Foreclosure Pokes a Hole in the Right of First Refusal Law
I’m sure most of you are aware of or have heard the term “right of first refusal (ROFR),” but what exactly does it mean for homeowners? Well what it means is:
A right of first refusal is a contractual right granted by an owner of property to another entity/person, whereby the owner gives said entity/person an opportunity to enter into a purchase contract with the owner, before the owner may enter into a purchase contract with a third party.
Right of First Refusal in Real Estate
Rights of first refusal often are entered into in real estate transactions and seen in condo associations and HOA’s. Essentially, the party with the ROFR gets the first bite of the apple, should the owner decide to sell, but do not fret…..that doesn’t take away all of the sellers power. For instance, if a third party offers to buy the home or condo at a set price, and for certain terms and conditions, the owner must disclose these terms and conditions to the person who holds the ROFR. Should the entity with the ROFR wish to exercise their right, the law requires the seller to sell the real estate to the holder of the ROFR at the same price and under the same terms and conditions as those offered by the third party. This way the seller still gets the benefit of the price agreed to by the independent potential buyer. Only after the right of first refusal has been declined, can the seller then sell their property to the interested third party.
Now that we have the basics, let’s look into those nook and crannies for the holes I mentioned. While many condo associations will draft into their bylaws and declarations language regarding their ROFR, the language will often only apply at the time of “Sale” of the subject property…leaving out the unfortunate instance of “Foreclosure.” Result = loss of the ROFR. So the parties now may be headed to court to duke it out, and the odds are heavily in favor of the seller here, but why? This could be for several reasons. For one, when asked to interpret the language in the condo associations bylaws or declarations, many jurisdictions are putting emphasis on the voluntary action that comes from a “sale” versus the forced action that results from a “foreclosure.” Also, by letting the foreclosure bidding process occur, the purchase price of the property is most likely going to be higher than it would have been in a hasty short sale situation, benefiting the mortgagee.
The preferable voluntary language triggering a ROFR will look something like, “should the homeowner wish to, elect to, or offer up their property for sale”. Notice that there is no exception drafted for the triggering of the ROFR should there be a forced sale, judicial foreclosure, auction etc. hence leaving the holder of the ROFR empty handed. Jurisdictions that strictly construe the language of these governing documents will find that the ROFR does not hold up in these instances. Should your condo association by laws or governing declarations have a ROFR drafted in them, check for this oversight or loop hole.
Any further questions, please feel free to contact Brooke Bryant at Bryant Law.