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Rights of First Refusal

Occasionally, a right of first refusal (ROFR) will operate as a limitation on the sale or disposition of real property. In simple terms, a ROFR is

a limitation on a property owner's ability to sell the property to a third party, requiring the owner to first offer the property to the holder of the right at the third party's offering price and terms.

T.W. Nickerson, Inc. v. Fleet Natl. Bank, 456 Mass. 562, 571-72 (2010). A ROFR falls within a category of property interests known as "pre-emptive rights", since they act as a limitation on an owner's ability to dispose of property without first offering the property to the holder of the right at the third party's offering price. A right of first refusal is usually established contractually between two parties, although occasionally a court may impose a ROFR as part of a judgment (i.e. in divorce proceedings).

A right of first refusal is not a restriction on the use of land. It is also not a covenant that runs with the land and thus does not bind future owners of the land (unless as otherwise explained below). Rather, it is typically a personal contractual obligation that only benefits specified people, identified by name or by relationship to those named and grants no rights to, and imposes no burdens on, anyone else who might come to own the land. Moreover, there are limitations on the time over which a ROFR may affect an interest in land. Under M.G.L. c. 184A, § 5(a) "a preemptive right in the nature of a right of first refusal in gross with respect to an interest in land or minerals becomes invalid if it is not exercised within thirty years after its creation."

In order for a right of first refusal to be triggered, all conditions precedent set forth in the original agreement, covenant or judgment granting or reserving the right must be met. In a typical scenario, if the landowner decides to accept a bona fide third-party offer to purchase the property, then "the right of first refusal ripens into an option to purchase [for the holder of the right] according to the terms of the third-party offer." Bortolotti v. Hayden, 449 Mass. 193, 201 (2007). Compliance with the terms and conditions of the third-party offer is strict, and thus any exercise of the option must be materially the same as to purchase price, deposits, dates for closing and other material terms. Additionally, the provisions of the ROFR usually specify how much time the holder of the ROFR has to either exercise the option or otherwise waive it.

Owners of property subject to a right of first refusal must pay close attention to the specific language of the ROFR provisions to ensure full compliance. For example, many ROFR agreements specify in what manner and timeframe the landowner must provide notice of the third-party offer to the holder of the ROFR. Otherwise, the landowner transacting a land sale contrary to the terms of a ROFR may be subject to litigation advanced by the holder of the ROFR.

If the terms of the ROFR agreement (or judgment) expressly require a bona fide sale before the notice provision is triggered, then a mere conveyance without any consideration will not qualify and the ROFR may remain in effect, so long as it is otherwise applicable to successors and assigns. Moreover, if the landowner dies before selling the property, then the specific terms of the ROFR agreement (or judgment) must be carefully analyzed to determine whether the ROFR is extinguished upon his death, or whether it continues to expressly bind the heirs, devisees and/or other successors in interest. There appear to be some interesting and unresolved questions regarding the exercise of ROFR's in the Commonwealth including (1) the enforceability of a ROFR by or against parties subsequent to the original covenanting parties (i.e. heirs); and (2) whether a property is still subject to the preemptive rights of a holder who has already once failed to purchase following a bona fide offer.

Written by Kristen M. Ploetz, Blog Editor

Copyright (c) 2011-2012 by Jeffrey T. Angley, P.C. All rights reserved.

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