A right of first refusal gives the holder of the right of first refusal (the "Holder") the opportunity to match any offer you receive on your property from a third party. For example, if you receive a million-dollar offer on your property that you wish to accept, first you have to offer to sell the property to the Holder for a million dollars. Only after the Holder refuses to purchase the property for a million dollars may you sell it to the third party.
What's the Problem?
This seems pretty harmless. Normally, you do not care who purchases your property, and a million dollars from one party is as good as a million from someone else. So why should you avoid giving someone a right of first refusal? There are several reasons:
First, many buyers are discouraged from doing the work necessary to make an intelligent offer if they know someone else has a right of first refusal. Who wants to investigate a property, determine its value, and then write up an offer if someone else can purchase it out from under them for the same price? The result is that the property becomes less marketable and therefore less valuable.
Second, a right of first refusal can seriously interfere with a timely closing. The reason is that if the parties agree to change the deal in any material way after the offer has been presented to the Holder, they have to go back to the Holder and again offer the property on revised terms. For example, if the buyer and seller discover a problem shortly before the closing and agree to adjust the purchase price or to change some other term of the deal, the property must again be offered to the Holder, and the Holder's time period must again be allowed to run. The result is often frustration and delay, and sometimes the deal even falls apart as a result.
Third, rights of first refusal are a frequent source of litigation. Many disagreements can arise when a right of first refusal exists. What happens, for example, if an offer is received for only part of the property? What happens if someone offers other property in trade? Both of these situations can cause the kind of disagreements that can lead to litigation. Another source of litigation, believe it or not, is that people often forget they have given someone a right of first refusal, perhaps years earlier. Later they enter into a contract to sell the property to a third party. If the Holder appears and asserts his rights, the seller is placed in a difficult position and may end up getting sued by both the buyer and the Holder, both of whom claim a legal right to purchase the property.
In other cases, disputes arise over whether a right of first refusal has been waived, or whether a property offer has been made. With rights of first refusal, the causes of litigation seem endless.
A right of first refusal is often given as a harmless throwaway in the course of negotiating a deal. This is usually a serious mistake. A right of first refusal is a serious detriment to the value and marketability of property and often leads to litigation. In most situations you should avoid granting rights of first refusal if at all possible.