What does it mean to have a right of first refusal?
Q: We tried to purchase two different lots in a lake community about two hours from where we live. They have a right of first refusal clause in the bylaws of the community association. We had signed contracts on both of these lots. The issue we had is that once we put in a contract for both of the lots, the owners then offered the lots to the adjoining lots and those owners purchased the lots. I feel that the neighbors should be offered the property before time and expense is incurred by a buyer. Can a right of first refusal legally be executed after a valid contract is made by another buyer? A:
Ah, the lake life. It sounds like a wonderful way to live, especially in light of the pandemic. Today, more people can take advantage of living somewhere more rural, now that they are empowered to work from home either part or full time.
When it comes to your purchase, however, we think there are two complications: First, the association itself seems to have a right of first refusal and second, the various owners have given each other a right of first refusal.
So let’s discuss what it means to have a right of first refusal. Within the context of a homeowners or condo association, associations may commonly have a right of first refusal to purchase another unit or property in the development or building.
Sam sees this all the time when it comes to condominium associations and some homeowners associations.
When a contract to purchase comes in, the
homeowner submits the contract to the association for its review and the waiver of the right of first refusal. It is quite unusual for an association to exercise its right of first refusal. When it does, the association has to purchase the property from the owner at the purchase price that the owners had agreed to accept.
Between private parties, the right of first refusal works in a similar manner. A property owner can give someone the right of first refusal in the same way. When the owner receives an offer to purchase the home, that owner would then turn around and let the person that holds the
right know about the offer and the purchase price. At that point, the person with the right of first refusal can let the right lapse or can decide to proceed and purchase the property.
We agree that you shouldn’t have to spend money on the deal until you know it’s going to go through. We don’t know if you were told when you signed the contract that other parties had a right of first refusal. We also don’t know if the listing sheet gave some indication of the existence of the right of first refusal.
If you were told that others had a right of first refusal, you could have waited to learn whether
the neighbor or association waived their right to purchase before spending money to hire an inspector, pay an application fee for a mortgage or pay any other fees.
As we mentioned, most associations don’t exercise the right of first refusal. So, it would be unusual for a buyer and seller to hold off on the mechanics of the purchase until a homeowners association waives the right.
But when a private party has that right, the likelihood that the right of first refusal is exercised goes up exponentially. That’s because neighbors, friends or other private parties never give each other the
right of first refusal unless there is a keen interest in buying the property.
Let’s say you have an extra lot by the lake and a friend who is interested in buying it from you. You and your friend may not know what is a fair price for the lot. So, you both agree that if you put the lot on the market and get an offer from an independent buyer, your friend will either buy the lot from you on the terms you’re offered or you’ll sell the lot to the buyer.
You can see how this situation might result in a greater likelihood that you’d lose out on the property when private parties have this right of first refusal.
It’s unfortunate that you spent time and money on your offers. If you still plan on buying at that lake, make sure you don’t spend money on the deal until the seller has cleared the right of first refusal. Your attorney should be able to help you draft something in the contract that keeps your costs down while you wait and see.
We hope this information helps and your next offer is accepted.