ShareAs a real estate professional working with various leases, purchase agreements, and other contracts, you may encounter a clause called “The Right of First Refusal” (ROFR). This clause is a relatively common one stipulating specific sale or transaction arrangements. It can apply to business, property, or other contractual transactions. In real estate, a ROFR gives certain parties the right to make the first offer on a property when it enters the market.
This clause has distinct advantages and disadvantages for renters, other potential buyers, and property owners. Learning about contractual rights as a real estate agent prepares you to work with buyers and sellers while navigating these clauses.
This article will discuss how the right of first refusal functions in various transactions, considerations for real estate agents when working with ROFRs, and situations when you may run into them. We’ll also touch on several common contractual contingencies that may appear alongside ROFRs.
What is the Right of First Refusal in Real Estate?
A right of first refusal stipulation in a contract, lease agreement, or other formal real estate property agreement grants its holder the first opportunity to make an offer on a property and buy it if it goes on the market. This is different than a lease-option contract, also called lease-to-own or rent-to-buy, where the tenant is already making payments toward the home purchase at the outset of a lease agreement.
Renters may wish to include this stipulation in the lease for their apartment or rental home, even before the owner has decided to sell. If a renter holds ROFR rights within the lease, they can determine whether they want to purchase the property if the owner sells it. Landlords often include these clauses in leases to entice renters, but the stipulations also have other popular applications.
How Does ROFR Work?
If a contract includes a ROFR, the seller must prioritize the right holder’s offer. Often, the clause includes a specific sale price.
When the landlord or property owner is ready, they can list the property for sale. However, they can’t negotiate or accept offers until they’ve notified the ROFR holder (like the tenant) about the sale of the property and allowed them to submit an offer.
If the right holder decides they’re still interested in purchasing the property, they have the first right to make an offer. If the clause includes a specific asking price, they must offer that amount.
The right holder doesn’t necessarily have to be a tenant, but it can’t be the property owner or lien holder.
Timeframe and Expiration
Usually, the clause stipulates a necessary timeframe for the owner to notify the right holder. For example, the owner may have to provide the right holder with a 45-day advanced notice. The ROFR contingency may also include an expiration date, so the clause could last for a portion of the contract’s term without renewal.
Here are a few other considerations for first refusal rights:
- If the right holder decides not to purchase the property, they must formally waive the right in writing before the owner can begin negotiations with other buyers or accept an offer.
- If the right holder doesn’t decide or attempt negotiations within the allotted timeframe, the owner can begin taking offers from other buyers.
- If the expiration date passes before the holder has decided to make an offer, the owner is free to negotiate or accept another offer.
Seller’s Rights in ROFR in Real Estate
These clauses grant sellers certain rights and offer them some advantages.
While they may not enter negotiations on any offers under a first refusal agreement, a seller may list their property for the price they believe the house is worth. If the seller receives an unprompted offer on the house, they may want to sell, even if the property wasn’t listed for sale. The clause still applies, but the right holder would have a limited period to match the offer, make their down payment, and prepare to purchase.
Typically, the clause includes an established price both parties agree upon before the property is listed on the market. Depending on whether it’s a buyer’s or seller’s market when the time to sell comes, this could benefit the buyer or seller.
Holder’s Rights in ROFR in Real Estate
The right holder has the first opportunity to buy a home when it hits the market. So, lease agreements with this clause would allow the right holder to buy instead of potentially moving out—especially mid-lease—if the owner decides to sell.
A clause like this could also save a buyer money, depending on the market. Sellers may accept this initial offer to the leaseholder rather than wait for another offer. This may incentivize the owner to sell the property at a low cost to the right holder, even below market value.
Property owners and right holders usually determine the asking price before signing the agreement, which could happen years before the property goes on sale. The predetermined offer may benefit the buyer if the market value has increased. However, if the value has decreased, the asking price may instead benefit the seller.
If a lease agreement includes a ROFR, the leaseholder may also want to begin saving money for a down payment or work to improve their credit score.
It’s important to note that there’s no guarantee that a seller will accept the right holder’s offer.
Common Right of First Refusal Situations
While right of first refusal stipulations are common, they’re not built into contracts automatically. If your clients want to include the clause, you may need to request it specifically.
1: Owner & Renter
A property owner and potential renter, most commonly a landlord and tenant, may want to include a ROFR clause in their lease. In this context, the stipulation means that if the landlord decides to sell, they must notify the renter first and give them the first opportunity to make an offer on the unit they currently rent.
2: Homeowners Associations (HOAs)
Condo associations and homeowners associations (HOAs) may require homeowners within the HOA to include the right of first refusal stipulations in contracts. In this scenario, if a homeowner sells their property, the board and HOA retain the right to review potential offers, weigh in, and even reject certain bids. This right allows HOAs or boards to refuse offers that violate the association’s rules.
3: Family Members or Relatives
A right of first refusal clause could apply to family members of the property owner. If an owner decides to sell a property, the ROFR stipulates that named relatives, like children or siblings, may have the first opportunity to buy the property and make an offer. Estates may likewise include this stipulation, dictating that a family member could make the first offer if a homeowner dies. Even if a tenant resides in a property that goes on sale, the family member named on the ROFR would have the first right to purchase the home.
Other Contractual Rights REALTORS® Should Consider for ROFR Holders:
The right of first refusal is just one of many stipulations, contingencies, and clauses that may appear in real estate contracts. It’s a good idea for real estate professionals to familiarize themselves with other common real estate agreement clauses. With basic knowledge of various stipulations, they could consider how several contingencies can work together to provide the best situation for their client.
Right of First Offer
A right of first offer (ROFO) clause dictates that an owner must negotiate with a right holder before selling or leasing their property to a third party. However, they may consider outside offers. While ROFOs and ROFRs are similar, only ROFOs allow owners to receive offers from outside parties.
Inspection Contingency
A home inspection clause in a purchase agreement dictates that a buyer has a right to demand a home inspection of a property before buying it. After the inspection, buyers could renegotiate, request repairs, or even back out of the agreement. A home inspection contingency may benefit a right of first refusal holder who would like their apartment or rental home to undergo inspection before they make an offer since a home inspection contingency can provide valuable information. Although tenants often understand the property and its issues firsthand, a formal inspection can help identify foundational issues or other problem areas that could require expensive repairs.
Appraisal Clause
The price is often outlined and agreed upon in advance in a right of first refusal clause. So, when the time comes to sell, if the property value has changed significantly, it may not best serve the right holder to enact their right. An appraisal clause allows the buyer to back out of a transaction if an appraisal shows that the property’s value has fallen below the established purchase price. They could still put in an offer later, but there would be no guarantee that the seller would accept their offer at that time. In this case, the appraisal contingency could help the buyer avoid paying above market value for the property.
Financing Contingency
A financing contingency states that a buyer’s offer depends on their ability to secure financing, like a mortgage. Paired with a right of first refusal, a financing contingency helps buyers to determine a timeframe for finding a mortgage or another loan. This contingency also allows the right holder to retract or cancel the deal if they can’t find financing. The clause usually will enable them to get back any money they’ve already put toward the purchase.
Right of First Refusal: Tips for Real Estate Professionals
In short, a right of first refusal in a real estate contract grants holders, like tenants or family members, the right to buy a property before the seller can negotiate with other interested parties. While this contingency appears most often in lease agreements between landlords and tenants, it may also be relevant in other transactions, probate estate negotiations, or within HOAs.
When real estate agents take the time to learn about clauses like the ROFR and understand how they function in different scenarios, they’re better equipped to serve their clients.