WHAT IS A RIGHT OF FIRST REFUSAL?

Posted on by Trey Wilson -- San Antonio Real Estate Attorney
                        
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WHAT IS RIGHT OF FIRST REFUSAL?

A Right of First Refusal or “ROFR” is a grant or covenant by a landowner to another of a preemptive or preferential right, to purchase the property on the same terms offered by or to a bona fide purchaser.” Tenneco Inc. v. Enter. Prods. Co., 925 S.W.2d 640, 644 (Tex. 1996).

HOW DOES A RIGHT OF FIRST REFUSAL OPERATE?

Typically a ROFR operates as follows:

  • “Property Owner A” grants to “Individual B” a right to purchase Property Owner A’s land on the same terms as A would agree to sell the land to any bona fide third-party (the ROFR). The ROFR takes the form of a written agreement and is recorded in the deed records of the County where Property Owner A‘s land is located. Under the ROFR agreement Property Owner A is the “grantor” and Individual B is the “holder.”
  • At some point in time Property Owner A decides that he is interested in selling his land, so he lists it for sale.
  • “Buyer C” offers to purchase Property Owner A‘s land for $X.  Property Owner A desires to accept Buyer C’s offer and $X as the purchase price.
  • Prior to accepting Buyer C‘s offer Property Owner A must provide Individual B with written notice of the offer and an opportunity to buy the land on the same terms (including price $X) offered by Buyer C.
  • At that point, Individual B has a specified time to exercise the ROFR by agreeing purchase the land on the same terms (and at the same price) as Buyer C. Essentially, the ROFR has become an option for Individual B.
  • If Individual B exercises the ROFR and complies with his obligations under the ROFR agreement, the Property Owner A is compelled to sell the land to Individual B.
  • If, however, Individual B fails to timely respond or otherwise comply with the ROFR agreement, then Property Owner A is free to sell the land to Buyer C, and Individual B no longer has any right to purchase the land.

RIGHT OF FIRST REFUSAL UNDER TEXAS LAW

Generally, a right of first refusal requires the grantor to notify the holder of his intent to sell and to first offer the property to the holder on the same terms and conditions offered by a third party. See id.; Navasota Res., L.P. v. First Source Tex., Inc., 249 S.W.3d 526, 532 (Tex. App.—Waco 2008, pet. denied). When the grantor communicates those terms to the holder, the right “ripens into an enforceable option.” FWT, Inc. v. Haskin Wallace Mason Prop. Mgmt., LLP, 301 S.W.3d 787, 793 (Tex. App.—Fort Worth 2009, pet. denied) (quotation omitted); Durrett Dev., Inc. v. Gulf Coast Concrete, LLC, No. 14-07-01062-CV, 2009 WL 2620506, at *4 (Tex. App.—Houston [14th Dist.] Aug. 27, 2009, no. pet.) (mem. op.). The holder may then elect to purchase the property according to the terms of the instrument granting the first-refusal right and the third party’s offer, or decline to purchase it and allow the owner to sell to the third party. See Jarvis v. Peltier, 400 S.W.3d 644, 652 (Tex. App.—Tyler 2013, pet. denied).

WHAT IS A BONA FIDE, GOOD FAITH  OFFER?

“A bona fide offer is one made in good faith which, on acceptance, becomes a valid and binding contract enforceable by any party to it.” Ray v. Lancaster Inv., Grp., No. 05-93-01857-CV, 1994 WL 416699, at *5 (Tex. App.—Dallas Aug. 5, 1994, writ denied) (not designated for publication) (citing Lede v. Aycock, 630 S.W.2d 669, 674 (Tex. App.—Houston [14th Dist.] 1981, writ ref’d n.r.e); Jones v. Riley, 471 S.W.2d 650,659 (Tex. App.—Fort Worth 1971, writ ref’d n.r.e.)); see also Baldwin v. New, 736 S.W.2d 148, 152 (Tex. App.—Dallas 1987, writ denied).  Texas courts have defined a “Good Faith Offer” as one “made honestly, sincerely, without intent to defraud or take unconscionable advantage of the grantor, and which is in observance of reasonable commercial standards of fair dealing.” See Central American Aviation Services, S.A. v. Bell Helicopter Textron, Inc., No. 02-06-126-CV, 2007 WL 614132, at *6 (Tex. App.—Fort Worth Mar. 1, 2007, no pet.) (mem. op.) (“‘Good faith’ is a state of mind consisting in (1) honesty in belief or purpose, (2) faithfulness to one’s duty or obligation, (3) observance of reasonable commercial standards of fair dealing in a given trade or business, or (4) absence of intent to defraud or to seek unconscionable advantage.” (citing Black’s Law Dictionary 713 (8th ed. 2004))). See also Railroad Comm’n v. Gulf Energy Expl. Corp., 482 S.W.3d 559, 568 (Tex. 2016) (noting that dictionary definitions of “good faith” “focus overwhelmingly on subjective state of mind”).

REMEDIES WHEN A LANDOWNER SELLS BURDENED LAND TO A THIRD PARTY WITHOUT FIRST OFFERING IT TO THE ROFR HOLDER 

A grantor’s sale of the burdened property to a third party without first offering it to the rightholder on the same terms constitutes a breach of contract. Riley v. Campeau Homes (Tex.), Inc., 808 S.W.2d 184, 188 (Tex. App.—Houston [14th Dist.] 1991, writ dism’d). When a right of first refusal relating to real property is breached, rightholders most frequently seek the remedy of specific performance. Robert K. Wise, et al., First Refusal Rights Under Texas Law, 62 BAYLOR L. REV. 433, 502 (2010). If the property has already been conveyed to a third party, however, the only remedy available from the grantor is money damages. See, e.g., Koch Indus., Inc. v. Sun Co., 918 F.2d 1203, 1214 (5th Cir. 1990).

Nevertheless, specific performance may still be available as a remedy against the third-party purchaser. To that end, a person who purchases property with actual or constructive notice of a right of first refusal takes the property subject to that right. See Jarvis, 400 S.W.3d at 652-53. Courts are in agreement that such a purchaser “stands in the shoes of the original seller when specific performance is sought and may be compelled to convey title to the [holder of the right of first refusal].” Id. at 653; see also A.G.E., Inc. v. Buford, 105 S.W.3d 667, 673 (Tex. App.—Austin 2003, pet. denied) (“When a sale is made in breach of the right of first refusal, it therefore creates in the rightholder an enforceable option to acquire the property according to the terms of the sale.”); Riley, 808 S.W.2d at 188 (“A sale or transfer of property burdened by a right of first refusal without making an offer to the holder of the right is a breach of contract for which the remedy of specific performance is available.”).

IMPORTANT PRO TIP

A Right of First Refusal is a contract, and is enforceable as a contract.  This means that the rights of the parties — both the grantor and the holder — are only as good as the ROFR agreement.

A poorly drafted agreement is fertile territory for disputes over the interpretation and enforcement of the parties’ rights and obligations. It is essential that a ROFR agreement be concise and specific in at least the following components:

  • a description of the land subject to the ROFR.
  • the duration of the ROFR – for how many years will the holder enjoy the right of first refusal on the land?
  • a definition of a third party. Can the offering third-party be related or connected to the grantor? 
  • strict procedures for the grantor providing notice of an offer.
  • strict procedures and deadlines for the holder responding to the offer notice.
  • a description of what occurs if the third party offer is terminated or falls through.
  • a description of the procedure following the holder’s exercise of his right to match the third party offer.