A right of first refusal clause is a statement in a residential lease agreement that allows the tenant or occupant of a rental unit to make the first offer on their property in the event that the landlord chooses to sell it.
Sample Right of First Refusal Clause
Below is a sample of a right of first refusal clause that could be incorporated into a residential lease agreement:
If within _____ days prior to the conclusion of this Lease Agreement, the Landlord chooses to accept a bona fide offer to sell the Premises, the Landlord shall provide notice to the Tenant(s) of said decision in the manner described in this Lease Agreement, and the Tenant(s) will have the right of first refusal to purchase the Premises, enforceable within _____ days of said written notice upon the terms contained in the notice. This provision shall only be effective after the termination, expiration, or conclusion of the original lease term, and shall not affect the Premises during the term of this Lease Agreement.
Why Include a Right of First Refusal Clause in a Residential Lease Agreement?
Landlords may use a right of first refusal clause if they plan to sell their property and want to avoid the hassle of listing the property and hiring an agent. Typically, the landlord will notify the tenants of their intention to sell. Then, the tenants will have a window of time to accept or decline the offer.
Pros and Cons for Landlords
Landlords should be aware of the potential benefits and challenges before entering into this agreement.
- Saving money – If the tenant chooses to buy, the landlord saves money by not having to hire a real estate agent or list the property.
- Potential to sell for above market value – If the price is locked in at the beginning of the agreement, there is potential to sell for above market value.
- Simpler process – Selling the property to current tenants reduces costs and additional work for the landlord—as long as the tenants are reliable and trustworthy.
- Could end up selling under market value – If there is a set price in the agreement, the landlord risks selling their home for less since there are no other buyers bidding for the property.
- Might drive away potential buyers – If other interested parties have to wait until the current tenants make a decision, they may move on to other properties.
- May not be able to refinance – When this clause is in place, lenders often prohibit loans—which means refinancing may not be an option.
Pros and Cons for Tenants
Tenants entering into a right of first refusal clause should be aware of the advantages as well as the risks of this agreement.
- May end up purchasing below market value – If the price is locked in beforehand, there is potential for a better deal depending on the market at the time of buying.
- No competition – Tenants are not competing with other buyers, leading to a simpler process.
- May end up purchasing above market value – With a locked-in price, tenants risk paying above market value for their property.
- No negotiation – If the price is agreed upon beforehand, there is no room for negotiation.
Should Landlords Set a Locked-In Price on Their Property?
Landlords may choose to set their price at the beginning of the agreement to increase their chances of selling for above market value. However, depending on the market, a locked-in rate also creates a risk of selling below market value. Sometimes, landlords will list their property first, then give the current tenants an opportunity to match an offer from the public.
What to Include in a Right of First Refusal Clause
Landlords should include the following information in a right of first refusal clause:
- Required notice from the landlord
- Length of time tenants have to accept or decline the offer
- Whether or not there is a locked-in price or if tenants can make an offer
- Clarification that this clause only goes into effect at the end of the lease and the landlord cannot sell the property during the lease term
- Any additional terms or conditions
A right of first refusal clause can result in a smoother and simpler transaction for both parties. However, there are complications that can arise, and it is recommended that both parties consult with a lawyer before entering this agreement.