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What's Wrong with a Right?
Posted on Jan. 31, 2013

A common acronym for Rights of First Refusal – “ROFR” – may bring to mind an image of a dog, for more reasons than the obvious similarity of the term to the sound a dog makes.

ROFRs are specialized agreements used when there is a reason to restrict the sale of property. For example, Farmer John may agree to sell a portion of his farm to Jane, but he may want the right to buy it back if Jane ever decides to sell the property, and will require that Jane grant him a ROFR. A ROFR might also be used when family members wish to keep certain property in the family. While the holder of an option to purchase property can force a sale against an unwilling owner, the holder of a ROFR only has rights after the owner has decided to sell. This makes a ROFR the weakest of all preemptive rights because the grantor of the ROFR is never obligated to sell.

Despite its weakness as a preemptive right, however, a ROFR can wreak havoc if it is not drafted precisely and with a view to consequences which the grantor may not have considered. ROFRs have a chilling effect on the ability of an owner to sell his property; consequently, a ROFR should include very specific terms with regard to how it is to be exercised. It should address: the form and timing of notice that the owner is required to give the holder of the ROFR in the event a sale is contemplated; the form and timing of the notice that the holder of the ROFR must give the owner if the holder intends to exercise the right; whether the ROFR is assignable; and to what degree the holder of the ROFR must match the terms of the offer of a third party.

A common issue with a ROFR arises when an owner decides to pull out of an agreement with a buyer to sell the property. When no ROFR is involved, if both the seller and the buyer agree to terminate their agreement, there is no problem. However, if there is ROFR in favor of a third party, the seller needs to consider whether the holder of the ROFR has exercised his right prior to termination of the agreement and if so, what the result of that is. By exercising a ROFR, the holder may be seen to have an irrevocable option to buy the property, even if the seller no longer wants to sell.

The intent of the parties to a ROFR must be very clearly set out in a written agreement. Courts are often called upon to construe ROFRs that have been imprecisely drafted – an expensive and time-consuming (and often unpredictable) method of dealing with a problem that could have been prevented with foresight and care.  Make sure you obtain the help of an attorney before committing to a ROFR that you might regret.

 

*This post was written by Attorney Marianne Sorensen.

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Department Chair

tomTom Berggren

Tom has an extensive finance and real estate practice representing a wide range of businesses and financial institutions. He specializes in real estate secured loans and often serves as local counsel in multi-state credits. He has the expertise to assist developers, lenders, nonprofits and governmental entities take advantage of New Markets, Historic and Investment tax credits as part of the project financing.

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