Rights of first refusal and rights of first opportunity are commonly referred to as preferential rights and routinely appear as part of real estate contracts. The differences and effects concerning these rights are not always clear.
Right of First Refusal
Black’s Law Dictionary defines right of first refusal as “a potential buyer’s contractual right to meet the terms of a third party’s higher offer.” This means that if a third party offers to purchase an owner’s property, the owner is obligated to notify the holder of the right of first refusal and provide the holder with the opportunity to match the offer or refuse to purchase the property.
Black’s Law Dictionary provides the following example: “If Beth has a right of first refusal on the purchase of Sam’s (seller) house, and if Terry (third party) offers to buy the house for $300,000, then Beth can match this offer and prevent Terry from buying it.” Right of First Refusal, Black’s Law Dictionary (10th ed. 2014).
There must be an offer on the table to initiate a holder’s right of first refusal. A holder may accept or refuse to purchase a property only after a third-party offer has been made. A holder’s rights are only valid for a specified period of time, and if a holder does not exercise their right within the specified period, the right expires and the owner is entitled to accept third party offers.
Right of First Opportunity
A right of first opportunity is also known as a first option to buy or a right of preemption. A right of preemption, as defined by Black’s Law Dictionary is “a potential buyer’s contractual right to have the first opportunity to buy, at a specified price, if the seller chooses to sell within the contracted period.” Right of Preemption, Black’s Law Dictionary (10th ed. 2014).
If the owner decides to sell or lease real property, the owner must notify the holder of a right of first opportunity and give the holder the first opportunity to make the first offer. The owner is contractually obligated to notify the holder before attempting to sell the property to anyone else.
For example, “If Beth has a right of preemption on Sam’s (seller) house for five years at $100,000, Sam can either keep the house for five years (in which case Beth’s right expires) or, if he wishes to sell during those five years, offer the house to Beth, who can either buy it for $100,000 or refuse to buy.” Right of Preemption, Black’s Law Dictionary (10th ed. 2014).
The key difference between a right of first opportunity and a right of first refusal is that the former gives the holder the first opportunity to make an offer, whereas the latter gives the holder an opportunity to match or refuse existing offers. The triggering event that initiates a holder’s right in a right of first refusal is a third-party offer, and the triggering event in a right of first opportunity is the seller’s decision to initiate a sale. Although similar, a right of first refusal and a right of first opportunity have some key differences.
It is important to note the differences and understand which right works best for your situation. To ensure the appropriate preferential right is used, contact an experienced attorney to advise and assist with incorporating a right of first refusal or a right of first opportunity clause into your real estate contracts.
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