When you’re starting a real estate business or brokering a deal for a client, even the smallest variation in language matters. That’s especially true when it comes to understanding the differences between the right of first refusal clause and the right of first offer. Are you clear on their meanings? Double-check with the concise explanations below.
Right of First Refusal Clause
The right of first refusal is usually triggered when a third party offers to buy or lease the property owner’s asset. Before the property owner accepts this offer, the property holder (the person with the right of first refusal) must be allowed to buy or lease the asset under the same terms offered by the third party.
There are also variations on right of first refusal clauses. In one type, the right of refusal functions as an agreement to lease or buy property at a price based on one or more appraisals at the time the clause is invoked.
The property holder might also agree to pay a percentage of the current value as agreed upon by the holder and the seller when the right of refusal was negotiated.
Similarly, right of first refusal might give the holder the contractual right to match any offer the seller receives, though they can choose not to exercise that right. This brings us to a similar clause called “right of first offer,” which is often mistaken for or confused with the right of first refusal.
Right of First Offer
The right of first offer is often triggered when a property owner decides to sell or lease an asset. It gives the property holder the first chance to buy or lease the asset before it’s offered to a third party. The property owner can accept or deny the holder’s offer -- but must give them a chance to buy or lease first.
This could also be dubbed “right to first negotiation.” It simply means the property holder has the right to make the first offer on the asset if the property owner decides to sell or lease on their own.
The owner is not obligated to accept that offer but must extend the contractual courtesy of giving the holder first bid.
Right of First Refusal vs. Right of First Offer
Right of first offer caps the property price at terms set by the triggering event (usually a third-party offer to buy or lease the property from the owner). Right of first offer gives the property holder a chance to buy or lease the asset before the owner lists it publicly. This doesn’t set a price and usually drives up property value.
Right of first refusal clauses are also generally engineered to expire at a specified date, while right of first offer clauses are not. The longer the term of your right of first refusal clause, the more risk each party accepts bearing market volatility and property value in mind.
It’s important to understand the differences between these subtly varied clauses. It’s equally crucial to help your clients understand the ramifications of each. Brush up on the basics here to explain it in a jargon-free way.