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FAQ: Options and Related Rights in Real Estate

1. What is the key difference between an option and a right of first refusal (ROFR)?

An option gives the holder the absolute right to buy or lease a property at a set price within a specific timeframe. The holder decides whether or not to exercise this right, controlling the timing. It’s a unilateral contract binding the owner to sell.

A ROFR grants the holder the right to match a third party’s offer if the owner decides to sell. It doesn’t force a sale, but gives the holder priority. This right only becomes active when a valid third-party offer exists.

2. Can an owner bundle a property subject to a ROFR with other properties for sale?

Generally, no. Courts protect the ROFR holder from being forced to purchase additional property. Owners cannot circumvent a ROFR by including the burdened property in a larger sale. Case law emphasizes this principle, with instances where courts enjoined such bundled sales to protect the ROFR holder’s rights.

3. What happens to an unexercised option or ROFR in a bankruptcy scenario?

The situation is complex and lacks clear-cut answers. Bankruptcy courts grapple with whether such rights are executory contracts or property interests.

• Executory contracts: If deemed executory, a debtor can reject the option or ROFR, terminating it.
• Property interest: If considered a property interest, the right might survive bankruptcy and be enforceable against the debtor.

Legal precedent varies, and outcomes depend on specific case facts and jurisdiction.

4. Can a ROFR be revoked if the third-party offer falls through?

The answer hinges on the specific language of the ROFR agreement. Some agreements clearly state whether the right survives the withdrawal of a third-party offer.

• Survival clause: If present, the ROFR remains active for subsequent offers.
• No clause: The right’s survival is ambiguous, potentially leading to litigation.

To avoid uncertainty, explicitly address this scenario in the ROFR agreement.

5. What is the Rule Against Perpetuities, and how does it apply to options and ROFRs?

This rule prevents property interests from being tied up indefinitely in the future. It dictates that an interest must vest (become certain) within a specific period, usually “lives in being plus 21 years.”

Applicability:

• Options: Generally subject to the rule, potentially rendering them void if exercisable beyond the permitted timeframe.
• ROFRs: Jurisdictions differ; some consider them subject to the rule, while others exempt them.

6. How can parties ensure their option or ROFR agreement is legally sound?

1. Clear language: Avoid ambiguity; explicitly state the type of right, property, price, timeframe, and other critical terms.
2. Statute of Frauds compliance: The agreement must be in writing and signed by the party against whom enforcement is sought.
3. Rule Against Perpetuities: Ensure compliance, potentially using a “savings clause” to limit the right’s duration.
4. Legal counsel: Consult with experienced attorneys for drafting and review, navigating legal complexities.

7. What are the pros and cons of a Right of First Offer (RFO)?

Pros:

• Lessens the chilling effect on property marketability compared to ROFRs. Owners can proactively seek offers without waiting for a third-party proposal.

Cons:

• The holder makes an offer without knowing the owner’s valuation, potentially overpaying or losing the opportunity to negotiate.

8. How can an option or ROFR be perfected as a security interest?

The process depends on whether the right is deemed a general intangible or a real property interest:

• General intangible: Filing a financing statement with the appropriate authority, often the Secretary of State, may suffice.
• Real property interest: Recording documents with the local land records office might be necessary.

Legal counsel should be consulted to determine the appropriate perfection method based on jurisdiction and specific facts.