Let’s talk about Right of First Refusal on a property. It’s not something that you run into every day, but they do exist and can be attached to a property that you are looking to purchase or even sell. A Right of First Refusal (ROFR) is a written agreement that the holder of the right possesses an option in the future to purchase the property prior to it being offered to sale to a third party. It doesn’t give the holder the right to purchase it at the present time, instead at a later time when the owner decides to sell or gives notice to the holder of a bona fide offer by a third. The holder is not required to purchase the property at the time but may if they chose to exercise the Right of First Refusal.
Most ROFR agreements will set forth the steps required to approach the holder to sell the property. This document ideally would have the steps required for the holder to exercise their ROFR and ideally would have a time period or deadline to which the holder must exercise their right once they have been put on notice.
The ROFR document will be found during the title exam of the property. If one is found the title examiner will make the appropriate requirement on Schedule C of the title commitment. If the holder of the ROFR chooses not to exercise their right, allowing the third party to purchase the property the title company will obtain a signed Waiver of Right of First Refusal document. The funding of the closing will not occur without this document being fully executed by the holder.
There are many issues that can come up with ROFR. A couple of these that we see are:
- The seller of the property has not informed the holder of the ROFR. This causes conflict because now you have a seller that has contractually agreed to sell the property and is facing either a breach of contract with their buyer or violating the ROFR agreement. Title can not close a transaction like this until the ROFR has been resolved.
- The ROFR is poorly written and is very vague with the terms of notification or vague on the time period the holder has in which to respond.
- A seller may not know that their property is subject to a ROFR, which can be a complete surprise. At the time the seller purchased the property, they should’ve been properly informed of the ROFR.
If you have a property that you are thinking about selling and know that it has a ROFR we suggest that you review your ROFR and familiarize yourself before you list your property or if you already have it listed, you will need to bring this item to the attention of your Realtor. As always if you have any questions please don’t hesitate to reach out to us here at Red River Title.