Option or Right of First Refusal?
Frank C. Sutherland | 08.03.18
It is not uncommon for non-attorneys to be confused regarding the differences between option agreements and rights of first refusal. Understanding the nature of both arrangements helps to ensure that you can secure rights that are most advantageous under a given set of circumstances.
Option agreements give the option holder the unilateral discretion to exercise pre-determined rights. For example, in the context of the sale of real estate, the holder of an option may be granted an opportunity to exercise the right to purchase specified property based upon stated terms and conditions within the timeframe stated in the option agreement. If the option holder gives notice that s/he is exercising the right to purchase the property within the stated timeframe, the option effectively becomes a purchase contract.
In contrast, a right of first refusal involves an agreement between an owner and the holder of the right, which gives the holder of the right the opportunity to match a third party offer. In the event the owner decides to sell his/her interest to a third party, the holder of the right of first refusal has the opportunity to match the third party’s offer within a pre-determined timeframe. In order to make this right effective, the holder of a right of first refusal is generally entitled to prompt notice from the property owner when a third party makes an offer to buy the subject property. Such notice would typically include a copy of the offer made by the third party in order to permit the holder of the right of first refusal to make an informed decision as to whether to “step into the shoes” of the third party. If the holder exercises his/her right within the pre-determined timeframe, he/she becomes the purchaser of the property under the terms and conditions of the third party offer.
When deciding whether to enter into an option agreement or a right of first refusal, be sure to consult with an attorney and fully discuss the advantages and disadvantages of each under the circumstances.
DISCLAIMER: The information provided is for general informational purposes only. This post is not updated to account for changes in the law and should not be considered tax or legal advice. This article is not intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.