|Rights of first refusal are very common, and
seem to be used in all sorts of business deals. You should
avoid them like the plague.
A right of first refusal gives the holder of the right of
first refusal (the "Holder") the opportunity to
match any offer you receive on your property from a third
party. For example, if you receive a million-dollar offer
on your property that you wish to accept, first you have to
offer to sell the property to the Holder for a million dollars.
Only after the Holder refuses to purchase the property for
a million dollars may you sell it to the third party.
What's the Problem?
This seems pretty harmless. Normally, you do not care who
purchases your property, and a million dollars from one party
is as good as a million from someone else. So why should you
avoid giving someone a right of first refusal? There are several
First, many buyers are discouraged from
doing the work necessary to make an intelligent offer if they
know someone else has a right of first refusal. Who wants
to investigate a property, determine its value, and then write
up an offer if someone else can purchase it out from under
them for the same price? The result is that the property becomes
less marketable and therefore less valuable.
Second, a right of first refusal can seriously
interfere with a timely closing. The reason is that if the
parties agree to change the deal in any material way after
the offer has been presented to the Holder, they have to go
back to the Holder and again offer the property on revised
terms. For example, if the buyer and seller discover a problem
shortly before the closing and agree to adjust the purchase
price or to change some other term of the deal, the property
must again be offered to the Holder, and the Holder's time
period must again be allowed to run. The result is often frustration
and delay, and sometimes the deal even falls apart as a result.
Third, rights of first refusal are a frequent
source of litigation. Many disagreements can arise when a
right of first refusal exists. What happens, for example,
if an offer is received for only part of the property? What
happens if someone offers other property in trade? Both of
these situations can cause the kind of disagreements that
can lead to litigation. Another source of litigation, believe
it or not, is that people often forget they have given someone
a right of first refusal, perhaps years earlier. Later they
enter into a contract to sell the property to a third party.
If the Holder appears and asserts his rights, the seller is
placed in a difficult position and may end up getting sued
by both the buyer and the Holder, both of whom claim a legal
right to purchase the property.
In other cases, disputes arise over whether a right of first
refusal has been waived, or whether a property offer has been
made. With rights of first refusal, the causes of litigation
A right of first refusal is often given as a harmless throwaway
in the course of negotiating a deal. This is usually a
serious mistake. A right of first refusal is a serious detriment
to the value and marketability of property and often leads
to litigation. In most situations you should avoid granting
rights of first refusal if at all possible.
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