What is right of first refusal, and how does it work?

A right of first refusal (RFR) in a real estate contract is typically a device that gives to a specific party the right to be the first allowed to purchase property if it’s offered for sale. The holder has the right to refuse to buy the property. An RFR is a future right, and it is contingent upon the property being listed on the market. The terms of an RFR can range from vague to very specific and confusing.

One type of RFR is an option to buy the property before it is sold to another buyer. At the time the RFR is negotiated the seller and holder may or may not bind themselves to a specific price or other terms. Also, the option may or may not end at a specific date in the future. The seller is not obligated to sell if a price and other terms were not been established at the time of the RFR’s negotiation. A variation is an agreement to sell and buy at a price based on one or more appraisals when the RFR is invoked.

Another type of RFR is the right of the holder to match any offer the seller has, therefore preempting its sale to another party.

A related idea is Right of First Offer (ROFO). This idea requires that the seller take part in “good-faith” bargaining with the ROFO holder before negotiating a sale with other parties. Seldom does the ROFO bind the parties to come to an agreement but this does happen. An ROFO simply aids in getting the buyer in front of the seller; nothing is guaranteed after that.

With a motive of self-interest, an RFR can give certainty to both the buyer and holder. Certainty can come in the form of future time, price, and other arrangements. If you are considering an RFR or ROFO agreement please contact a lawyer for assistance. Drafting languages and terms can be very simple or complicated. Making sure that all parties understand how these agreements work is a top priority.