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What to know about future interests in a real estate deal

Many contracts involving real estate don’t involve an immediate sale or lease of a property. Instead, they contemplate a future sale or lease, and give the parties various rights involving the future transaction.

The most common of these future rights are an “option,” a “right of first refusal,” a “right of first offer,” and a “right of first negotiation.” These terms can be confusing, and it’s very important to understand the difference.

For example, suppose Alan owns some property, and Joan is interested in buying or leasing it at some point in the future. As part of a contract with Alan, Joan might acquire one of these future rights.

If Joan has an option, that means that she has the right, within a certain period of time, to force Alan to sell or lease the property to her at a price specified in the option agreement. Joan might pay Alan a fee for this right, and the contract might allow the option to be renewed if Joan pays an additional fee. Joan doesn’t have to exercise the option at all, but if she does, Alan has to go through with the transaction.

If Joan has a right of first refusal, that means that if, during a certain period of time, Alan gets an offer from someone else to sell or lease the property, and he’s willing to accept it, then he has to first offer the property to Joan on the same terms. Joan will have a certain length of time to make up her mind. If Joan likes the terms, she can force Alan to sell or lease to her on the same terms, and the third party will be out of luck. Note, however, that unlike with an option, if Alan never gets an offer from a third party, Joan has no right to force him to sell or lease to her.

If Joan has a right of first offer, that means that if, during a certain period of time, Alan decides to sell or lease the property, he must tell Joan, and Joan will have a right to make an offer for the property before Alan puts it on the market. Typically, Alan doesn’t have to accept Joan’s offer, but if he doesn’t, then he can’t sell or lease the property afterward to anyone else on terms that are less favorable to him than Joan’s offer.

If Joan has a right of first negotiation, that means that if, during a certain period of time, Alan decides to sell or lease the property, he must tell Joan, and then for another period of time (say, 30 days), Alan must negotiate with Joan in good faith to see if they can agree on a price. During this time, Alan can’t sell or lease the property to anyone else.

It’s not always clear what it means to negotiate in “good faith.” Often, to force the owner to act in good faith, the contract will say that if Joan makes a firm proposal during the negotiations and Alan turns it down, Alan can’t accept a later offer from someone else on the same (or worse) terms. This makes a right of first negotiation similar to a right of first offer. However, a right of first offer usually puts the property owner in a slightly better position, because it forces Joan to “go first” and name a final price, rather than engaging in back-and-forth negotiation before agreeing to a number.

If you’re involved with a contract that includes any of these future rights, it’s very important to speak with a real estate attorney in order to make sure your interests are fully protected.

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