Right of First Refusal; Right of First Offer
Rights of first refusal and rights of first offer could, in some respects, be considered alternative forms of option agreements. They must satisfy the same essential requirements as options, such as definiteness and consideration . However, some issues are particular to these types of agreements.
A right of first refusal affords the optionee the right to match or better an offer to purchase received by the optionor. A right of first offer requires the optionor to offer to sell the property to the optionee before offering it to anyone else. A right of first offer allows the optionor to proceed to sell the property on the same or better terms if the optionee does not accept the optionor’s offer.
In general, a right of first refusal is triggered by a proposed voluntary sale by the offeror. See Pellandini v Valadao (2003) 113 CA4th 1315. An involuntary condemnation of the property does not trigger the right of first refusal. See Campbell v Alger (1999) 71 CA4th 200.
In contrast to traditional option agreements, under a right of first refusal the optionee may not be in control of the terms and conditions set forth in the offer to purchase. In general, an optionee is not required to match exactly the offer to purchase received by optionor if the offer is of a nature that cannot be easily matched by anyone other than the offeror. Courts will consider commercial realities in evaluating whether the optionee has matched or bettered the offer to purchase. Arden Group, Inc. v Burk (1996) 45 CA4th 1409. See also San Diego Watercrafts, Inc. v Wells Fargo Bank, N.A. (2002) 102 CA4th 308; McCulloch v M & C Beauty Colleges, Inc. (1987) 194 CA3d 1338; C. Robert Nattress & Assocs. v CIDCO (1986) 184 CA3d 55, 72. But in Hartzheim v Valley Land & Cattle Co. (2007) 153 CA4th 383, 394 n6, the court seemed to imply in a footnote that because the optionee was unable to match the unique terms of the offer, the optionee could not have exercised its right of first refusal.
The mechanics of a right of first refusal or right of first offer must be addressed when drafting the agreement. The agreement should specify whether the option applies only to the first instance in which it can be exercised or whether it renews if the optionor does not successfully close the offer. For the offeree, it is useful to establish objective guidelines for the terms and conditions that the offer must follow so that there will be less room for disagreement as to whether offeree has matched such offer.
A right of first refusal is considered more likely to have an adverse, rather than favorable, effect on the price at which the offeror can sell the property. A prospective purchaser will be less inclined to spend the time and money to evaluate the property and negotiate a purchase agreement if the purchaser is aware that the offeree could step in under its right of first refusal and acquire the property by matching the purchaser’s offer.
From an offeree’s point of view, the right of first offer represents a way to validate the proposed purchase terms because an independent third party is willing to purchase the property on those terms. A right of first offer allows the offeror to market the property more easily after offering the property to the offeree. However, the offeror may not be sufficiently knowledgeable about the market value of the property to present an offer to the offeree. This deficiency can be addressed if the offeror consults brokers or appraisers or potential buyers before presenting the offer to offeree. From the offeree’s point of view, the offeree may not have a sufficient basis to determine whether the offered price and terms reflect the current market.
The parties should consider including specific requirements for the terms and conditions of the right of first offer, such as requiring the purchase price to be all cash. If the offer is not limited to a cash purchase price it may be difficult for the offeree to match the offer.
In either a right of first refusal or a right of first offer, the offeror may want to limit the representations and warranties to be made to the offeree, as opposed to the third party purchaser, because the offeree is likely to be more knowledgeable about the property than a third party purchaser. Because the right of first offer is often part of another transaction, such as a lease, it may be appropriate to limit the assignment of this right, and the offeror should consider limiting the offeree’s ability to transfer the right of first offer.
When a right of first offer or right of first refusal is part of another contractual relationship between the parties or between one of the parties and a third party, consideration should be given to establishing the date or circumstances on which the right of first offer or right of first refusal terminates. In the case of a lease, the tenant may negotiate for a right of first offer or right of first refusal to purchase the landlord’s fee estate should the landlord wish to sell the leased premises. Absent express language or other showing of mutual intent to the contrary, the right of first offer or right of first refusal may expire when the lease expires. See Smyth v Berman (2019) 31 CA5th 183, in which a right of first refusal held by a tenant to purchase the landlord’s interest in the leased property was held to terminate at the end of the lease term. The tenant in this case continued to occupy the leased premises on a month-to-month basis, which he acknowledged was a holdover tenancy. The court held that only essential lease terms carry forward from the initial lease to a holdover tenancy, such as the amount of rent payable. Absent proof of an intent by the landlord and tenant to make the right of first refusal an essential term, it expired when the initial lease ended.