Right of First Refusal

Imagine you are a landlord and are ready to sell your property. What if your tenants are ready to buy from you without you needing to even list the home?

To some extent, that’s one way that a Right of First Refusal may work. But it’s not the only situation where it can be beneficial. Read on to learn more about this provision, when it is usually used, and what it could mean for you.

What Is a Right of First Refusal Provision?

A Right of First Refusal (ROFR) provision is a legal clause in a lease that states that should the landlord decide to sell, the tenant will have the opportunity to put in an offer before other buyers or refuse to do so. The provision can include contingencies around the sale, like when the tenant must be informed or when the offer or refusal must be submitted. 

What Does a Right of First Refusal Provision Mean for Sellers?

If you have a Right of First Refusal provision written into your tenant’s lease, you need to notify your tenant regarding your plans to sell your property.

Depending on how you have laid out the provision, they will then have a set period to decide whether to put an offer in on the house before you accept other offers. Just as with a regular sale, you will want to look at comparable properties to get a good idea of a fair selling price. Just because you have a Right of First Refusal contingency does not mean that you need to sell your home below market value. While it reduces the opportunity for negotiating between multiple offers, you can still get a reasonable price when you work with a skilled Realtor who understands the market and has worked with these clauses before.

Often, a ROFR is not ideal for sellers, especially during a hot market when homes are selling quickly and going for more than their asking price. If however you are not planning on selling soon, you can add an ROFR contingency to your property’s lease to provide you with options down the line.

What Does a Right of First Refusal Provision Mean for Buyers?

If you have a Right of First Refusal provision in your lease and have been informed by your landlord that they intend to sell the property, you should take a look at the clause to determine your next steps.

The provision should spell out what the requirements are for you to be able to purchase the home or to inform your landlord that you are not interested in purchasing the home. The provision will likely provide a specific timeframe in which you will need to act and the manner in which you need to respond. For example, you may need to provide written notice that you are not putting in an offer to purchase the property within 15 days. Or maybe you will need to secure a mortgage pre-approval within a certain time frame to show that you are interested in purchasing the home. Regardless, it’s a good idea to speak with a real estate professional so you can decide whether to purchase the property or look elsewhere and what a fair offer is.

If you are in the market for a home and find one where there is a Right of First Refusal provision in place, you can still put in an offer on the home. However, your offer will not be considered until the seller’s tenant opts out of purchasing the property.

If you are looking to purchase a home where a tenant has already refused to purchase the home but are still under lease, you will likely need to honor the lease terms and inform the tenant whether you will or will not be allowing them to renew their lease.

As you can see, there are plenty of different scenarios for how a Right of First Refusal can impact the purchase of the home for all parties involved.

Should You Add a Right of First Refusal Clause to Your Lease?

If you are planning on renting your property and are unsure whether you want to add in a right of first refusal provision, consider the real estate climate. For example, right now we are in a seller’s market. Houses are selling quickly and often for more than their listing prices. There are also limited single-family rentals on the market. There is no expectation of this changing any time soon, however, there is also no guarantee that it will not change.

If you are thinking of adding a Right of First Refusal to your lease, also consider the terms you want to include. When should your tenant inform you that they would like to purchase the property? What will they need to provide you with in order for you to take their offer seriously? Do you want the contingency to expire after a set amount of time? Do you want to stipulate a price or a percentage above market value?

Discuss your options with a real estate lawyer so you can craft a lease that protects your interests and provides your tenants with the possibility of an exciting option in the future.

A Right of First Refusal provision can be a useful contingency, but it can also be a hindrance. Make sure to speak to your Realtor to learn more about the real estate market and whether such a contingency makes sense for you. 

If you are looking to sell a home with a Right of First Refusal clause already in place, make sure that you have a skilled Tampa Realtor on your side to help protect your interests. Just because you have a contingency in place does not mean that you should accept any offer that your tenant makes. Make sure you get a fair price that is in line with the market. Contact me today to learn more.