How Does a First Right or Refusal Work?

Question: Howard, my neighbor is buying 50 acres of my 200-acre farm.  He wants a First Right of Refusal to buy the   remaining 150 acres. I think it’s a good idea to have a buyer when we’re ready to sell.  My wife doesn’t agree.  How can I  convince her?

 Answer: Your wife has reason to be cautious.  Let’s be sure you haven’t confused the “giving Howard the first chance to buy” with giving Howard “a First Right of Refusal.”   The two are quite different. 

 A “first chance to buy” is typically a handshake agreement not legally enforceable.  You remind Howard when you are ready to sell and give him first chance to buy. If he says yes, a contract is prepared and the sale is closed. If he says no, you have fulfilled the “gentleman’s agreement” and you can find another buyer.
   
 To clarify, a First Right of Refusal is a binding contract.  When you’re ready to sell to a third party, you can contact Howard, but it’s not necessary.  You contact Howard only when you have a signed contract with a buyer.  At that point, Howard is the buyer unless he exercises his First Right of Refusal.  Does that sound awkward?  Well, it is, and a standard First Right of Refusal can also complicate your sale.  Here’s how!

You must tell every prospective buyer that Howard has a First Right of Refusal on the 150 acres.  The prospective buyer must be willing to sign a contract and stipulate that Howard could be the buyer at that same price as his First Right of Refusal.  Only after Howard refuses the contract does the  contract between you and the new buyer become binding.

It’s understandable why many buyers will “walk away” rather than sign a contract containing a First Right of Refusal clause.  They are really negotiating the price for Howard and not for           themselves.
 
 If Howard refuses the contract, the title insurance company   closing the sale will require a Quit Claim Deed from Howard or     evidence that the contract has been refused by him.  Should the sale with the new buyer not close, Howard continues to have a First Right of Refusal.  All future contracts would have to be    refused by Howard before another person can purchase the property.  The First Right of Refusal continues until the property is sold either to another buyer or Howard.

Another complication occurs if you decide to sell only part of the 150 acres.  Suppose your wife’s nephew wants to buy 20 acres.  Well, Howard, has the First Right to Refuse that contract.  Or,  suppose you want to sell to a friend at very favorable price.  Again, Howard has the right to buy under the same price unless he refuses the contract. 

 As stated, a verbal first chance to buy is a gentleman’s  agreement and does not have the elements necessary to be considered a legal contract.  On the other hand, the signed First Right of Refusal is an enforceable contract and is an encumbrance on the land.  It’s even enforceable after your death.

 There are ways to protect yourself against these and other pitfalls.  Always seek an attorney’s opinion before signing a First Right of Refusal.