The Right of First Refusal or ROFR is a term used to describe a contractual right that allows the holder an exclusive set of specified terms before the seller can enter into any other transition with a third party. In real estate, the term is used to describe a document that gives an interested homebuyer the right to buy a property before any other offers are negotiated.
The right of first refusal is a commonly used lease provision, that can also be found in other agreements. Essentially, in real estate, a ROFR works to give potentially interested homebuyers a right to purchase the property before a seller can negotiate any other offers. Typically, this clause is written before the property is publicly listed on the market.
How Does the Right of First Refusal Clause Work?
The right of first refusal clause is commonly added to real estate contracts. It works to help the seller market a home to an exclusive audience and can ease tension during the homebuying process.
Before outside offers can be reviewed from the general public, the right of the first refusal creates a space for negotiations without any other interested parties getting in the way. During the time that the right of first refusal is in place, the holder has the option to make an offer without the additional pressure of impending competitive offers.
A ROFR includes three parties: the owner, a third party or buyer, and the option holder. For the clause to work, the owner needs to make the same offer to the option holder before making any offers to the buyer. Also known as a Right of First Negotiation, a right of first offer (ROFO) differs from a ROFR in that it requires the owner to exercise “good faith.”
How is The First Right of Refusal Clause Used?
Oddly enough, the right of first refusal contract covers a variety of assets including real estate, personal property, a patent license, intellectual property, and even business interest and transactions that are not necessarily assets, including rights to distribution and more.
It can also be used in business transactions in creative industries like that of screenplay writing and music making. In the entertainment industry, a ROFR gives the holder a right to make the movie or music before any other party can. In the case of divorce cases, a ROFR can also be used when dealing with custodial offers.
The division of parenting time, visitation orders, and other obligatory terms for parents, custodians or family members may also be included in the clause.
ROFR vs ROFO
During real estate negotiations, a ROFR or a ROFO may be used to ease pressure and tension during the homebuying process. Here is a clear example of each, to help you compare and better understand how they work.
Jed owns a house and Bo makes an offer to purchase the home for $1 million. However, Sam holds a ROFR to buy the house. Thus, before Jed can make a sale to Bo, he has to offer it to Sam first for the price of $1 million. If Sam accepts, then he must agree on the same price that Bo is willing to pay. If Sam accepts, he then buys the house instead of Bo.
However, if he declines Bo can purchase the house at the agreed-upon $1 million dollar price tag.
Instead of a ROFR, Sam holds a ROFO. Before Jed can negotiate any deals with Bo he has to try to sell the house first to Sam – and on the same terms that Jed has offered. If they agree, the property can be sold to Sam.
However, if an agreement is not reached, then Jed must start again with new negotiations and remove any price or term restrictions.
The Right of First Refusal or ROFR is different from a ROFO, however, it is important for homebuyers to understand each. Regardless of how you want to approach purchasing a home, using a ROFR, ROFO, or both can help you make the deal. Talk to your real estate agent before making any decisions, and use these tips to guide the process.
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