When transferring property, sellers sometimes insist on the real estate right of first refusal – this gives them the chance to be first in line to repurchase the property if their buyer later decides to sell.
Rights of first refusal can have obvious advantages if your financial circumstances change later on. If you’re keeping adjoining land, you may wish to protect yourself against the risk of something unattractive or unwanted being built next door.
But Brit Grosskopf of Texas A&M University and Alvin Roth of Harvard University have both identified a little-recognized distinction in legal drafting during sale negotiations that can turn this apparent blessing into an unwanted curse.
What is a Right of First Refusal?
One type of first-refusal right gives the former owner the ability to regain the property by matching competing bids. Rights holders only have to equal the high bid without engaging in the auction themselves.
But another form of rights of first refusal (common in certain real-estate and entertainment negotiations) requires the right holder to accept or reject the seller’s demand before other potential buyers are offered the same deal. If the right holder refuses the price, she forfeits the chance to match other offers.
The Right of First Refusal in Negotiation
As illustration, suppose you hold the right of first refusal for a piece of property you value at $500,000. If you only have to match prior bids, you may get a bargain if the market is weak, perhaps buying back the parcel for $400,000. But supposed you have to respond before the market has been tested. If the owner demands $475,000, you may be pushed close to your limit, yet feel reluctant to risk losing the property to a higher bidder. In essence, the second type of right leaves you bidding against yourself.
As this particular example suggests, when negotiating sales with the right of first refusal on the table, make sure the specific terms won’t turn around and bite you later. You need to remember: Even perfectly negotiated agreements rarely become perfectly executed negotiated agreements – you shouldn’t hesitate to make sure to negotiate for the best terms to agreement while also thinking about implementation and the long-term viability of the agreement.
Have you benefited from a right of first refusal? We’d love to hear your story in the comments.
10 Hardball Tactics in Negotiation – Here are some negotiation strategies to counter hard bargaining tactics at the negotiation table. From dealing with difficult people at the bargaining table and unproductive counterparts to overly aggressive and uncompromising counterparts, difficult people at the negotiation table take on a myriad of forms but the negotiation strategy for grappling with them remains similar. Don’t leave value unclaimed, and don’t let a hard bargaining counterpart keep you from creating value with the negotiation advice in this article.
Dealmaking: Are You Overly Committed to the Deal? – Becoming overly committed to the deal at hand can cost negotiators in the future. Before entering into any negotiated agreement, negotiators need to have a full understanding of exactly what the agreement entails, financially and otherwise. Find out the pitfalls negotiators face when they become focused on the idea of reaching a negotiated agreement, rather than focusing on the importance of crafting viable, win-win agreements that are sustainable long into the future of the business relationship.
Dealmaking: Top Business Deals – The Program on Negotiation’s top ten business deals – negotiation case studies from real life examples of negotiation. What negotiating strategies did these expert negotiators employ in their successful deals, and what pitfalls did other negotiators encounter in their less successful agreements?
Top 10 Business Negotiations – These are the top business negotiation case studies – examples of hard bargaining tactics and integrative strategies that encompass a range of negotiation styles.
Originally published in 2012.