What Does Right of Refusal Mean in Real Estate Law?

by Steve Lander
Rights of first refusal let rightsholders hold buyers hostage.

A right of refusal, sometimes more completely referred to as a right of first refusal, lets a third party match an offer to buy a property. It's a choice frequently given to tenants. While a right of first refusal can be an appealing option to have when you're a buyer, it can also be frustrating.


Option holders benefit greatly from a right of first refusal, since it puts them in a position of power. While they can negotiate with the owner at any time to buy the property, they can also sit back and see what the market does. If the property goes under contract at an attractive price below what the option holder would have paid, the option lets him swoop in and buy the property. Ultimately, a right of first refusal gives him two shots at buying the property -- one through a regular negotiation, and one more, just in case.


When you're an option holder, a right of first refusal can put you in a position in which you end up negotiating against yourself. If the seller knows you really want to buy the property, she has a strong incentive to get your best price, then take the property to market and try to beat it. This could pressure you to pay too much for the property just to avoid the risk of having another buyer drive the price up even higher. For a seller, granting a right of first refusal can actually make it harder to sell the property. When buyers see a right of first refusal, they know that they could go through the entire negotiating process and have the property snatched out from under them. Furthermore, they must also wait for the right of first refusal period to end before they can actually be sure they're buying the property.

Condos and Co-Ops

Some condo associations grant themselves the right of first refusal to buy units when they go on the market. In co-op buildings, the building's board can prevent a sale to a party that the co-op doesn't want in the building. Since condo buildings don't have boards that operate like a co-op board, writing a right of first refusal gives the less-power condo board the same ability to derail a sale to an undesirable owner that a co-op would have. Condo boards could also exercise their right to buy a unit if it needs a unit for the benefit of the property -- such as for creating a workout room or a unit for a maintenance person.


A right of first refusal is a common fixture in timeshare contracts, as well. Many timeshare resorts reserve the right to purchase resale units at negotiated prices. This has two effects. First, it establishes a minimum price for a unit on the resale market, since it becomes impossible for someone to actually buy a unit at a too-low price when the resort snatches the unit out from under them. Second, it allows resorts to buy desirable timeshares back at low prices and resell at full price.

About the Author

Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.

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