Robert Moore, Attorney and Research Specialist, OSU Agricultural & Resource Law Program
A Right of First Refusal (ROFR) is a contract between the owner of the real estate and the person who is receiving the right to purchase (Holder). If the owner wishes to sell or transfer the property, the Holder has a legal right to purchase the property subject to the terms and conditions of the ROFR. If the Holder does not exercise their right to purchase the property, the owner can transfer the property to the third-party buyer. A ROFR can be an effective way to help keep land ownership in the family.
A ROFR can be established in a number of ways including on a deed. However, in most situations the best method of creating a ROFR is a stand-alone document that is recorded with the county recorder. By using a separate document, the terms and conditions of the ROFR can be clearly expressed to avoid future confusion or conflict.
There are a number of terms and conditions to include in a ROFR. Perhaps the most important term is how to determine purchase price. One way to establish the purchase price is by matching a bona fide offer. Upon receiving an offer to purchase the land, the owner offers to sell the land at that same price to the Holder. If the Holder declines to purchase the land at that price, the owner is free to sell to the third party at that price.
Another way to establish the purchase price is by appraisal. If the appraisal method is used to establish the purchase price, a multi-step approach should be considered to avoid the effect of an outlier appraisal. For example, the owner can obtain and appraisal first. If the Holder objects to the owner’s appraisal, the Holder can obtain an appraisal of their own. If the two appraisals do not match or not within a certain percentage of each, the owner and Holder agree on a third appraisal. After the third appraisal is conducted, the middle appraisal of the three establishes the purchase price. Also, any qualifications for appraisers, such a licensed or unaffiliated with the parties, should be included in the terms.
Sometimes both the offer matching and appraisal will be used in a ROFR to establish the purchase price. Terms may include using the lesser of an offer and an appraisal for the purchase price. Or, if there is no offer and the owner would like to sell, then the appraisal method is used to establish the purchase price. The important thing is to make it very clear how the purchase price is established to avoid disputes between the owner and potential buyer.
Timelines should be included in the ROFR. Timelines should be included for:
- Number of days to provide an offer to the Holder
- Number of days to establish the purchase price by appraisal
- Number of days to accept or reject an offer by the Holder
- Number of days to close the purchase
An additional term to consider is what transfers are exempt from the ROFR. The owner of the land may want to be able to transfer to their family or spouse without triggering the ROFR. Therefore, the ROFR should specifically state any transfers that are exempt. The most common exempt transfers are those transfers to descendants and spouses.
Another important provision is the length of term of the ROFR. The ROFR should have a limit on its term whether it be a number of years or for the life of the owner. A ROFR that goes on generation after generation can cause big problems for a future owner because the Holder or their heirs may be difficult to find and/or cooperate.
Consider the following example of a common way in which a ROFR is used.
Mom and Dad want to gift five acres to their daughter, Jane, so that she can build a house. Mom and Dad’s only concern is that they do not want the five acres to leave the family because it sits in the middle of their farmland. Mom and Dad gift the five acres to Jane and enter into a ROFR at the same time. The ROFR requires Jane to offer Mom and Dad the first chance to buy the five acres before Jane transfers it. An exception is made that Jane may transfer the land to her children without triggering the ROFR. The purchase price is established by a three-step appraisal price with the appropriate timelines included. The ROFR will be in effect for the next 30 years and then will expire.
The ROFR gives Mom and Dad the assurance that Jane will not be able to simply sell the property to someone outside of the family. Without the ROFR, Mom and Dad may be reluctant to gift the land for fear of Jane transferring the land to someone else. The ROFR allows Jane to have full ownership of the property and the discretion to build a house as she wishes but also protects Mom and Dad from having an unwanted neighbor.
ROFRs can be effective in real estate transfers, particularly among family members, and in estate planning. Keep ROFRs in mind the next time you are considering transferring real estate or as you design your estate plan that includes real estate. A ROFR should be drafted with the assistance of an attorney to be sure that all the important terms and provisions are included, and it is executed and recorded property.