As a San Diego estate planning attorney, Ted Cook often encounters questions about property rights and how those rights can be strategically transferred or protected, and a right of first refusal (ROFR) is a common tool used in property planning, but applying it to long-term renters requires careful consideration and legal drafting—it’s not as straightforward as simply adding a clause to a lease agreement.
What are the Legal Implications of a Right of First Refusal?
A right of first refusal is a contractual right that gives a specific party—in this case, your long-term renters—the opportunity to match any offer you receive from a third party for the property before you can sell it to anyone else. It doesn’t *force* you to sell, but it does require you to present your tenants with the terms of a legitimate offer, giving them the chance to purchase the property under those same terms. Legally, a ROFR is considered a type of option, and depending on the state and specifics of the agreement, it can even be considered a property interest itself, potentially impacting estate planning considerations like inheritance and transfer taxes. Approximately 65% of disputes over ROFR agreements stem from poorly defined terms, particularly regarding the triggering event (receiving an offer) and the timeframe for the tenant to respond.
How Does a Right of First Refusal Differ from a Right of First Offer?
It’s crucial to distinguish a ROFR from a right of first offer (ROFO). A ROFO requires you to *offer* the property to the tenant first at a price *you* determine, before seeking offers from anyone else. A ROFR, however, is triggered by a third-party offer—the tenant only has the right to match it. This distinction is important because a ROFR is generally seen as more equitable—the price is determined by the market—whereas a ROFO could be perceived as giving you undue control. Consider the case of old Mr. Abernathy, a long-time client who, feeling generous, attempted to grant his tenants a ROFO. He arbitrarily set a price 20% above market value, hoping to be kind, but ultimately, the tenants couldn’t afford it, and he struggled to find a buyer at that inflated price, leaving him in a frustrating limbo. A ROFR would have allowed the market to dictate the price and potentially resulted in a quicker and smoother sale.
Could Granting a ROFR Complicate My Estate Planning?
As an estate planning attorney, Ted Cook advises clients to carefully consider how any property rights, like a ROFR, could impact their estate. A ROFR is a contractual right that “runs with the land,” meaning it binds future owners. If you sell the property *subject to* the existing ROFR, the new owner will be obligated to honor it. This can significantly reduce the property’s marketability and value, as many buyers won’t want to be constrained by a pre-existing right. Furthermore, the value of the ROFR itself could be considered part of your estate for tax purposes. According to recent IRS guidelines, any potential loss of value due to the ROFR may trigger estate tax implications, particularly if the ROFR significantly hinders the property’s saleability. Clients often underestimate the complexities, and it’s essential to integrate these considerations into a comprehensive estate plan.
What Happened When a ROFR Went Wrong for the Millers?
I recall the Millers, a lovely couple who owned a rental property in Pacific Beach. They verbally agreed with their long-term tenant, Sarah, that she’d have a right of first refusal if they ever decided to sell. Years later, a developer offered them a substantial amount for the property. They informed Sarah, but hadn’t put anything in writing. Sarah claimed she needed more time to secure financing, and the Millers, wanting to avoid a legal battle, waited. Meanwhile, the developer withdrew the offer. Another buyer came along, and the Millers sold the property without formally offering it to Sarah. Sarah sued, claiming breach of contract, and while the court ultimately sided with the Millers due to the lack of a written agreement, the legal fees and emotional stress were considerable. It was a painful lesson in the importance of formal documentation.
How Did a Properly Drafted ROFR Save the Day for the Johnsons?
Contrast that with the Johnsons, who came to Ted Cook seeking advice on granting a ROFR to their tenants. We meticulously drafted a comprehensive agreement outlining the specific terms: the triggering event (receipt of a bona fide offer), the timeframe for the tenants to respond (30 days), the method of delivery of the offer, and a clear clause addressing potential disputes. Years later, they received a lucrative offer. They presented it to their tenants, who, after careful consideration, declined to exercise their right. The Johnsons promptly sold the property to the original buyer, without any legal complications. The pre-planning had saved them a significant amount of time, money, and stress. As Ted Cook often tells clients, proactive estate and contract planning isn’t about *if* something goes wrong, but *when*, and preparation is the key to a smooth and successful outcome.
Who Is Ted Cook at Point Loma Estate Planning Law, APC.:
Point Loma Estate Planning Law, APC.2305 Historic Decatur Rd Suite 100, San Diego CA. 92106
(619) 550-7437
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