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What is a Right of Refusal and How Does it Work?

By Mary Lamphere

A right of refusal allows someone the right to purchase a property under the exact terms and conditions that are contained within an offer that the owner of the property receives from another potential buyer. With a right of refusal, the owner is under no considerable obligation to sell their property nor is there any obligation for the owner to consider a sale at a predetermined price. In fact, you may not even realize that there is a right of refusal until the owner receives an offer from someone interested in purchasing their property and they are considering the idea of accepting the offer.

Often times, the right of refusal is extended first to the tenant of the property. What happens is the owner of a property will receive an offer from someone who is interested in purchasing their home. The home may already be on the market or, if the home is not already on the market, the offer may be unsolicited. When the owner considers accepting the offer, he or she will make the terms of the offer known to the holder of the First Right of Refusal to determine whether or not that person is interested in purchasing the property under the exact same terms and for the same price.

If the holder of the First Right of Refusal is not willing to purchase the property under the exact terms that were set forth by the original party interested in purchasing the property then the owner has the right to proceed with the sale of the property with the original prospective purchaser. The right of refusal basically allows the holder to accept or refuse an extended agreement from the owner of a property to purchase the property at a set price and with specific terms.

In some states (such as Texas), the right of refusal allows the holder of the right to exercise his or her decision to go through with the purchase of a home or to void that right and allow another buyer to follow through with the purchase. If moving into a home that is already for sale or if you're already a tenant in a home and the landlord alerts you to his or her decision to sell, you may ask that your lease or rental contract provide you with a First Right of Refusal. This would protect you from being forced out of the home if a sale offer were to be accepted by the property owner by allowing you to first accept the offer to purchase and follow through with a sale contract under the same terms.

What a Right of Refusal May Look Like on Your Contract

The right of refusal may say something like, "In the event the OWNER offers the property for sale, the HOLDER shall have the first right to purchase the property with the following terms and conditions set forth: a) OWNER has already established a listing price and will notify the HOLDER in writing of intent to sell at said price. HOLDER will have a set amount of time (usually 10 days) to respond to a notice of intent to sell and, if HOLDER exercises right of first refusal he or she will have 45 days to close."

The actual legal manner in which the terms are set forth will depend on your individual contract but overall, the right of refusal clause should state that you, the Holder of the right, have the right to purchase a property if the owner decides to sell and that you will be given the first shot at the home purchase before other offers are accepted and a sale proceeds.

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