Some real estate contracts may include a right of first refusal (ROFR). ROFR grants an interested party—such as a potential home buyer or a company leasing commercial space—the right to be considered to lease or purchase a property before anyone else. It has a number of ramifications for buyers, sellers, and renters, both positive and negative.
Right of First Refusal in Real Estate
When a party has right of first refusal to a piece of property, the owner of that property must give them an opportunity to purchase or lease it before considering other offers.
ROFR in residential housing is often granted before the house is ever put up for sale. The owner may not even be currently interested in selling the home at the time it is granted, but in the event that they do decide to sell it, they must give the person who holds the right of first refusal the opportunity to make an offer on it. If they refuse, they may then list it and consider other buyers.
In commercial property, ROFR can involve both purchases and rental agreements. For instance, if a company is renting commercial space from the owner, they may ask for right of first refusal for additional space adjacent to theirs as part of their lease. This is often done to make room for future growth.
ROFR in the Housing Market
ROFR in the housing market might occur if a real estate agent happens to have a client who is interested in a particular home. They may approach the homeowner and ask if they’d be willing to enter into an ROFR agreement if they should ever decide to sell their property.
Another example is in the case of landlords. They may offer renters right of first refusal in their lease agreements to entice new renters. Should they ever decide to sell the property, their renters would have first bid on it.
ROFR can make things more difficult for the seller since it precludes them from entertaining other offers. However, it can mean they never have to list the property at all if they decide to sell, and it allows them to give preference to certain buyers.
ROFR in Commercial Leases
A right of first refusal is often granted to companies leasing space on commercial property. Companies that anticipate high levels of growth in the future may request ROFR for nearby space. If that space becomes available, the tenant will have the opportunity to match any offers on it before it’s sold.
ROFR can complicate various matters related to commercial property. For instance, if the property owner decides to sell the property, an ROFR could require them to break it out to the holder, separating it from the sale. Naturally, this could make it less attractive to potential buyers.
If the property is owned by a legal entity—an LLC or corporation, for instance—an ROFR could also complicate the sale of the company if its main asset is real property. Selling shares of the company could constitute sale of the property, triggering the ROFR.
Negotiating for ROFR
To make certain a right of first refusal agreement ends up being beneficial for both parties involved, it needs to be constructed with numerous eventualities in mind. A real estate attorney can help you through that process. Contact us for the legal support you need in negotiating real estate contracts.