a property that you have been leasing and you are now ready to purchase, contact Hero Home Programs™. Their team of home buying specialists will put you in touch with local experts who will assist with your purchase while saving you thousands of dollars.

Homeownership is a dream for many. Let Hero Home Programs™ helps make it a reality for you.

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