RIGHT OF FIRST REFUSAL: A NEGATIVE SURPRISE FOR CLOSING!

Wed, 03/13/2019 - 11:16am

RIGHT OF FIRST REFUSAL: WHAT IS IT? 
A right of first refusal (ROFR) is a contract that gives one party (we’ll call them the “ROFR holder”) the right to be the first allowed to purchase a specific property if it is offered for sale before that property can be sold to anyone else.  There can be different styles of ROFR but the most important thing to note is that a seller may not sell their property on the open market without addressing the ROFR.   

A common type of ROFR involves a scenario where the ROFR holder has the right to buy a piece of property before it can be sold to any other buyer.  The terms of purchase are not set at the time the right is created but the owner of the property agrees not to sell without allowing the ROFR holder the right to purchase.  Typically with this type of agreement the document creating the agreement will set forth the steps required to approach the ROFR holder to sell the property.  Ideally this same agreement also sets out the steps required for the ROFR holder to exercise their right as well as a deadline in which the ROFR holder must respond.  With this type of option, when the seller receives an offer on their property they have to turn around and share that offer with the ROFR holder before the owner can sign the contract.    

FIRST RIGHT OF REFUSAL: HOW IS IT ADDRESSED?
When a property is subject to a ROFR the seller has steps they must go through before they can sell the property to a third party.  The steps that must be followed will be controlled by the legal document that created the ROFR but in general it involves the seller sending the offer received to the ROFR holder.  Once that is done the ROFR holder has the option of purchasing the property instead or waiving their ROFR and allowing another sale to go through.  To get to closing, a title company has to have a signed Waiver of Right of First Refusal document in the file before funding can occur.  

FIRST RIGHT OF REFUSAL: WHAT ARE THE PITFALLS?
When it comes to a ROFR there can be many issues that delay or stop a closing.   

First, we see sellers go under contract all the time with a ROFR where they have not yet sent the offer to the ROFR holder.  Understand that this is quite problematic because if the ROFR elects to purchase the property the seller has now contractually agreed to sell the property to someone else and now has quite an issue on their hands.   That seller is now faced with either breaching a contract or violating the ROFR agreement and a title company is not able to close either transaction until the ROFR issue has been dealt with.  

Another issues arises from the documents that created the ROFR.  Many of these documents are poorly drafted and fail to provide the proper steps for notice or more importantly the steps to waive the ROFR.  In many cases these ROFR documents do not include a timeline in which the ROFR holder is required to elect to purchase or waive their rights which means any existing offer is suspended in time until the ROFR signs the waiver.  

Let’s look at the following examples of ROFR clauses: 
“In the event the owner desires to sell the property, the property shall be offered for sale to ROFR Holder at the same price at which the highest bona fide offer has been made for said property. The ROFR Holder shall have thirty (30) days from receipt of the copy of the offer to exercise the ROFR and said ROFR Holder must submit a matching offer in writing to owner in order to exercise the right.  In the event thirty (30) days pass from the receipt of the offer by ROFR Holder and ROFR Holder has not made a written offer to owner, the ROFR shall be deemed to be waived by ROFR Holder. In the event ROFR Holder exercises their right to purchase the transaction shall be consummated within 30 days from the offer or the ROFR shall be deemed waived.”     

In this example the language is clear. Before the seller goes under contract to sell the property to someone else they must make the offer to the ROFR holder.  The ROFR holder then has to agree to the same terms as the offer and if they do not respond within X days of their receipt of the offer they are deemed to have waived their ROFR.  With adequate documentation that the offer was made a closing can be allowed to occur.  

Now let’s look at a problematic example: 
“In the event the owner desires to sell the property, the property shall be offered for sale to ROFR Holder at the same price at which the highest bona fide offer has been made for said property.  In the event ROFR Holder exercises their right to purchase the transaction shall be consummated within 30 days from the offer or the ROFR shall be deemed waived.”     

In this example there is no stated timeline in which the ROFR holder is required to act. That means that their right is open ended.  If they fail to respond the seller may not sell their property to a third party and must hold the property until they can obtain the waiver of ROFR.  The owner must wait until the ROFR holder responds to them.  

A third ROFR issue that can arise is having a seller be completely surprised that their property is subject to a ROFR.  At the time of purchase the ROFR should be properly disclosed to a buyer of the property but buyers typically do not read a title commitment in full and so they do not understand the encumbrances that affect their property until it is too late.  Can you imagine being a property owner that goes to sell their property, only to find out that they do not have the legal right to do so until they have offered it for sale to the ROFR holder? Too often the ROFR issue is not pointed out to the buyer of a property and they can be very surprised down the line when they want to sell.  To best protect themselves, a real estate agent should always make sure that their client is aware that a ROFR affects the property that they are buying.  A real estate agent should make sure that their client is aware of the process required before they could later sell their property.    

FIRST RIGHT OF REFUSAL: NOW WHAT?
The best way to navigate a transaction involving a ROFR is to work closely with your Texas National Title escrow team.  While we cannot complete the process for the seller, we can definitely help your client figure out what steps are required for them to handle the ROFR as well as what timeline constraints there are to get to closing.  We can also help you provide documentation on the ROFR to your buyer in the transaction.  We are the experts you need and the partners that you can trust in getting your clients to closing.