A right of first refusal in Texas real estate law is a written agreement by which the holder of the right possesses a future option to purchase property prior to its sale to a third party. This article will outline the basics of rights of first refusal in Texas, as well as some of the typical situations in which litigation over such rights may arise.
Right Of First Refusal Basics And Requirements
A right of first refusal (“ROFR”) is an option contract whereby the holder of the right has the future option to purchase property when the owner intends to sell it. The holder of the ROFR has the right to purchase the property prior to any other third party who seeks to purchase it. A ROFR does not give the holder the right to purchase the property at the present time. Instead, the option only matures when the owner elects to sell the property or gives notice to the holder of a bona fide offer by a third party to purchase the property. At that time, the holder may, but is not required to, purchase the property.
Since a ROFR is an option contract, it must be supported by sufficient consideration in order to be binding and irrevocable. Additionally, since a ROFR is an option to purchase real estate, it is subject to the statute of frauds. This requires that the ROFR be (1) in writing, (2) signed, and (3) contain all the essential terms of the option. In general, this requires an adequate description of the property to which the right applies, and the terms by which the option is triggered. It is not generally necessary to include a price in the writing.
Rights Of Parties In A Transaction Involving A Right Of First Refusal
Transactions involving ROFR often involve three parties – the property owner, the ROFR holder, and a third party interested in purchasing the property. As such, litigation can sometimes occur when a ROFR is involved in a real estate transaction. Below are a few common situations in which this can occur:
- If the rights holder does not properly exercise the ROFR in ordinance with its written terms but has nevertheless conveyed the property, the third party purchaser who was not conveyed the property may bring suit against the holder of the ROFR to contest the transfer.
- If a ROFR is validly exercised, a prospective third party buyer has no rights against the holder of the ROFR.
- If the owner sells the property in violation of the ROFR, the rights holder may exercise the right as if he had been properly noticed of the intent to sell or given the opportunity to exercise his right.
- If a rights holder acquiesces to a sale in violation of his ROFR, the right is terminated and the rights holder may not later sue to enforce the ROFR.
Situations may also arise in which the owner of the property subject to a ROFR wishes to sell more or less of the property in a single transaction. Generally, if the owner attempts to sell property subject to a ROFR, bundled with additional properties, the rights holder has the right to purchase the property subject to the right only, and cannot be forced to purchase the entire bundle in order to exercise his right. However, the owner may generally sell a smaller portion or tract of the property subject to an ROFR, provided the rights holder is given the option to purchase the smaller portion or tract put up for sale.
Challenges To The Validity Of A ROFR
The validity of a ROFR is primarily challenged in two ways. First, it is possible for a ROFR to violate the Rule Against Perpetuities as recognized by Texas. This most commonly occurs if no time limit is placed on the ability to exercise the option. Second, a ROFR can be invalidated as an impermissible restraint on alienation. Generally, a ROFR will be valid if its terms are reasonable with regard to the price and time allowed to exercise the right. If both of these terms are not reasonable, the ROFR will be invalid unless it is deemed reasonable considering:
- Its duration
- The variety of types of transfers allowed
- Limitations on the number of persons to whom transfer is prohibited
- The effect on the value of the property
- The marketability of the property absent the restraint.
For an example of a ROFR deemed reasonable and valid see Randolph v. Terrell. For an example of a ROFR deemed invalid see Gray v. Vandver.
Contact Sheehan Law, PLLC Today
If you are buying or selling real estate involving a right of first refusal in Austin, Round Rock, Cedar Park or Pflugerville contact the Austin real estate lawyers at Sheehan Law, PLLC for a consultation. We can answer any questions you might have, and provide you with sound, knowledgeable legal counsel.