Rights of first offer, negotiation, and refusal empower organizations to bid on property before others and align with conservation goals. Get practical drafting tips, risks, and examples to structure enforceable agreements and avoid missed opportunities.
By Brad Nakase, Attorney
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A landowner might not be prepared to sell their property, but whenever they are, they might be willing to give an organization the chance to buy their real estate before it becomes available to another party. More precisely, there may be a chance for the organization to bargain with the owner before the property is put on the market, accept or submit an offer on the property, or counter a third-party buyer’s bid after the property has been put up for sale in the market.
An organization is granted the benefit of the first right of offer or the right of refusal by the owner by legally making a commitment offering any or all of these possibilities.
Organizations regularly come across circumstances in which they wish to buy a specific property, and its current owners are not interested in selling. Some owners could prefer to leave such concerns to their heirs or never desire to sell.
Owners may promise to get in touch with the organization if they eventually think about selling, but past experiences indicate that such promises shouldn’t instill confidence because, when the time comes, owners might not remember conversations from years ago or may decide it isn’t worth the trouble to get in touch with what they believe to be a financially strapped organization. It can give the organization assurance that it will have a chance to compete for the asset if and when the owners (or subsequent heirs) consider selling it.
For someone to exercise a first right offer, the owners must first offer the property to the grantee or holder, on their individual terms, before making the property available to other people. A first right of offer can also be set up such that the holder makes the first offer when the owners notify them that they want to sell.
A right of initial negotiation goes a little further and calls for the owners to engage in good-faith negotiations with the holder for a certain amount of time. It can be added to the right of the initial offer, but cannot stand alone. When offers are made by others, the holder of the privilege of first refusal has the ability to match any bid that the property owners are prepared to accept.
These rights can often be combined to give the holder the first chance to respond to the owners’ desire to sell as well as the guarantee that, should the owners’ initial projections about the property’s value be inflated (i.e., ahead of the property being listed on the market), they still have the chance to match an outside buyer’s offer once the property becomes available on the market.
An organization is guaranteed a chance to buy a property through both a right of the initial offer (whether or not there is negotiation) and a claim of first refusal. Another advantage of the conversations that result in owners giving a right of initial offer or right of initial refusal is that they may help to establish a rapport with the owner, which may pave the way for more inventive and tangible arrangements for the preservation of the property.
If they are aware of the real estate instruments appropriate for this situation, organizations interested in purchasing land from owners who are not currently active in selling can address owners’ issues more easily and adaptively.
For instance. The group has determined that purchasing an area owned by a family with a strong commitment to conservation is a high conservation goal. The organization wants to include the site in the nearby preserve. The land’s owners have been excellent stewards. They have little interest in selling right now. They also probably are reluctant to sell while they’re still healthy and enjoying the property. They’ll put off dealing with mortality-related issues until later, probably for their estate or heirs.
What alternative tactics might the land trust pursue if purchase is not an option, at least not in the near future?
The privilege of the first right to offer is often accepted by owners because there is little harm to them. Before listing the asset for sale, they only need to let the holder know what terms they are prepared to accept. The terms that are being offered do not need to be fair or market-comparable.
The owners are under no duty to entertain a counterproposal; the privilege of first offer, in the absence of an option of first negotiation, as explained next, is a “take or leave” proposition. Without having to interact with the holder anymore, the owners can proceed with their marketing strategy if the offer fails to receive acceptance within the predetermined response period.
As an alternative, the advantage of the first right to offer could be set up so that the holder makes the first offer as soon as the owners notify them that they have an interest in selling. The owners are also not overburdened by this arrangement. Owners have no obligation to approve the holder’s offer; the only disadvantage is that they must give the holder notice and wait the allotted amount of time for the holder to submit an offer before listing the property for sale.
When an organization has a right of initial offer, its main benefit is that it will be informed when the asset will be ready for purchase. The owners might not make a reasonable offer or be open to accepting one before seeing how prospective purchasers react to the property’s listing on the market. This gives the organization the chance to establish a rapport with the owners prior to marketing the property.
The organization can inform the owners about conservation tactics that could be useful or interesting to them. Following the property’s exposure to the market realities, the organization can also get ready to make a more informed proposal that the owners might consider more seriously.
For example, if the owners ever need or wish to sell their property, they want to have every option available to them. However, they have informed the organization that they intend to give them a chance to purchase the property before marketing it, as the organization is their top choice buyer, all other things being equal.
The right of initial negotiation is an extension of the privilege of the first right of offer, not a separate right. The goal is to give counterproposals time after the first proposal is rejected and, if feasible, to allow the holder to come to an arrangement with the current owners before other parties can submit competing bids.
