The right of first refusal is a common provision in real estate transactions. Although its definition is straightforward, it can raise various legal issues that both parties to the contract should be aware of before moving forward with the transaction.
We have a long history of handling commercial real estate transactions and representing everyone, from small business owners to large corporations in various industries. An Arizona real estate lawyer at Provident Law® can advise you of your legal rights during your real estate transaction, including the implications of the right of first refusal. Together, we can explore any legal issues that may arise during the transaction, determine the best strategy for addressing those issues, and work to resolve those issues as favorably as possible for you and your business.
Defining the Right of First Refusal
The right of first refusal is a contractual provision that requires the owner of a certain property to allow another party the first opportunity to purchase the property on the same terms if the owner chooses to sell it. In other words, if the property owner decides to sell their property, they must allow the person or entity holding the right of first refusal the first chance to purchase it according to those terms.
Describing the Property Subject to the Right of First Refusal
Parties to a right of first refusal should identify the property at issue. While this may seem self-explanatory, commercial real estate often is part of a larger package of properties. The property subject to the right of first refusal could be part of a larger tract of commercial real estate, a building within a shopping center, or a group of similar properties. Therefore, the parties should strictly define the property to which the right of first refusal should apply.
Defining the Sales or Transfers that Trigger the Right of First Refusal
Many right of first refusal clauses provide that “any sale or transfer” of the real estate will result in applying the right of first refusal option. However, one or both parties may not intend every such sale or transfer to be the case. For example, the parties should discuss whether they want the following sales or transfers to trigger the application of the right of first refusal:
- When the property owner is a business entity, a transfer or sale of the stock in a corporation or membership interests in an LLC;
- Attachment of a lien to the property that involves the transfer of title to the lender involved in the transaction;
- Transfer of the property to a family member or trust for estate planning purposes;
- When the property owner is a business entity and a merger with another company occurs.
The parties may choose to specifically exclude these events as triggering events for the right of first refusal. Otherwise, they could specify that the right of first refusal is equally applicable and binding on the “new” property owners that may result from these events.
Likewise, the contract could specify instances in which the right of first refusal is binding on the property’s new owner. For instance, if a lien is placed on the property and the lender later forecloses on the property, the purchaser of the property at a foreclosure sale could be subject to the right of first refusal.
Specifying the Terms of the Sale
Contract provisions containing a right of first refusal clause often refer to that option as subject to the “same terms” as the original sale. However, the parties must consider whether they want to or if it is even possible to duplicate those sale terms.
For example, if the current owner has owned the property for some time, the party holding the right of first refusal may want to inspect the property to determine if the purchase price is still fair. Another example of a potential deviation from terms might be if one party wishes to use alternative financing to purchase the property, such as exchanging one parcel of real estate for another, using third-party financing, or purchasing the real estate with one or more partners.
Furthermore, the party holding the right of first refusal may wish to specify that the right of first refusal depends on no further restrictions on the property other than those that existed at the time of the sale. This language can prevent the owner from attempting to add restrictions on the sale that discourage the right of first refusal holder from purchasing the property.
Outlining the Terms of the Right of First Refusal
Finally, the property owner must ensure that there are limits on the ability of the other party to exercise the right of first refusal. For instance, the party holding the right of first refusal should only have a limited time to determine whether to exercise their right. Allowing that party unlimited time to exercise their right could otherwise make it nearly impossible for the property owner to sell the property to a third party. A right of first refusal provision should also outline the specific procedures for the party holding the right of first refusal to notify the property owner of their decision whether to exercise or decline the option to purchase the property.
Contact Us for Assistance with Your Real Estate Transaction Today
Real estate transactions can easily become complex. The real estate attorneys at Provident Law® have decades of combined legal experience representing clients in real estate transactions, and we are experienced in efficiently and economically resolving disputes that arise from those transactions. We aim to build a long-term relationship with you as we work together to proactively address and solve your most complex legal problems in real estate, commercial litigation, business law, and more. Contact a commercial lawyer today by calling (480) 388-3343 or reach out to us online to set up a time to see what we can do for you.