Articles Tagged with right of refusal

underwood-guide-to-right-first-refusal-300x300A right of first refusal – sometimes called a “preemptive right” – is a right provided by contract that gives a party priority to purchase a property if the owner decides to sell. This right may be included in an ownership agreement between two co-owners who are cotenants. The person who holds the right is the “grantee,” and the person who gives the right to a fellow co-owner is the “grantor.”

A right of first refusal gives the cotenant priority over other potential buyers when the other cotenant makes a decision to sell their interest in the property. Unlike a valid option provision where a cotenant is obligated to sell the property to the other cotenant subject to the terms of the ownership agreement, under a right of first refusal, a second cotenant’s ability to purchase the first cotenant’s interest depends on the first cotenant’s desire to sell it. The right of first refusal becomes an option when the owner “voluntarily decides to sell the property and receives a bona fide offer to purchase it from a third party.” (Campbell v. Alger (1999) 71 Cal.App.4th 200, 206-207.)  

What types of instruments contain a right of first refusal?

underwood-right-of-first-refusal-300x300A right of first refusal is, essentially, an option contract. It is a contract or a condition in a contract between the owner of an asset, and some other person with an interest in that same asset, that allows the interested person to buy the asset from the owner instead of allowing the owner to sell it to a third party. Put differently, it’s a conditional right to acquire property, depending on the owner’s willingness to sell. (Campbell v. Alger (1999) 71 Cal.App.4th 200, 206.) 

The classic example is for a long-term lease of a house. There, as part of the lease, the owner provides that the renter has a right of first refusal if they rent for a set amount of years (let’s say five). After those fives years are up, the owner tries to sell the house on the market to a third party. But, because of the right of first refusal, the renter must be allowed to chance to make the same offer as the third party. Only if the renter “refuses” to match the offer is the sale allowed to proceed. 

While the concept itself is rather straightforward, there are many legal complexities that can arise when the right is integrated into other actions concerning property, such as eminent domain proceedings, probate sales, and partitions. 

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