Right of first refusal

Right of first refusal: A key concept in property investment

The right of first refusal is a crucial aspect of property investment that is significant for both buyers and sellers. It ensures that certain individuals have the right to purchase a property before it is sold to a third party. In this article, we explain the basics of the right of first refusal, its significance and the various scenarios in which it applies.

What is the right of first refusal?

The right of first refusal is a contractually agreed right that allows a third party (usually a tenant or a neighbour) to purchase a property at a pre-agreed price before the owner sells it to someone else. It serves to give certain individuals – usually those with a special connection to the property – the first opportunity to buy.

The legal basis of the right of first refusal

The right of first refusal is typically set out in a contract of sale or another legal agreement. The key points to bear in mind are:

• Written form: The right of first refusal should always be set out in writing to be legally binding.
• Duration: The duration of the right of first refusal should be clearly defined.
• Procedure: It should be specified how the right of first refusal can be exercised. What time limits apply to the exercise of this right?

Why is the right of first refusal important?

The right of first refusal plays a key role in the property sector for several reasons:

• Protection of interests: It protects the interests of tenants or neighbours by giving them the opportunity to purchase the property.
• Increase in value: In certain markets, the right of first refusal can lead to an increase in the property’s value, as potential buyers are aware of the possibility of purchasing the property.
• Transparency: It provides clarity regarding the owner’s intentions to sell and the procedure that must be followed.

Right of first refusal in property investment

For investors in the property sector, the right of first refusal is a key element of the due diligence process. Understanding such rights can be crucial in various situations. For example, it comes into play when an investor wishes to purchase a property that is already let to a tenant. In such cases, the tenant’s right of first refusal could significantly influence the sale process.

How does the right of first refusal work?

The procedure for exercising the right of first refusal is as follows:

1. The owner plans to sell the property.
2. The owner must inform the entitled third party (e.g. the tenant) of their intention to sell.
3. The third party now has a specified period in which to exercise their right of first refusal.
4. If the third party exercises this right, the sale goes ahead. Otherwise, the owner may sell the property to a third party.

A clear example of the right of first refusal

Imagine that Mr Müller has been living in a rented flat for several years. During this time, he has got on well with his landlord, Mrs Schmidt. One day, Mrs Schmidt decides to sell the flat. However, she has included a right of first refusal for Mr Müller in his tenancy agreement. This means that she must contact Mr Müller first before making an offer to any other party.

Mrs Schmidt informs Mr Müller of her intention to sell and gives him one month to decide whether he wishes to buy the flat. Mr Müller, who loves the flat and is well established in the neighbourhood, decides to exercise the right of first refusal and buys the flat from Mrs Schmidt. This ensures that the flat remains in the hands of a valued tenant.

Conclusion

The right of first refusal is an important element of the property market, with both legal and economic implications. A clear understanding of these provisions can be beneficial to both buyers and sellers. In the complex world of property investment, it is important to stay informed and to recognise the relevant rights and obligations.