What Is a Right of First Refusal in Real Estate?

The Right of First Refusal (RFR) is a contractual agreement that provides a specific party the option to purchase a property before the owner can offer it to others. This legal mechanism establishes a preferential purchasing right, which becomes active when the property owner decides to sell. The RFR grants its holder the ability, but not the obligation, to match any legitimate offer made by a third party. It offers an initial opportunity to acquire a desired property.

Understanding the Right of First Refusal

A Right of First Refusal is a legally binding stipulation within a contract, lease agreement, or other formal real estate document. It grants a designated party the initial opportunity to make an offer on a property and acquire it should the owner decide to sell. This arrangement effectively puts the RFR holder at the front of the line to purchase the property.

The parties involved in an RFR agreement are typically identified as the “grantor” and the “grantee.” The grantor is the property owner who extends this right, while the grantee is the party holding the RFR. For example, if a property owner (grantor) receives an offer from a third party, the RFR holder (grantee) must be notified and given the chance to buy the property under the same terms.

The RFR is inherently a contingent right, meaning it only becomes active under specific circumstances, primarily when the grantor decides to sell the property and receives a bona fide offer from an outside buyer. The RFR does not obligate the grantee to buy the property; rather, it provides them with the exclusive option to match an external offer. If the grantee chooses not to exercise their right, they can waive it, allowing the grantor to proceed with the third-party offer.

The Process of Exercising RFR

The process of exercising a Right of First Refusal begins when the property owner, or grantor, receives a bona fide offer to purchase their property from a third-party buyer. This offer triggers the RFR clause, obligating the grantor to notify the RFR grantee. This notification must include all material terms of the third-party offer, such as the proposed price, any contingencies, and the timelines for closing.

Upon receiving this notification, the RFR grantee enters a specified decision period, which is the timeframe they have to respond to the grantor’s offer. This period typically ranges from 30 to 60 days, as stipulated in the RFR agreement. During this time, the RFR holder must evaluate the terms and decide whether to exercise their right.

The RFR grantee has two primary options: they can choose to match the third-party offer, thereby exercising their right, or they can decline to do so, effectively waiving their right. If the grantee decides to match the offer, they must formally communicate their acceptance in writing and agree to all the material terms presented. If they decline or fail to respond within the allotted timeframe, the RFR is considered waived for that particular transaction.

Should the RFR be exercised, the transaction proceeds with the RFR grantee as the buyer, adhering to the matched terms. However, if the RFR is waived or not exercised, the grantor is then free to proceed with the original third-party offer and sell the property to that buyer.

Key Provisions in an RFR Agreement

A legally sound Right of First Refusal agreement includes several essential contractual elements. Notice requirements specify how the grantor must inform the grantee of a third-party offer, often mandating written notification and specific delivery methods, such as certified mail. This ensures the grantee is properly apprised of the opportunity to purchase.

Timeframes are a component, outlining the period the grantee has to respond to the notice and, if exercising the right, to finalize the purchase. These periods can vary but are typically set to allow reasonable time for due diligence. The agreement also clearly identifies the scope of the property or interest subject to the RFR.

Triggering events detail the specific actions or proposed transactions that activate the RFR, such as any bona fide offer to sell the property to a third party. The matching terms provision clarifies that the grantee must agree to all material terms of the third-party offer, not solely the purchase price. This includes financing arrangements, closing timelines, and other conditions that may be part of the external offer.

RFR agreements often include exceptions or exclusions, specifying situations where the right might not apply, such as transfers to family members or as gifts. Duration and termination clauses define how long the RFR remains in effect and under what conditions it may expire or be terminated.

Situations Where RFR is Commonly Used

The Right of First Refusal finds frequent application across various real estate scenarios. In co-ownership agreements, such as those between joint tenants or tenants in common, an RFR can ensure that if one owner decides to sell their share, the other co-owners have the first chance to acquire it. This helps maintain the existing ownership structure and can prevent unwanted outside involvement.

In the context of leases, particularly commercial or residential, tenants may secure an RFR to purchase the leased property if the landlord decides to sell. This provides tenants with stability and a potential pathway to ownership, particularly in states where tenant RFRs are supported by law. This type of provision is often included in a lease agreement.

Homeowners’ associations (HOAs) and condominium associations sometimes incorporate RFR clauses in their governing documents. These provisions typically allow the association or other unit owners to purchase a unit when it comes up for sale, often to maintain property values or control who resides in the community.

Adjacent property owners may also enter into RFR agreements, granting a neighbor the first option to buy a specific portion of land if it becomes available for sale. This can be useful for consolidating land or preventing undesirable development. In commercial real estate, RFRs are often found in joint venture agreements, allowing partners to control the transfer of membership interests and maintain the integrity of the venture. This helps prevent shares from being offered to external parties without first being offered to existing partners.