When transferring property, sellers sometimes insist on rights of first refusal—the chance to be first in line to repurchase the property if their buyer later decides to sell. A right of first refusal can be an obvious advantage if your financial circumstances later change. And if you’re keeping adjoining land, you may wish to protect yourself against the risk of something unattractive being built next door. What are some of the advantages of first rights of refusal in negotiation, and what are the downsides? Brit Grosskopf and Alvin Roth have conducted negotiation research into this area and have identified a little-recognized distinction in legal drafting that can turn this apparent blessing into a curse.
Types of First Right of Refusal in Negotiations
One type of first-refusal right gives the former owner the ability to regain the property by matching competing bids. Right holders only have to equal the high bid without engaging in the auction themselves. But another form of the right of first refusal (common in certain real-estate and entertainment markets) 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.
As illustration, suppose you hold a right of first refusal for a piece of property that 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 suppose you have to respond before the market has been tested. If the owner demands $475,000, you’ll be pushed close to your limit, if reluctant to risk losing the property to a higher bidder. In essence, this second type of right leaves you bidding against yourself.
As this example suggests, when the right of first refusal is on the table, make sure the specific terms won’t turn around and bite you later.
Related Negotiation Skills Article: The Impact of Anxiety and Emotions on Negotiations: How to Avoid Misjudgment in Negotiation Scenarios – Learn how emotions impact negotiation styles at the bargaining table and what negotiators can do to overcome this effect.
Adapted from “Blessing or Curse: The Right of First Refusal,” first published in the Negotiation newsletter.