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Rights of First Purchase (Offer, Negotiation or Refusal)

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Last modified Feb 03, 2012



Experts

Patricia L. Pregmon
Pregmon Law Offices
610-834-7411
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Pregmon offers more than 25 years experience in real estate law and has helped scores of clients find creative solutions to their conservation goals.

Jane Menchyk
Western Pennsylvania Conservancy (WPC)
412-586-2333
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Over 5 years experience coordinating and conducting all aspects of real estate transactions including land protection projects.

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Acknowledgements

Patricia L. Pregmon, attorney at law, is the primary author, and Andy Loza, the contributing author and editor.

Disclaimer

Nothing contained in this or any other document available at ConservationTools.org is intended to be relied upon as legal advice. The authors disclaim any attorney-client relationship with anyone to whom this document is furnished. Nothing contained in this document is intended to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to any person any transaction or matter addressed in this document.

Copyright

Copyright © is held by the Pennsylvania Land Trust Association

Text may be excerpted and reproduced with acknowledgement of ConservationTools.org and the Pennsylvania Land Trust Association.

A right of first purchase gives a potential purchaser the opportunity to purchase before a property is sold to another. It can be a right of first offer, a right of first negotiation, a right of first refusal or a combination of these rights.

Summary

The right of first purchase can be a right of first offer, a right of first negotiation, a right of first refusal or a combination of these rights. The right of first offer requires the owner to offer the property, on owner’s terms, to the person who holds the right (called the “holder”) before offering the property to others. The right of first negotiation goes one step further and requires the owner to negotiate with the holder in good faith for some period of time. The right of first refusal allows the holder the right, after offers are solicited from others, to match any offer that the owner is willing to accept. These rights are often combined so that the holder has the opportunity for first response and the assurance that, if owner’s expectations are unrealistic before exposing the property to the market, there is still the opportunity to match a market price.

Track Record

Rights of first purchase are widely used in business transactions.

Typical End Users

  • A conservation organization that wants assurance that a particular property will not be sold without having an opportunity to bid on it.
  • An owner who has no interest in selling his land but is willing to give the conservation organization the opportunity to purchase it when, by owner’s death or otherwise, the property becomes available for purchase.
  • A tenant who wants the opportunity to acquire real property under lease.

Conservation Impact

  • The right of first offer eliminates a conservation organization’s concern that an owner will sell land important to the organization’s mission without the organization having the opportunity to make an offer or knowing that the owner was making the land available for purchase.
  • Negotiating a right of first purchase is an inexpensive first step to create a relationship with the present owner and the opportunity to become a participant in negotiations with a third party purchaser. Even if the conservation organization ends up not purchasing the property in fee, it has had the opportunity to initiate a discussion of potential benefits of including conservation techniques as part of the deal structure.
  • The right of first refusal provides some assurance that the conservation organization is not paying greater than fair market value.

What You'll Need

  • Agreement as to the events triggering the rights of first purchase, the time frames for responding to offers, the cash consideration (if any) for grant of the rights of first purchase and other details.
  • Legal assistance in preparing the right of first purchase agreement.

Obstacles and Challenges

The length of time that the owner is willing to provide to the conservation organization to respond to an offer may not be sufficient for the conservation organization to satisfy itself of the feasibility of the project or make a reasonably prudent decision.


Comparison of Rights of First Purchase

Rights of first purchase, sometimes called preemptive rights, are structured as a combination of one or more of the following: a right of first offer (RFO), a right of first negotiation (RFN) and a right of first refusal (RFR).

Right of First Offer

An owner is usually willing to accommodate a right of first offer because the detriment to the owner is minimal. All the owner has to do is notify the holder of the terms the owner is willing to accept before the owner lists the property or accepts an unsolicited offer. The offered terms do not have to be reasonable or comparable to market. The RFO alone is a “take it or leave it” proposition -- there is no obligation on the part of the owner to consider a counterproposal. If the offer is not accepted within the agreed upon response time, then the owner can move forward with his marketing plan without any further need to deal with the holder.

