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We examine options and rights of first refusal in real estate.
We discuss the legal distinctions between these rights, explores how they interact with other areas of law (statute of frauds, rule against perpetuities, bankruptcy law), and offers guidance on drafting clear, enforceable agreements.
Numerous court cases are cited to illustrate the complexities and potential pitfalls of ambiguous contract language.
We also discuss the critical need for precise drafting to avoid disputes and unintended consequences.
Practical examples and sample forms are included to assist legal practitioners.
How do options and refusals legally differ in real estate?
An option to purchase real estate and a right of first refusal are distinct legal instruments with different characteristics and implications. The key difference lies in the power they afford the holder and the circumstances under which they can be exercised.
Options:
• An option functions as a binding offer from the seller (optionor) to the potential buyer (optionee) to sell a specific property at a predetermined price within a specific timeframe.
• The optionee pays a non-refundable fee for the option, giving them the exclusive right to purchase the property during the option period.
• If the optionee decides to exercise the option, the seller is obligated to sell the property regardless of their willingness to do so.
Rights of First Refusal (ROFR):
• A ROFR does not grant the holder the power to compel the owner to sell.
• It is a conditional right that only becomes active when the owner receives a bona fide offer from a third party.
• The ROFR holder then has the opportunity to match the terms of the third-party offer or decline, allowing the owner to sell to the third party.
• The ROFR holder cannot initiate the sale and has no control over the timing or the terms, which are determined by the third-party offer.
In essence, an option gives the holder the power to purchase the property at their discretion, while a ROFR merely grants the first right to buy if the owner decides to sell.
The Colorado case, Stuart v. D’Ascenz, illustrates how courts distinguish these two legal instruments.
In this case, a lease included a clause granting the tenant the “1st right of refusal” at a specified price.
The court determined that this clause did not constitute an option because it did not give the tenant the power to demand conveyance before the owner expressed a desire to sell.
The court held that the lease provision granted only a right of first refusal, as the tenant could only purchase the property if and when the owner decided to sell.
The sources emphasize the importance of clear and precise language in real estate contracts to avoid ambiguity and potential litigation.
Parties should clearly state whether a clause grants an option or a ROFR and specify the terms under which the right can be exercised.
Failure to do so can lead to legal disputes and unexpected outcomes.
