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Crafting an Enforceable Right of First Refusal

Posted On September 10, 2020

A Right of First Refusal (the “ROFR”) is a contractual right given by the owner of real property that grants the holder of the ROFR the opportunity to purchase the property before the owner may sell the property to a third party. A ROFR is a useful tool for tenants who anticipate that they may desire to purchase the property in the future, especially at a time when they would otherwise be faced with a new landlord who might not plan to renew their lease beyond their current term. They are also often used by developers and community associations to provide some control over the future of the development. 

The ROFR is subject to the rule against restraint of alienation of interest in land, i.e., it cannot be deemed to have placed the right to convey the property in the hands of someone other than the owner of the property. This determination can be avoided by ensuring that several characteristics of the ROFR are reasonable, including its purpose, duration, and the method of determining the price. See 61 Am. Jur. 2d Perpetuities and Restraints on Alienation §109 (2002).

The recent South Carolina Court of Appeals decision in Barry Clarke v. Fine Housing, Inc. and RRJR, L.L.C. illustrates when the terms of a ROFR may be inadequate and, therefore, unenforceable. In this case, the owner of the property leased half of the parking spaces to Clarke, and the ROFR in the lease simply stated that the owner granted Clarke “the right of first refusal should it wish to sell.” The court noted that the lease failed to specify whether the ROFR applied to the entire property, including the improvements, or just the leased parking spaces. It also did not state how the purchase price would be determined and did not provide a time frame for Clarke to exercise the ROFR. The court held that the ROFR was unenforceable due to the lack of specificity of its terms.

To ensure a ROFR will be enforceable, be as descriptive as possible. Reference a proper legal description of the subject property. Provide a term for the ROFR. Include clear instructions for how and when the owner should notify the holder of the ROFR of its intention to sell the property to a third party, as well a clear time limitation and method for the holder of the ROFR to declare its intention to exercise the ROFR and purchase the property. Define the purchase price or establish a method of calculation. If the owner desires the holder of the ROFR to match the price being offered by a third party, specify that the owner shall provide written documentation to demonstrate that the offer is genuine. These details make it much more likely that the ROFR will be enforceable. An experienced attorney can craft a proper ROFR that both memorializes the understanding of the parties and ensures its enforceability.

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