In real estate, a right of first refusal means someone is entitled to the first option to buy a house before the house is put on the market for other potential buyers. The house only goes up for sale in the open market if the party with the right of first refusal declines the purchase.
A right of first refusal can be beneficial in many situations. Below are some of the common cases in which it applies.
Tenant and Landlords
When a tenant signs a tenancy agreement, they may negotiate a right of first refusal with the landlord. In such a case, the landlord would give the tenant the first option to buy the house if the landlord ever decides to sell the house. The landlord can only sell the house to another party if their tenant is not interested in the purchase.
Property Owners and Family Members
Some property owners also give their family members the right of first refusal. Say you have a second home that your family members occasionally use for vacations. You can sign a right of first refusal agreement with the family members so that they have the first option of purchase in case you decide to sell your second home.
Property owners and HOAs
A homeowners association (HOA) may also demand a right of first refusal from the homeowners subject to the association. In this case, the agreement works a little differently in that the HOA doesn't plan to purchase the house, but rather to vet incoming property owners. A common agreement is that members of the HOA have to run their purchase plans by the board first, and a sale only goes through with the approval of the board.
A good right of first refusal should have these three major elements.
Duration of Application
This refers to how long the agreement holds. For example, if you are dealing with a tenant, the agreement can last for the duration of the lease. If you are dealing with an HOA, the agreement can last for the duration of the homeownership.
Timeline of the Right
This refers to how long the right holder has to exercise the right once they receive the sale notification. For example, when a property owner wants to sell their home, they may give the right holder a month or three months to determine whether they want to buy the house or not. This is important so that the right holder does not hold the property owner hostage as they dilly dally with their decision.
Terms of the Sale
Lastly, the agreement should also contain the terms of the sale. The terms of the sale include things like price determination and encumbrances, among other things.
For more information, contact a real estate service in your area.