By Robert Moore, Ohio State University Agriculture and Resource Law Program
A right of first refusal (ROFR) is a contract between the owner of the property and the person who receives the right to purchase (holder). If the owner wishes to sell or transfer the property, the holder has the legal right to purchase the property subject to the terms and conditions of the ROFR. If the Holder does not exercise his right to acquire the property, the owner may transfer the property to the third party purchaser. An ROFR can be an effective way to help keep land ownership in the family.
A ROFR can be established in several ways, including on a deed. However, in most situations, the best method of creating an ROFR is as a stand-alone document that is registered with the county recorder. By using a separate document, the terms and conditions of the ROFR can be clearly expressed to avoid future confusion or conflict.
There are a number of terms and conditions to be included in an ROFR. Perhaps the most important term is how to determine the purchase price. One way to establish the purchase price is to match a bona fide offer. Upon receipt of an offer to purchase the land, the owner offers to sell the land at the same price to the Holder. If the holder refuses to buy the land at this price, the owner is free to sell to the third party at this price.
Another way to establish the purchase price is through appraisal. If the valuation method is used to establish the purchase price, a multi-step approach should be considered to avoid the effect of outlier valuation. For example, the owner may first obtain an appraisal. If the Holder opposes the expertise of the owner, the Holder can obtain his own expertise. If the two appraisals do not agree or are not within a certain percentage of each, the owner and the Holder agree on a third appraisal. After the completion of the third valuation, the intermediate valuation of the three establishes the purchase price. In addition, any evaluator qualifications, such as licensed or not affiliated with the parties, must be included in the terms.
Sometimes the matching of the offer and the valuation will be used in a ROFR to establish the purchase price. Conditions may include the use of the lesser of an offer and an estimate of the purchase price. Or, if there is no offer and the owner wishes to sell, the valuation method is used to establish the purchase price. The important thing is to clearly specify how the purchase price is established to avoid disputes between the owner and the potential buyer.
Deadlines should be included in the ROFR. Timelines should be included for:
- Number of days to provide an offer to the Holder
- Number of days to establish the purchase price by appraisal
- Number of days to accept or refuse an offer from the Holder
- Number of days to complete the purchase
An additional term to consider is which transfers are exempt from ROFR. The land owner may wish to be able to transfer to family or spouse without triggering ROFR. Therefore, the ROFR should specifically identify all transfers that are exempt. The most common exempt transfers are transfers to descendants and spouses.
Another important provision is the term of office of the ROFR. The ROFR should have a limited duration, whether it is a certain number of years or the life of the owner. A ROFR that is perpetuated generation after generation can cause big problems for a future owner because the Holder or his heirs can be difficult to find and/or to cooperate.
Consider the following example of a common way to use an ROFR. Mom and dad want to donate five acres to their daughter, Jane, so she can build a house. Mom and Dad’s only concern is that they don’t want the five acres to leave the family because it’s in the middle of their farmland. Mom and dad gift the five acres to Jane and enter into an ROFR at the same time. The ROFR demands that Jane give Mom and Dad the first chance to purchase the five acres before Jane hands them over. An exception is made that Jane can transfer the land to her children without triggering ROFR. The purchase price is established by a three-step appraisal price with the appropriate deadlines included. ROFR will be in effect for the next 30 years and then expire.
The ROFR gives mom and dad the assurance that Jane won’t be able to just sell the property to someone outside the family. Without the ROFR, Mom and Dad may be reluctant to give the land away for fear that Jane will transfer the land to someone else. The ROFR allows Jane to have full ownership of the property and the discretion to build a house as she wishes, but also protects Mom and Dad from having an unwanted neighbor.
ROFRs can be effective in real estate transfers, especially between family members, and in estate planning. Keep ROFRs in mind the next time you consider transferring real estate or when designing your estate plan that includes real estate. An ROFR should be drafted with the assistance of a lawyer to ensure that all important terms and provisions are included, and that it is well executed and recorded.