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How to Handle a First Right of Refusal on a Property

Written by Jim Gillespie Ph.D. on Thursday, 14 July 2005 7:00 pm
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If you ever have a prospect interested in buying a property with a First Right of Refusal on it, you have a delicate situation that you need to address. When talking about a potential sale of a property, a First Right of Refusal is an agreement that gives someone the right to purchase a property at the exact same terms and conditions contained in an offer that the owner has received (and wants to accept) from another buyer.

In this situation, the owner is first obligated to offer their property for sale to the holder of the First Right of Refusal at the exact price and terms contained in the offer they've received. The holder of the First Right of Refusal can then either agree to purchase the property under the same terms and conditions, or decline and allow the other buyer to move forward and complete the purchase.

This is very different from someone having an option to purchase because with a First Right of Refusal, the owner has no obligation to sell their property to anyone at a predetermined price. The ability to exercise a First Right of Refusal is only triggered when an owner receives an offer to purchase their property that they would like to accept. The property may be listed at the time, or the owner may have received an unsolicited offer to purchase without ever listing their property for sale.

When a First Right of Refusal is given, it's normally given to the tenant occupying the property, but occasionally it can be given by an owner to someone else. It's normally negotiated in situations where the tenant feels they'd like to own the property someday, but the owner isn't interested in selling it to them right away.

So in activating the First Right of Refusal, a buyer submits an offer to the owner that's acceptable for the purchase of the property, then the owner presents the offer to the holder of the First Right of Refusal to see if they are willing to purchase the property under the same price and terms. If they're not, the owner will then proceed to sell the property to the original buyer who submitted the offer.

The problem here is if you're the agent representing the buyer submitting the original purchase offer to the owner. If the First Right of Refusal is exercised, you now have no transaction to get paid on unless you have a listing on the property. This is true even though it was your client's offer that caused the sale to take place. So in effect you've done all the work that caused the seller to sell their property, and you've saved the seller from paying you a commission in the process, too.

So what's the ideal solution here?

I learned a solution in my early days in the business when I worked for a man name Ira Garson. Ira was a legend at selling and leasing industrial properties in the Los Angeles area, and I was fortunate to be the last agent he ever trained before retiring from real estate brokerage.

Ira had achieved a level of success in his career that allowed him to dictate the terms and conditions that others had to abide by in order to do business with him. And this is an amazingly powerful place for any agent to be able to come from. So whenever Ira came upon a situation where he had an interested buyer for a property with a First Right of Refusal on it, he'd always say something like this to the owner:

"The only way that I'll attempt selling your property is if you sign an agreement stating that you'll pay me a 6 percent commission if your tenant exercises his First Right of Refusal to buy it. Whether or not your tenant exercises his First Right of Refusal, it's my having produced the offer from my buyer that's creating the sale, and I should be compensated for it."

Not every single owner that Ira talked to in this situation would agree to do this, but the ones who were fair and understood the value of what he was bringing to the table did. In addition, the ones who wouldn't sign an agreement like this were most certainly people who wanted to waste his time and have him provide them something of great value for free. But Ira was a 30-year veteran in our industry, and he wasn't going to let that happen to him.

So if you encounter a situation where there's a First Right of Refusal on a property, consider doing it Ira's way. Make sure the owner will pay you a commission if the other party exercises its First Right of Refusal when you submit your offer, and you'll go home with much more than a "thank you" from the owner at the end of the day.

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4 comments

  • Comment Link dural Lexan Thursday, 23 October 2014 7:44 pm posted by dural Lexan

    The CAR Commission agreement says commission is paid when also an option is exercised. The right of first refusal is an option and the Realtor should get paid if the option is exercised but I agree that it is best to put in in Additional Terms in the CAR Commission form.

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  • Comment Link flylowguy Sunday, 17 August 2014 1:45 pm posted by flylowguy

    Using Ira Garson's logic, where does that leave the buyer exercising first right with regard to who represents him? Ira's buyer might have been the spring that caused the trap to set, but in real estate, there's going to be a question of who then works the first right holder's interests? If there is an MLS agent who listed it, does that agent then inherit the buyer and work his half for free? Of it's it's not a brokered deal, who has any responsibility to the buyer?
    Once Ira is paid as selling agent for his representation to his unsuccessful buyer, he's theoretically out of it, unless he opts to take on the new buyer as well, and that puts him in not only a double commission position, but a potential conflict of interest as well.

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  • Comment Link Warren Monday, 30 September 2013 10:39 am posted by Warren

    do you have to have an offer on a commerical property to present the tennant with a first right of refusal letter?

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  • Comment Link Diana Laxdal Friday, 13 September 2013 9:46 am posted by Diana Laxdal

    What about a homeowner who exercises their right of first refusal. The foreclosuree acknowledge that. By calling the homeowner , trying to bribe them into waiving their right of first refusal . Then do not follow through with the stipulations of the statute. Blatantly Ignore and lie to the homeowner . When homeowner calls to question what is going on(5 weeks later , they tell homeowner that sale price is no longer valid. Even though the homeowner knows this is not true. The homeowner had spoke to bank and could get a loan for that amount(57,900) I. Know the foreclose did want to sell to us because of this offer which is less than owed. They had the listing removed. They did not offer a good faith letter. They did not contact owner once. The homeowner contacts them and told the price was no longer good.(a lie) they then send a letter 2 months in row stating they were giving us notice the property would be listed. That did not happen until 4 months later. Then we get a good faith letter with a price they knew we could not afford. They listed with out of town realtor. I could not find anyone to enforce this statute. It is a little known statute. When I exercised our right and they responded to this by attempting to bribe, wouldn't they be breaking the law by not falling through. We were wrongfully foreclosed upon for being behind only $4,000 when we had plenty of equity or could pay that amount. Although I tried repeatedly . Do we not have the authority to file a lis penned
    And a law suit?

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