The terms right of first refusal and right to buy are often used interchangeably to refer to a right to acquire a property, but they are actually two very different rights. Whether you are the obligor (the owner of the property) or the beneficiary (the one who gets the right), it is important to understand the distinction between the terms.
Right of first refusal
A right of first refusal is based on an agreement where the owner of a property is obliged to offer the grantee a preferential right to acquire the property if the owner wishes to sell their property.
A right of first refusal is therefore characterized by the fact that only the owner of the property can actualize it, and especially in this respect a right of first refusal is different from a purchase right.
In which cases does the right of first refusal come into play?
The parties' agreement is decisive, but if this is unclear or in the absence of agreement, some additional rules apply:
- If an agreement is made between the owner of the property and a third party on the transfer of the property, this actualizes the right of first refusal so that the entitled party gets the right to acquire the property before the third party.
- Forced sale, including by foreclosure, also gives rise to a right of first refusal.
- If the owner of the property makes a gift disposition, i.e. if the obligated party transfers the property to a third party as a gift, this will generally not update the right of first refusal (unless there is evidence to the contrary in the parties' agreement on the right of first refusal).
- If the owner of the property dies and the property is transferred to the heirs, this does not update the right of first refusal (unless there is evidence to the contrary in the parties' agreement on the right of first refusal)
If the right of first refusal is actualized and the entitled party wishes to acquire the property, the starting point is that the property must be transferred to the entitled party on identical terms as the owner of the property has accepted in the purchase agreement with a third party. This starting point may, of course, be deviated from in the specific agreement on the right of first refusal.
Right to buy
A right to buy is based on an agreement where the owner of the property undertakes to sell the property upon demand from the entitled party. Therefore, unlike the right of first refusal, it is the entitled party who can actualize the right.
A right to buy is often formulated as a right to buy a property on demand within an agreed deadline. A right to buy thus constitutes an obligation for the owner of the property to sell the property upon demand from the entitled party.
As a purchase right is not triggered by a sale of the property to a third party, a purchase right agreement must contain all relevant terms regarding the transfer of the property, including the deadline for exercising the purchase right, the amount of the purchase price, takeover date, division of responsibilities, etc.
Registration of rights
If the entitled party wishes to secure their rights, this can be done by registration, cf. section 1(1) of the Registration Act.
If there is no registration, the right is not protected against extinction, i.e. prosecuting creditors or a third party in good faith who has entered into a purchase agreement with the owner of the property will be able to displace the entitled party's right of first refusal or purchase right, cf. section 1(2) and section 5 of the Registration Act.
However, as a rights holder, you must be particularly aware that a right of first refusal and a purchase right are not in themselves a right over a real property in the sense of the Land Registration Act, as they are only a private law agreement between the obligated party and the entitled party. Therefore, if the right of first refusal or purchase is to be secured by registration, it must necessarily be formulated in such a way that the right can be asserted against the owner of the property at any time.
If you have any questions about purchase and pre-emption rights or purchase agreements/real estate in general, you are always welcome to contact CLEMENS real estate experts.
