What Is a Right of First Refusal?

A right of first refusal gives a specific person the opportunity to purchase an asset only after a third party has made a legitimate offer. The key point is that the right holder cannot act until the owner decides to sell and receives a bona fide offer from someone else.

Once that offer exists, the owner must present the terms to the person holding the right of first refusal. That person then has the choice to purchase the property under the same terms as the third party offer, or under any alternative terms spelled out in the agreement.

If the right holder declines, the owner is free to proceed with the third party sale. If the right holder accepts, the third party transaction is blocked and the property is sold to the right holder instead.

This structure gives the holder protection without forcing a sale or allowing them to initiate a purchase on their own timeline.

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What Is an Option to Purchase?

An option to purchase gives the holder the power to buy an asset at any time, as long as the conditions in the agreement are met. Unlike a right of first refusal, no third party offer is required.

The option holder can trigger the purchase whenever they choose, subject to the pricing, timing, and financing terms set out in the agreement. This makes an option to purchase a much stronger right, since it places control in the hands of the option holder rather than the property owner.

Options are commonly used when families want to guarantee that a specific person will have the ability to acquire property, often at a predetermined or discounted price.

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Common Family and Estate Planning Uses

Both tools are frequently used in family property arrangements, but for different reasons.

A right of first refusal is often used when parents sell property to a child at a reduced price and want to ensure the property does not later get flipped for profit. If the child decides to sell, the parents can step back in and reclaim the property before it goes to an outside buyer.

An option to purchase is more commonly used in estate planning when families want to keep property such as a cabin, farm, or other legacy asset within the family. It allows one child or group of children to buy out others, often using their inheritance to do so.

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Customizing the Terms

One of the most valuable aspects of both rights of first refusal and options to purchase is flexibility. These agreements can be tailored to fit the family’s goals and financial realities.

Common terms that can be customized include:

• Purchase price tied to fair market value or a set percentage of appraised value
• Use of a contract for deed rather than immediate full payment
• Installment payments with a future balloon payment
• Timelines for exercising the right or option
• Restrictions on resale to non family members

Using installment payments or balloon structures can be especially helpful when a buyer needs time to secure financing or liquidate other assets.

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Choosing the Right Tool

Deciding between a right of first refusal and an option to purchase depends on the family’s priorities. If the goal is simply to prevent property from leaving the family without forcing a sale, a right of first refusal may be appropriate. If the goal is to guarantee that someone can acquire the property, an option to purchase may be the better choice.

When used correctly, both tools can preserve family assets and promote long term harmony.

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Frequently Asked Questions

1. Can a right of first refusal force someone to sell property?
No. It only applies after the owner chooses to sell and receives a third party offer.

2. Is an option to purchase enforceable if the owner does not want to sell?
Yes, as long as the option is valid and the holder follows the agreement terms.

3. Can these rights be included in wills or trusts?
Yes. Both rights of first refusal and options to purchase are often included in estate planning documents to control how property is transferred.

Author

Claire creates wills and trusts which provide security and peace of mind. She compassionately listens to her clients’ dreams, goals, and fears and then fashions plans that best meet their needs. It is important to Claire that her clients understand different options and make decisions that are right for them. She loves to educate clients by drawing out complicated concepts.

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