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Dealing with first right of refusal clauses

By Peg Ritenour, OAR Vice President of Legal Services/Administration

In today’s “move-up” housing market, many buyers commonly have to sell their existing home before they can purchase a new one. To protect themselves, buyers usually make the purchase of their new home contingent on the sale of their current residence.

Sellers, however, are often reticent about accepting an offer with such a contingency for fear it will take months for the buyers to sell their home. A popular solution that agents suggest to sellers is that a “right of first refusal” clause (or a “concurrency” clause as it’s called in some parts of this state) be placed in the contract. This type of clause permits the seller to continue to market the property and to seek other offers. In the event the seller receives another acceptable offer, the first buyers then have a certain period of time in which to remove the contingency for the sale of their home or to show that such a contingency has been satisfied. This period of time is usually set at 48 or 72 hours, but it may be shorter or longer.

In theory, a first right of refusal clause can be an excellent tool for all parties involved. However, in practice the exercise of such a clause can turn into a legal nightmare for the seller, buyer, and their agents if the clause was poorly drafted.

The following are the areas in which problems most frequently arise with right of first refusal clauses:

What type of offer/contract will trigger the clause?

The first right of refusal clause should specify what type of second offer will trigger the buyers’ obligation to remove or satisfy the contingency for the sale of their home. For example, will any offer acceptable to the seller be sufficient or will only a non-contingent, cash offer allow the seller to exercise this clause? It is in the seller’s best interests that the clause be broad, allowing any offer that is acceptable to the seller to trigger the first refusal clause. On the other hand, for the buyer, it is best if the clause limits the seller to considering only offers that are non-contingent.

How will the buyers be notified that the clause is being triggered?

The first right of refusal clause should set forth how the sellers will notify the buyers that they have received another acceptable offer. Can it be done verbally, or must it be delivered in writing? Just as important is clarifying when the clock starts to run. For example if the listing agent emails notice to the buyers’ agent, does the 24 or 48 hours start when the email is sent, when the buyers’ agent opens the email or when they notify the buyer?

What does the first buyer have to do?

The contract should set forth clearly what the first buyers have to do to keep their contract alive after they are notified that the seller has received another acceptable offer. The clause should specify whether the first buyers have to demonstrate that they have a pending contract on their existing residence or can just remove the contingency on the sale of their home. The clause could also be written to require that the first buyers provide proof of financing that is not contingent on the sale of their home and/or will proceed to close within a certain specified number of days.

How will the buyers notify the sellers that they have satisfied/removed the contingency?

The first right of refusal clause should indicate how the buyers must notify the sellers that they are removing or have satisfied the contingency. Is the buyer required to deliver the notice in writing? Is the buyer required to provide a letter from the lender verifying that their financing has been approved unconditionally?

These are the major areas in which disputes can arise when first right of refusal clauses are poorly written. Because this is a detailed contract provision and is so commonly used, brokers should have such an addendum drafted by an attorney. This will not only help to assure that it is well written and addresses the above issues, but is necessary to avoid an allegation of the unauthorized practice of law.

Tags: legal