Negotiation: The Right of First Refusal

This week we continue with our focus on negotiation. The rights of first refusal refers to the chance to be first in line to repurchase a property if the buyer decides to sell it at a later time. Although this is a little known fact, there are two types of first-refusal right when it comes to negotiations.

Two Types of First-Refusal Rights

The first “gives the former owner the ability to regain the property by matching competing bids.” They must propose a value equivalent to the highest bid, but do not need to engage in any type of bidding war or auction. The second type of first-refusal right “requires the right holder to accept or reject the seller’s demand before other potential buyers are offered the same deal.” In this type of refusal, the right-holder loses the chance to match other offers in the future if he/she initially refuses the right. These offers are made before the property is actually on the market.

The Right of First Refusal in Negotiation

These rights are best demonstrated through the use of a hypothetical. Let us say you hold the first-refusal rights to a property worth $1 million. If you want to buy the property and your only requirement is to match the highest bid, you may be able to get the land for a bargain. This would be an example of the first type of refusal right.

Now let’s say you want the purchase the same property, but you must respond to the listing before the property is on the market and before any other offers have been made. If the owner demands $900,000, you may have no choice but to pay the amount. In the first example, you may have been able to lower the price because other buyers were not willing to offer anything close to $1 million. In this second example, you are essentially bidding against yourself.

We hope this post serves as a cautious warning to our readers. The next time you negotiate a sale with the right of first refusal, be sure the terms won’t leave you bidding against yourself. The best case scenario would be going with the first type of refusal-rights strategy, presented in the first hypothetical. Do not hesitate to negotiate the terms of an agreement if you think you are being left with the short end of the stick. Bidding against yourself, as shown in the hypothetical, is not the best way to purchase property or buy anything else.

Source referenced: Harvard Law Program on Negotiation


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Rausch Mediation & Arbitration Services
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