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What Is Right Of First Refusal In Real Estate?

By Tabitha Jean Naylor

The right of first refusal is a legal code New York state exercises under chapter 9 of their constitution. This law has been effective since 1986 when New York case law first upheld the right of first refusal. It is a contractual right of a party that allows them to enter into a commercial transaction with a party before anyone else can. The entity with the right of first refusal possesses the right, but not the obligation to take part in a transaction of an asset. If the party with the right of refusal fails to enter the transaction then the owner of the asset is at liberty to open bidding to any other interested persons.

When Is A Right of First Refusal Used?

There are several situations in which a Right of First refusal might be negotiated. A very common use of this right occurs when a couple jointly owns property, and they decide to divorce. A court may award a right of first refusal so that when one spouse sells the home the other spouse has the right to purchase the home at the same price and under the same conditions as the offer the seller receives from a third party.

Another situation where the right of first refusal is seen occurs in business transactions where a business or a commercial property is held jointly. Partners may negotiate a right of first refusal to prevent the business from being sold to someone the remaining partners cannot or will not work with or to prevent the property from being sold under less than favorable conditions.

Condominiums are another special case where the right of first refusal is commonly negotiated. According to Robert E. Parella, a professor of law at St. John's University School of Law in Jamaica Queens ''Any time you have a communal living arrangement, there is an interest on the part of the majority of the owners to exercise some say over who lives in the building, and somewhere along the way it got rather firmly rooted in New York that with a co-op, the governing documents would very often allow the co-op to arbitrarily withhold consent to a transfer, while with a condominium, the only kind of restriction that most people believe would stand up would be the right of first refusal.''

Right of First Refusal in New York Real Estate

The right of first refusal in a real estate contract is a mechanism that gives a particular party the specific privilege to be allowed to buy a particular property if it is offered for sale. It is a future right and the right is attached to a specific property-it does not apply to just any property. The terms of the right of refusal are negotiated at the time the right is established and may include specific terms regarding price, as well as other conditions of the sale.

A specific type of right of first refusal is an option to buy a property before it is sold to other bidders. There might not be a prior agreement between the holder and the seller, so there might not be a specific price or date in the future. The option may be valid up to a certain date or not. In such a case the seller is not obligated to sell if the prices were not agreed upon when the contract was set up.

When it comes to real estate property sales in New York, the right of first refusal commonly known as "last look" gives the holder the right, but not the obligation to review all offers on the joint venture. The holder then can exercise this right by purchasing the highest offer on bid. Partners in a real estate business often grant each other this right of first approval this way if a partner is leaving they can prevent a newcomer who is not familiar from buying a stake in the joint venture.

The right of first refusal in real estate is used strategically to give the buyer a number of advantages such as limiting the number of bidders in a transaction which automatically also limits the price. With a right of first refusal in place, the seller's powers are minimized, so in many cases they are unable to sell the property at higher market prices.

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