First Right of Refusal

[Dustin Caldwelll]

I had to relocate to Chicago from ATL for my job and hired a property MGT company to assist with renting out my home in ATL. We found a tenant who owns his own company, wants to pay in advance with 3 month increments (from his companies checkbook) and wants a "first right of refusal" if we decide we want to sell the house in the future. He also wants to sign a three year contract. The language my property mgr put in the contact is below. We have not signed this contract yet.

I feel like there are some angles here where I could get screwed. Open to all pessimistic scenarios!

During the term of the lease, and any extensions thereof, "Resident" has the first-right-of-refusal to purchase "Property". "Resident" has the right to purchase "Property" at the same price and terms as provided to the "Property" owner in a bona fide offer from a 3rd party. The 3rd party offer must be acceptable to the owner's, in the owner's sole discretion. "Resident" has 36 hours, after being notified, to match the 3rd party offer with a bona fide offer of equal or greater value and terms. If "Resident" does not deliver a bona fide offer to purchase the "Property" at equal or greater value and terms within 36 hours, "Property" owner has the right accept the 3rd party offer with no other obligation to "Resident" concerning the purchase of "Property"

[Leonard L.]

Never give a right of first refusal. I usually deal in bigger deals than houses and I can tell you that where the deal is large enough to merit the involvement of serious lawyers, this is one of the most heavily negotiated provisions. It can go on for pages, and there is a good reason for this -- it has huge potential to go wrong.

For example, say you have an offer at $250k which you think is very generous, but the market is moving quickly and you want to strike while iron is hot. You give to tenant, and 36 hours later he accepts. So you have to tell strong buyer to go away. Same with person that was in 2nd position, 3rd position, etc. Now suppose the original offer had a 20 day inspection contingency period and a 30 day financing contingency. So that means for 20 or 30 days, you don't know if your tenant is going to perform. Say he pulls the plug on day 30 and you have to give deposit back, as per terms of original offer. Now what? You take back to your former bidders and hope that a month later they are still interested? Will they pay the same price? Or do you re-market? And then if they come in lower, do you have to offer to tenant all over again? Essentially my view is that giving a ROFR is giving someone the power to kill your deal.

If a tenant wants the right to buy, most I will give them is a right of first offer. Before I take to market, I tell them at what price and terms under which I intend to market the property. They have right to make an offer at this price and terms, which I must accept. However, if they refuse, their rights terminate. I have right to take to market and make deal, even if deal is less favorable than the price/terms I offered tenant. And even that I would not give unless absolutely necessary.

This is not legal advice, just wisdom gained from years of deals.