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.
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Originally published in 2012.
Rights of first refusal are thrown around quite liberally (and vaguely) in deals by business teams who often have little understanding of the mechanics of such clauses. Accordingly, this post does a nice job of highlighting one of the more problematic issues for the inattentive deal-maker. That said, it is also critical to highlight that the time-frame of a Right of First Refusal generally is important to track as well, lest the parties be held ‘hostage’ by a term for an indefinite period of time. Good deal makers understand that taking time up front to address critical detail saves time (and lots of $$) in the long run.
The first type of right of first refusal may make the property essentially unmarketable–in a sale of a property encumbered by such a right, one then has to negotiate with a buyer, reach a price and then tell the buyer to hold that thought while someone else decides whether or not they want to take advantage of the deal the buyer has struck. Many potential buyers are reluctant to enter that game–the lower the price they negotiate, the more likely they are to lose.
Hello Jeff, One would assume that before the property goes to market the seller would have already negotiate he right of refusal withy the potential buyer.
Am I wrong here?
I believe right of refusal is an extraordinary asset IF you really want to regain access to the property, for example. More for an emotional or practical reason as a business move it is not necessarily the smartest since you are already showing the future potential buyer your level in interest… extremely high. You have very little leverage.
In the case that you do not compete against yourself, you compete against others, which is as dangerous since bluffing (false potential buyer with high offer) can push you to make a stronger offer….
In conclusion, I would say that if you want it that bad, in the end, you will probably pay it more, unless the asset you want is UNWANTED by anyone else….
I believe that right of refusal is an extraordinary asset if you really want to regain access to the any kind of property and if you already negotiate the right of refusal property with the buyer.
I think right of refusal is one of the best thing if a person really want to regain the access over any kind of property. The author of this article Pon Staff does a nice job of highlighting one of the more problematic issues for the inattentive deal-maker. Nice article. Keep going
This topic is also very pertinent to negotiating in areas other than real estate and property rights. Right of First Refusal or ROFR as it is often referred to in technology collaboration and supply agreements, is a must, to gain or maintain competitive advantage in the Hi Tech R&D arena and during a tight supply market. Having been involved in business negotiations of many such agreements, I know firsthand that to grant or to gain ROFR often becomes a bone of contention for both negotiating parties.
Whenever we negotiated long term supply agreements of critical electronic materials or joint development agreements with specialty chemicals and process gases companies, our team always insisted on and negotiated hard to have “exclusivity rights” as number one priority. If a company had upper hand in negotiations due to IP or patented processes, and they did not want to grant exclusivity, then ROFR was, and still is, the next best thing. By having exclusivity or ROFR, a company can easily gain fair amount of competitive advantage over competing companies, expected to be vying for the same specialty material, “recipe” or the patented process in coming days.
Cad Saúde Pública 2003; 19:7 25-33. (MACHADO, 2009). https://Mcaf.ee/7v4jr8
The first type of right you describe is referred to in the commercial real estate industry as a true “right of first refusal”. The second type of right you describe is more commonly and accurately referred to in the commercial real estate industry as a “right of first offer” for the reasons articulated very well in your article.
I heard this term for the first time in my 57 years less than a month ago, and then a second time last week. In both situations, there have been problems and interpersonal hurts as a result of this legal stipulation. I have a number of questions as a result. Have tried Googling by questions, but while the articles have been informative, none have answered these questions:
1. Can something found in a deed require a Right of First Refusal? I was told this was the case of one of the two situations. That doesn’t seem right, since a deed merely states who the owner is.
2. Can a stipulation in a decedent’s will require the making of a Right of First Refusal?