What Is A Right Of First Refusal In Real Estate?
Most of the time, an owner of real estate can sell it to whomever they wish, under the terms which they and their chosen buyer mutually deem acceptable. However, in some cases, that right to sell is restricted. A “right of first refusal” (“ROFR”) is the right of a third party to purchase property from a seller who would otherwise sell it to someone else. For example, if Seller wants to sell a house to A, but B holds a right of first refusal, then B may generally choose to become the buyer, having priority over A. We call it a “right of first refusal” because before Seller can sell to A, B must first be given the right to turn down (or “refuse”) the purchase opportunity before the seller is free to sell to their chosen buyer.
Rights of first refusal, while commonly enforceable, represent a “restraint on alienation,” which is a legal term referring to restrictions on being able to freely sell something. The American legal tradition treats restraints on alienation with some degree of scrutiny, because we generally prefer the freedom to contract as we please, and restrictions on this freedom often result in things not fetching their full market value, or not being put to their highest and best use. Washington State courts have said that an ROFR, in order to be enforceable, must be for a “reasonable and legitimate purpose”.
Parties to a ROFR structure those rights in all kinds of ways. But some terms are more likely than others to be found unreasonable. A preemptive right to purchase property for a pre-determined fixed price can be found unreasonable if it is way below market value. Also, Washington courts prefer ROFRs to have a time limit, particularly where the price is fixed. Failure to have a time limit can result in either the ROFR being declared void, or the court still enforcing the ROFR but subject to the Court imposing a reasonable time limit. Courts will also look at the circumstances under which the ROFR was entered into, including whether it was fair at the time and whether there was reasonable consideration given.
ROFRs generally differ from a typical “option contract” in that an ROFR generally requires a triggering event before its holder has the right to purchase (i.e., an offer or agreement to sell the property to a third party). Option contracts, on the other hand, allow the holder of the option to initiate a purchase even when the owner has taken no action to sell their property.
Generally speaking, an ROFR is most likely to be found enforceable if its holder is required to match the material terms of a third party sale, and if the ROFR specifies an express time limit. A party wishing to sell property which is subject to an ROFR should make sure to provide timely and proper notice to the holder of the ROFR, to given them a fair opportunity to exercise it; failing to do so can open you to liability to both your third party buyer and the holder of the ROFR. It is helpful to consult a real estate lawyer if you are considering buying or selling a property subject to an ROFR.
The lawyers at Beresford Booth have a wealth of experience assisting with real estate transactions and disputes. Whether you are planning a transaction or in the midst of a real estate dispute, we are here to help.
To learn more about What Is A Right Of First Refusal In Real Estate?, please do not hesitate to contact us at info@beresfordlaw.com or by phone (425) 776-4100 for assistance.