For the holder, the RFO provides an alert that the property is available for purchase. It also opens the possibility that a deal can be explored with the owner, if the owner is willing to explore, before the property is fully marketed.

Right of First Negotiation

A right of first negotiation buys additional time to counter the owner’s initial offer. A reasonable time for negotiation is usually at least 30 days and often up to 90 days from the date of the owner’s initial offer. The right of first purchase agreement will provide that, if the holder proposes a counteroffer to owner’s first offer within some period of time, both parties will negotiate in good faith for a stipulated negotiation period. If the owner and the holder do not come to terms within the negotiation period, there is no further obligation on the part of the owner unless a right of first refusal is also included in the right of first purchase agreement as discussed below.

Right of First Refusal

A right of first refusal is triggered only after the owner has successfully marketed the property. The owner must hold off finalizing a satisfactory offer during the RFR response period so that the holder can decide whether to purchase on the offered terms. For that reason, the time period for a response to an RFR can be expected to be considerably shorter than the time period for a response to an RFO -- a matter of days rather than weeks. Owners do not like to agree to an RFR because it can have a chilling effect on marketing the property. Serious purchasers do not like to invest time and effort negotiating a deal only to have it snatched away from them by the holder of the RFR.

An RFR alone may not be of much practical use to the holder. If it is not combined with an RFO, the offer may come as a complete surprise to the holder. The RFR is a “take it or leave it” proposition -- there is little or no opportunity to negotiate changed or additional terms unless the right of first purchase agreement provides otherwise. The offered terms may not include any contingency period to obtain inspections or financing or other protections the holder may need to enter into the transaction on a reasonably prudent basis. The result for many nonprofit organizations is that the risks of committing resources to a property with little or no investigation or preparation may outweigh the rewards of conserving land at a market price.

Combination

The optimal right of first purchase for a conservation organization is a combination of all three rights -- an initial offer from the owner with sufficient time to negotiate a mutually acceptable transaction followed by a right of first refusal if the negotiations are unsuccessful. The rationale is that, if the owner’s expectations prior to testing the market were unrealistic, the conservation organization ought to have some opportunity to respond to a realistic offer. If the conservation organization has had the opportunity to become familiar with the property during a negotiation period of 30 or more days as a result of an RFO/RFN, it will put the conservation organization in a much better position to make a quick decision to accept or reject terms submitted as a result of the RFR.

Coming to Agreement

Not so Simple under the Surface

A right of first purchase agreement needs to be carefully negotiated and drafted to achieve the desired outcome.

In negotiating a right of first purchase agreement with an owner, the conservation organization must ask for exactly what it wants. If it simply requests a right of first refusal, that is what it will get -- a right to match an offer, likely within a time period that is far too short to make a prudent decision. If it requests a right of first offer and doesn’t clarify that it wants the offer followed by a period of good faith negotiation and a right of first refusal, it’ll get what it asked for -- an offer that is “top dollar” with no opportunity to negotiate and no guarantee that the owner will come back to the organization if the first offer proves to be unrealistic.

On the surface, the right of first offer and right of first refusal appear to be simple exchanges of offers but, when applied to particular circumstances, the parties may have different views as to its operation if potential issues have not been raised and answered in the negotiation. Many of these issues are addressed in the “Terms and Issues” section below.

In Writing and Proper Form

The right of first purchase agreement must be in writing and, to protect the rights of the holder, should be in proper form for recording in the public records. If the owner objects to recording, a recordable release can be delivered with an escrow agent to clear title if the right is not exercised within the applicable response period

Terms and Issues to be Addressed in a Right of First Purchase Agreement

Triggering Events

The RFO will be triggered when the owner decides to sell or otherwise transfer the property. The conservation organization will want to be sure the triggers include listing the property for sale with a broker, advertising the property for sale, soliciting offers or otherwise exposing the property to the market. Additional concerns may need to be addressed; for example, if the land is only valuable to the conservation organization as a whole and not in pieces, should application for subdivision approval be a triggering event? If the conservation value of the land is its forest resources, should commencement of logging activities or entering into a lease for forestry purposes be a triggering event?

