Difference Between Options and Related Rights
| | Wednesday, May 17, 2006 @ 12:52 PM EDT
|  Printer Friendly Page
 Send this Story to a Friend |
Contributed by: Inactive Account
Inactive Account Properties
Read more archived articles about U Make The Call
The following briefly summarizes the differences between options, rights of first refusal, right of first negotiation, and rights of first offer:
1) Option - The clearest and strongest right that can be granted to give a party flexibility in the future; the option grantee ("grantee") is given the right, but not the obligation, to lease, buy or otherwise control a specified asset in the future. To be enforceable, the option should set forth exactly what asset is subject to the option, the price and terms on which the optionee can exercise the option, the date or dates on or between which the option is
 | |
| Advertisement |
exercisable, and the corresponding dates for closing or delivery of the optioned asset. See BLACK'S LAW DICTIONARY (7th ed. 1999), at 1121 (defining "option to purchase real property" as "[a] contract by which an owner of realty enters an agreement with another allowing the latter to buy the property at a specified price within a specified time, or within a reasonable time in the future, but without imposing an obligation to purchase upon the person to whom it is given").
2) Right of First Refusal - An alternative to an option. Unlike an option, a right of first refusal does not entitle the holder of the right to force the other party to sell of lease the asset. Instead, if and when the other party decides to sell or lease the asset to any third party, the holder of the right of first refusal can require the asset to be sold or leased to him or her for the same price and terms that the owner is willing to accept from the third party. Obviously, a right of first refusal is much weaker from the standpoint of the holder that an option: it does not set the price for the asset in advance, and it allows the owner of the asset to decide whether and when to sell or lease. The property owner generally will resist granting a right of first refusal because of its chilling effect on the marketability of the property. Brokers may be reluctant to list a property that is subject to a right of first refusal unless they are also promised a commission if and when the holder of the right exercises it and purchases the property. See BLACK'S LAW DICTIONARY (7th ed. 1999), at 1325 (defining "right of first refusal" as "[a] potential buyer's contractual right to meet the terms of a third party's offer if the seller intends to accept that offer"). The scope of the "price and terms" of a third-party offer that the holder of a right of first refusal must meet should be carefully set forth in the right of first refusal. See, e.g., Hahalyak v. A. Frost, Inc., 444 Pa. Super. 494, 502-503 (1995) (holding that language of right of first refusal was "clear and unambiguous" and that "terms and conditions of any proposed lease" included only economic terms of proposed lease and not agreement of proposed lessee to vacate existing space in the building or agreement of another party to pay "inducement fee" for such vacated space).
3) Right of First Negotiation - In order to avoid the chilling effect of a right of first refusal, the parties may instead use a right of first negotiation. This provision provides that the owner must notify the holder of such a right that the owner intends to sell or lease his or her property. The parties then have a specified period of time in which to negotiate, on an exclusive basis, a mutually acceptable deal. The obvious advantage of right of first negotiation over a first-refusal right (from the owner's perspective) is that the right of first negotiation period ends before the owner or any third party or broker invests time and money in negotiating a deal. There is therefore no "chill" on the marketability of the asset. A right of first negotiation does not give the holder of the right any assurance that the parties will reach final agreement on the price and terms for the transaction. If the exclusive negotiation period lapses without an agreement on price and terms, the owner generally is free to sell or lease the property to a third party free and clear of the rights of the holder of the first-negotiation right.
4) Right of First Offer - In some transactions, particularly involving the sale of real estate, the parties will provide for a right of first offer ("RFO") in favor of the buyer. The holder of a RFO has the first right to make an offer for the purchase of the property before the owner can sell the property to a third party. The owner is give a specific period to accept or reject the offer, and if the owner rejects the offer, he or she is free to sell the asset to one or more third parties, with the only restriction being that he or she cannot accept a price that is less (or in some cases less than a percentage of) the price offered by the holder of the RFO. This puts the holder of the RFO in the position of naming its price without knowing the owner's estimate of the value and without the opportunity to require the owner to negotiate to an agreed price (unless that right is included in the agreement). The RFO is used, for example, where a purchaser of a parcel wants a right to buy the adjacent parcels when they become available for sale, but the owner is unwilling to give an option or right of first refusal. With respect an RFO (which is preferable to a right of first refusal because it minimizes the "chilling" effect on the marketability of the property), the holder of the right can be afforded additional protection by requiring the owner to make an offer to the holder of the right, containing the terms (including price) that the owner will accept, before the owner can offer the property to a third party. This "smokes out" the price that the owner will accept. However, the owner still controls the timing of any potential sale and is not obligated to reduce the price it asks for the property even if it is "unreasonable." (However, the owner may be obligated, if negotiated for by the holder of the right, to sell the property for at least that price if the holder elects not to accept the owner's offer).
By- John C. Murray
Word Cloud:
period will agreement option rights give which related accept right party specified negotiation between parties price offer asset property sell owner holder difference without first options refusal lease when third terms
|
|
| |
|