The grant of the initial offer will define the span of time allotted for negotiation. Thirty days, and frequently up to ninety, is a fair amount of time to negotiate. Both parties must engage in good faith negotiations throughout the negotiation period, according to the Model Deed of Right of First Offer. There is no additional duty on the side of the owners if the holder and the owners cannot agree within the negotiating time (with the exception that the holder also has a right of initial refusal).
For example, the organization believes that the owners’ stated sales price is far higher than its market value. The organization can arrange a reasonable and responsive alternative proposal based on market data and an examination of the legal and physical limitations on the property’s development potential by adding a right of initial negotiation to the right of initial offer.
Only once the property has been successfully marketed by the owners does a right of initial refusal take effect. To make it possible for the holder to choose whether to compete with a satisfactory offer from another party, the owners must wait to accept it throughout the acceptance time outlined in the right of initial refusal grant.
The owners will desire this acceptance window to be significantly shorter than the time frame for responding to a first offer since, in contrast to the initial offer, the first rejection carries the possibility that, should the owners fail to answer quickly, a third-party bidder will withdraw an adequate offer.
The seller usually has a handful of days to act on an offer from a potential buyer. The owner may lose a satisfying sale if the outside buyer’s decision period is shorter than the privilege of first refusal’s acceptance period. This is because the holder may not match the outside buyer’s offer, and the outside buyer may decide not to increase their offer.
Owners who, under all other circumstances, would choose a sale to the company requesting the right of initial refusal may find the issuance of the first refusal to be alluring.
For example. When an elderly owner passes away, he would like his land to be purchased by the organization without lowering the value of his inheritance. Although he believes that the assessed value determined for estate tax reasons may be lower than comparable values, he might offer an option for purchase that would allow the organization to buy the land at the value determined by the assessment. Rather, when the estate is ready to sell to a third party—likely a residential developer—he suggests a right of first refusal.
It will take time for an organization to review the outside buyer’s real estate offer to the landowner and, if everything is satisfactory, secure the required internal permission. It is likely that the organization will require time to get funding as well. But as previously mentioned, the owner who grants the right of initial refusal is probably going to want to make sure that the organization has a limited amount of time to react. This severe time limitation can be lessened through the combination of a right of initial refusal with the right of the initial offer (and negotiation).
Ideally, an organization will acquire the rights of initial offer, negotiation, & refusal from the owners. This means that a first offer can be made and considered with enough time for negotiating a deal that both parties can agree on, and if the negotiation fails, the organization will have the right of initial refusal. It makes sense:
Many owners make an unacceptable, overpriced first proposal to the organization because they have irrational assumptions about the market value of their property. The organization gains from understanding that the property will shortly be presented for sale, even though an agreement may not be possible at this time.
Before losing the asset to another buyer on the free market, the organization can react with a reasonable offer and show justification for it thanks to the advantage of first negotiation. Even in the event that an agreement fails to be reached, the organization had the chance to: (1) inform the owners about a variety of conservation options; (2) better become acquainted with the property; and (3) establish a connection with the owners that could result in successful future discussions once the property was put on the market.
The privilege of first right of offer alerts the organization that the asset will be advertised for sale, and the right of initial negotiation gives it time to prepare for and quickly decide whether to reject or accept terms provided to it as a consequence of a right of initial refusal.
Both the right of the initial offer and the right of first refusal are obtained from the owners by the organization using the default terms of the Model Award of Right of First Offer & Model Award of Right of First Refusal, respectively. The owners notify the group years later that they intend to sell this asset:
1. Written and Recorded
The owners’ pledges of a right of initial offer or privilege of first refusal should be expressed in written form and in a form that can be recorded, according to a sensible organization:
In the event that the owners transfer the property to another party without keeping their promise to the organization, the other party will be released from any obligation to the organization if the written commitment is not documented. To put it another way, the third-party purchasers are under no duty to keep a promise provided by the owners.
2. Thorough Drafting
To get the intended result, rights of initial offer, negotiation, & refusal must be properly formulated and negotiated. The group needs to be clear about what it wants. It will only be granted the right to compete with an offer if it just demands the privilege of first refusal, probably in a time frame that is excessively brief to allow for a wise choice.
3. Previous Liens
If all three of the above requirements are met, the organization will forfeit its rights under the permits of first offer & first refusal:
However, considering the difficulty involved, the owners are unlikely to agree to subordination if the organization pays little for the rights and the risk of default is low. A company may therefore justifiably determine that the little risks and expenses do not justify pursuing subordination.
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