The right of first refusal (ROFR) in real estate is common with a renter, lessee, family member, company, or other party who has priority over other parties to buy a property. The right of first refusal clause in contracts outlines that holders have the right, but not the obligation, to get involved in buying the property. These rights typically last a set amount of time, and the seller can move on to other buyers in Chicago, Illinois, or other areas after that time expires.
The Advantages and Disadvantages of Rights of First Refusal
The right of first refusal has pros for both parties, while sellers bear most of the cons. For example, sellers may be limiting their potential profits since they generally cannot negotiate third-party offers before talking with the rights’ holder about the purchase. Many sellers hesitate to offer a right of first refusal for this reason, but they may do so if they are struggling to attract tenants (or good tenants) to a property. In this sense, a right of first refusal can be a significant advantage for sellers.
For rights holders (potential buyers), the advantage tends to be the insurance policy of sorts. A common scenario is one in which a retailer prefers to lease retail space, but would buy the space rather than risk eviction after a new owner bought it. The ROFR clause in the lease gives the retailer added peace of mind that it can stay at the property for many years if it wants. A similar concept exists for residential renters who would prefer not to uproot their family if they can buy the property instead.
The Right of First Refusal in Real Estate
ROFR in real estate is similar to a security options contract in that holders have the right but not the obligation to purchase an asset (whether it is a piece of property or a security). People or companies may request a right of first refusal to see how a real estate project turns out down the road. They are open-minded to becoming involved at some point, but don’t want to make the commitment at this earlier point. Tenants and lessees are also common rights holders if they want to stay in the property if it gets sold. Family members who may have to deal with inheritance issues are also common holders.
The clauses are customizable with language relating to the time period the rights apply for and whether a third party is authorized by the potential buyer to conduct the purchase. Many people find that investing in the cost of a real estate lawyer is worth avoiding the pitfalls that come with trying to navigate ROFR themselves.
ROFR differs from a right of first offer (ROFO) in that the seller is not required to negotiate for ROFOs. In ROFR, owners notify the rights holders that the property is for sale, and rights holders can make the first offer. The owners can accept or refuse the offer, and negotiate with other parties if they refuse.
When Would You Use a Right of First Refusal?
If you’re a renter (residential or commercial), you could use a right of first refusal if you’d like to stay at the property for a long time. Many people and companies prefer to rent, but would be up for ownership at some point if it meant losing a well-known storefront or the house that children have lived in for years.
Owners might use ROFR if they’re having trouble attracting people to the property. It can give them a bit more drawing and negotiating power, as can other tactics such as paying for a home inspection and paying for home repairs.
Families doing real estate planning for inheritances often use a right of first refusal clause, too. For instance, a child or heir would have the right of first refusal before a property gets sold as part of an estate or trust matter.
How Do You Get a Right of First Refusal?
A real estate lawyer can advise you on the specifics of your case in the Chicago, Illinois, area. It is not a good idea to draw up or sign a contract without having a lawyer review it.
For example, it can be easy to overlook details relating to matching high bids and the time period rights holders have to match an offer. Whether you’re the owner or potential buyer, you can discuss ROFR early in the process as a way to help seal the deal or later on in the process if you have concerns about stability or need more incentive to sign the contract.
How Does a Right of First Refusal Work in Chicago, Illinois?
In real estate, the right of first refusal generally works like this:
- The owner decides to sell the property (or an estate is considering selling a property).
- The owner lets the rights holder know, and the holder decides not to make an offer or does make an offer.
- The owner accepts or declines the offer.
- The owner finds other parties to discuss the sale with if the offer is declined.
- If or when another buyer makes an offer, the owner asks the ROFR holder to match or renegotiate. If the holder declines, the owner can go ahead and accept offers.
Other Forms of the Right of First Refusal in Illinois
“Right of first refusal” is a common term when it comes to co-parenting, too. Child custody right of first refusal language typically says that the parent who does not currently have the child has the right of first refusal if the other parent needs a babysitter or childcare during his or her parenting time.
For example, two parents split custody 50/50 with alternating weeks. The child is with Parent A for that parent’s regularly scheduled week, and the parent has a work dinner to attend. The parent is obligated to ask Parent B if he or she wants the child for that time. If Parent B declines, then Parent A is free to pursue other childcare options. There are many similarities in the right of first refusal clause/concept between real estate and co-parenting.