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Options & Rights of First Refusal

Option to Purchase

An option is a privilege or right that the owner of property (the "optionor") gives to another person (the "optionee") to buy certain property at a fixed price within a certain period.

The option is a mere offer that binds the optionor to sell, but does not obligate the optionee to do anything. Because the optionee is not bound until the option is exercised, the granting of an option constitutes neither a sale of the property nor an agreement to sell. However, during the option term the optionor usually cannot revoke or withdraw the option without the optionee's consent.

Right of First Refusal

A right of first refusal obligates the property owner to offer the property to the holder upon the same terms as the owner proposes to sell to a third party. A right of first refusal gives the owner more control over the transaction than an option because the holder cannot force the sale at will. Rather, the holder must wait until the owner decides to sell the property.

A right of first refusal becomes an option once the owner decides to sell the property, because the holder is still not obligated to exercise the right. If the holder rejects the right, the owner is free to sell to the third party upon the terms offered to the holder. Otherwise, the owner must sell to the holder on those terms.

Legal Requirements

To be enforceable, options and rights of first refusal must usually be in writing, signed, contain an adequate description of the property, and be supported by consideration. They may be included in lease contracts, or they may be drafted as standalone agreements.

Acceptance of an option or a right of first refusal must be unqualified, unambiguous, and in strict accordance with the terms of the offer, and any other act will be treated as a rejection of the offer. So, if the agreement states that it may only be accepted by delivering a yellow balloon to the owner at midnight on the third Sunday in March of an even-numbered year, the act of sending a letter by certified mail will not be effective. However, conditions that are imposed in bad faith or for the specific purpose of defeating the holder's rights will not be enforced.

Closing Thoughts

Options and rights of first refusal are important legal documents and a frequent source of litigation. Clear and careful drafting by an experienced attorney will help to ensure that such agreements are enforceable and reduce the risk of future disputes. If you need help from a Texas real estate lawyer, please contact us.

Roberts & Roberts, LLP