Excluded Transfers

The owner will probably want to exclude certain transfers among family members, trusts for benefit of family members and, perhaps, controlled companies from triggering rights of first offer, negotiation or refusal. The holder will want to assure that the right survives the excluded transfer and applies to a transfer of ownership out of one of these parties.

Property

A description of the property subject to the right of first purchase should be attached to the agreement. An issue of particular interest to conservation organizations is whether the right to purchase all of the property is triggered upon a decision by owner to sell part of the property. The conservation organization may have no interest in purchasing a piece unless it can purchase all. A similar issue is whether the conservation organization can exclude an improved area, perhaps around a residence, from its purchase so as to buy land only.

Notice Requirements

Since the response time for an RFR may be very short, consideration should be given to delivery of notice of acceptance by electronic mail or telefax. Response times should always be measured by defined “business days” so as to avoid the problem of dealing with a three-day response period over a holiday weekend.

Response Time

Both the owner and the conservation organization have legitimate concerns regarding the response times allowed for the holder in a right of first purchase agreement. The conservation organization wants to extend times as long as possible to allow the organization time for study, outreach to stakeholders and potential funders, as well as internal deliberation. It needs sufficient response time to make a reasonably prudent decision. The owner is more likely to agree to the conservation organization having an extended period to respond to a first offer and to respond in negotiations than allow for it in an RFR. The response time that the owner will find acceptable for an RFR will be shorter because longer response times can dampen the interests of potential purchasers. The owner doesn’t want to lose a deal in hand with a purchaser ready, willing and able to purchase while waiting for the conservation organization to determine whether it can purchase or not.

Matching Terms in a Right of First Refusal

If the right of first purchase agreement does not provide otherwise, the holder of a right of first refusal, upon notifying the owner of acceptance, is legally bound to the identical terms contained in the offer made by the third party. That may sound fair and reasonable but, when applied to a purchase by a conservation organization, the offered terms may require adjustment to be equitable.

  • Adjusting for Contingencies. A conservation organization must act with reasonable prudence when approaching a real estate transaction; a developer profits by taking calculated gambles. An offer tendered to the conservation organization that provides no opportunity for property inspection is, in almost all cases, not an acceptable offer even if the purchase price is right. The solution is to negotiate in the right of first purchase agreement a minimum time for due diligence and closing whether or not included in the offered terms.
  • Adjusting for Approvals. The purchase price offered by a developer is usually based upon an anticipated yield measured in dwelling units or developable square feet after certain approvals are obtained. The terms may include months or even years for the developer to seek approvals. A sale to a conservation organization eliminates these risks but, unless the RFR provides otherwise, the purchase price to be matched will not be adjusted to reflect its value “as-is” and without approval contingencies.
  • Other Adjustments. The terms applicable to a sale to a conservation organization may also be adjusted to include possible savings to seller on broker’s commission (by excluding the holder of the RFR) and other benefits that only the purchasing conservation organization can offer; for example, a credit for elimination of liability for realty transfer tax.

Reactivation

The right of first purchase agreement should provide a mechanism for reactivation if for any reason the sale to the third party is not consummated on the same terms as offered to the conservation organization within a specified time period.

Rule Against Perpetuities

Preemptive rights created in Pennsylvania after January 1, 2007 are not subject to the application of the rule against perpetuities so there is no longer any need to limit the term to one or more lives in being plus twenty-one years.

Prior Liens

The conservation organization risks divestment of its rights under the right of first purchase agreement if there are prior liens on the property and no subordination or other appropriate agreement has been obtained from the lien holder to recognize the rights of the conservation organization under the agreement. Unlike an option contract to purchase at a fixed price, obtaining a right of first purchase does not typically require a substantial cash investment. If the conservation organization has paid little, if any, consideration for the right, the owner is usually not expected to obtain subordination of existing liens.

 

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