Mountain Law: A primer on rights of first refusal | SummitDaily.com

Mountain Law: A primer on rights of first refusal

A right of first refusal (ROFR) is an option to purchase real property that cannot be exercised until there is a triggering offer by a third party. Once the triggering offer is made, the person holding the ROFR, called the "preemptioner," can decide whether to preemptively purchase the property on the same terms as the triggering offer. ROFRs are "weak" options because the owner is never compelled to sell the property in the absence of an acceptable triggering offer.

One question is whether the preemptioner's offer must exactly match the triggering offer — i.e. be "mirror image?" The problem with allowing differences in the preemptioner's offer is that this begs the further question of how different the offer can be. This, in turn, can impede the marketability of property by creating uncertainty about who is entitled to purchase it. Some courts require the preemptioner's offer to be an exact match of the triggering offer. However, other courts require only the "material" terms to be identical. To my knowledge, Colorado courts have not yet addressed this issue.

Consider the common situation where an offer to purchase a condominium unit triggers ROFRs in the existing condominium unit owners. One existing unit owner submits an identical matching offer to the triggering offer and another existing unit owner submits an offer for a higher price. The terms of the ROFR are that, if there are multiple would-be preemptioners, the selling owner can pick one. Naturally, the seller wants to pick the highest offer. However, if the seller picks the higher offer, the owner who submitted the identical offer might cry foul play. In this circumstance, it matters whether the preemptioner's offer must be an exact match. To the extent that the governing documents are vague on this issue, the condominium association should amend them for clarity.

Even in jurisdictions that require the preemptioner's offer to exactly match the triggering offer, there are three recognized exceptions. First, through express or implied waiver, the owner can waive the exact matching requirement. Second, proper names need not be matched for obvious reasons. Third, an owner cannot, to discourage the preemptioner from exercising the ROFR, insert into the triggering offer unusual terms that will be repugnant to the preemptioner. This third exception forbids "poison pills" in the triggering offer. A poison pill can result in the owner (and possibly the third-party making the triggering offer) being liable for interfering with the ROFR in bad faith. While poison pills can take many forms, they may include such things as an abrupt closing (called a "sign and close" contract), a restriction on the use that can be made of the property after closing, or the buyer agreeing to give the seller something that no other buyer could match (such as use of another property). Whether any given contract contains a poison pill depends on the facts and circumstances of the case.

In sum, an owner of real property must be sensitive to how the structure of a real estate contract could affect a ROFR.

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A rule that prohibits bad faith seems reasonable on its face. However, such a rule creates practical complications. When such a rule applies, an owner selling property that is encumbered with a ROFR must consider how the terms of the contract will be viewed in hindsight by a court and whether they would somehow be repugnant to a preemptioner. Some situations will be clearcut bad faith. However, plenty of other situations will not be. For example, what if an owner wishes to sell land subject to restrictive covenants that impose architectural control? Would those covenants be repugnant to a preemptioner? Could the preemptioner use the threat of litigation to obtain a better deal than he is otherwise entitled to? A legitimate transaction could easily be tarred as bad faith.

In sum, an owner of real property must be sensitive to how the structure of a real estate contract could affect a ROFR. The owner must, at a minimum, have a reasonable justification for any terms in the contract. Any ROFR should be drafted or amended with an eye to avoiding future conflict when it is triggered, particularly concerning whether a preemptioner's offer must be an exact match of the triggering offer.

Noah Klug is owner of The Klug Law Firm, LLC, in Summit County, Colorado. He may be reached at 970-468-4953 or Noah@TheKlugLawFirm.com.