What Is a Right of First Refusal, and How Does It Work

Elise Williams

2023-03-24 17:08:10 • Filed to: Real Estate • Proven solutions

What is a 'Right of First Refusal'

A person owing the 'Right of First Refusal’ has the opportunity to make a business transaction or agreement with another individual or a company, before anyone else can. If the person with the 'Right of First Refusal’ refuses the transaction, then the original presenter of the property has the right to offer the bid to other prospective customers.
The 'Right of First Refusal’ is often bidden by a company or the owner when they want to test the outcome of a business opportunity or a property; this right allows them to keep away from committing to invest further until they can analyse the prospect of that particular property. However, until they make up their mind, the requesting entity of the 'Right of First Refusal' will always have the chance to commit before any other interested party wants to.
For those holding the right, this serves as a coverage policy that they will be able to secure their desired property without losing it to someone else. For instance, a tenant who can afford to lease a house would buy it only because he is afraid that the owner would rent it out to someone else. In a situation like this, the tenant can request to have a 'First Right of Refusal’ added as a clause into the leasing contract; this right will allow the current tenant to be the first person to avail the buying opportunity.
The agreement proves to be simultaneously beneficial and disadvantageous to a proprietor or seller. The transaction is drafted before entering into the real estate market; therefore, an owner has the opportunity to convince the residing tenant or potential buyer, to pay more than the home's current value. However, what doesn't work in his favour is the fact that the 'Right of First Refusal’ acts as an obstruction in his effort to trade the house with another buyer who may prove to be a better resident for the home. If the tenant takes a longer time to proceed with the agreement or terminate it, either way, the more secure buyers that the owner has aligned, are lost to time.

When is it Used

A 'Right of First Refusal' is a widely used practice in the real estate industry and is now becoming a clause commonly added into a property transaction. Here are a few day-to-day examples:
1) Right between a Proprietor and Leaseholder:
As a usual practice, leaseholders include this clause in their leasing agreements whenever they are interested in buying the same property that they are residing within. By adding this clause, they are given 'home security' in a sense that whenever the Proprietor wishes to sell his property, he will have to consider the tenant currently residing within that house before he can make an offer to someone else.
2) Right between relatives or acquaintances:
Including this right into a property, leasing document allows your relatives, friends, or other known people to have the first right to consider your bid on the house before you think of selling it to another potential buyer, even if the other buyer is ready to pay you more.

Should I Agree to a 'Right of First Refusal’ Clause?

When including the Right of First Refusal clause into a property transaction, the owner has the right to add, alter or remove sub-clauses which vary from owner to owner. It is possible that one property's clause includes a time duration restriction while another term may demand a guaranty or proof to further proceed with the agreement, or another clause may require different payment methods or payment breakdown.
In either case, you cannot expect the conditions under 'Right of First Refusal' to be the same in every contract. Therefore, it is always better to either involve a lawyer or communicate your case with a person who knows about real estate handlings. Nonetheless, you should pertain to the usual practice and read your contract comprehensively to avoid missing out on any important dates, restrictions or demands mentioned in the clause. Sign only when you are sure shot ready to commit to the agreement and eventually buy the property for which you are signing a 'Right of First Refusal'.

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