Q:       What is a “right of first refusal”?

            A:        A right of first refusal is a right to match an offer to purchase property. Let’s say that you put your home up for sale, knowing that your neighbor, Sally, might be interested in buying it. You might choose to give Sally the right to match any purchase offer you may receive for your home.

Q:       How does a “right of first refusal” work?

A:        Let’s say you decide you want to sell your home to your friend, John, for $200,000 under certain conditions. However, since you gave your neighbor Sally a right of first refusal to purchase the home, you must first offer it to Sally under the same terms as those you offered to John before you can sell it to John. If Sally exercises her right of first refusal and follows through with the purchase, John will not be able to buy your home.

Q:       When I draft a right of first refusal, what issues should I cover?
A:        You should address these issues: 

·       Cleary identify what real estate is subject to the right of first refusal.  Suppose you give Sally a right of first refusal for your home as well as the lot next to it. The right of first refusal agreement should address what will happen if, for example, a potential purchaser, such as John, wants to buy only the home and not the next-door lot, and what the price will be.

·       Non-cash offer.  A right of first refusal should address what will happen if, for example, a potential purchaser wants to exchange his home for yours. In this case, Sally, who holds a right of first refusal, cannot match such an offer. The right of first refusal should say exactly how much Sally must pay in cash to match a non-cash offer.

·       Timing.  It is important to carefully draft provisions about when rights of first refusal can be exercised. For example, you should notify Sally within a certain number of days after you receive another offer, and Sally should have an opportunity to exercise her right within a certain number of days. You should also make it clear how Sally will be notified (such as by mail or in person). You should also specify the date of closing, or require Sally to close on whatever date a potential buyer might specify in an offer. The right of first refusal also should have a termination date. After that date, Sally would no longer have the right of first refusal.

Q:       Is a right of first refusal transferable?

            A:        Unless you’ve said, in writing, that Sally cannot transfer her right, then Sally may transfer it to a third party. So, as the property owner, you should state specifically that the right is personal only to Sally, or that Sally can transfer the right of first refusal to a third person. A right of first refusal also should be drafted so that it is binding upon entities or trusts that you own or have an interest in. For example, it could state that, if you transfer your property to a company you own and that company receives an offer to purchase, Sally may still exercise the right of first refusal. You should also state what happens upon your death, as an owner. For example, it may state that the right of first refusal will terminate when you die. Otherwise, the right of first refusal may continue to apply to whoever inherits the home.

Q:       What happens if Sally declines to exercise her right of first refusal?

            A:        Some rights of first refusal provide, for example, that if Sally accepts the right but is unable to complete the transaction, she will no longer have the right in the future. Others provide that the right continues if the property is sold to another party. If the right of first refusal document says nothing about this issue, then there may be differences of interpretation.

Q:       What if either Sally or I change the terms of the purchase?

            A:        Typically, slight variations to the offer by you, as owner, and Sally, who exercises her right of first refusal, are acceptable. In general, you and Sally may not “materially vary” from the terms of the original offer. Obviously, the meaning of “materially vary” may be disputed.

            A carefully drafted right of first refusal addresses most of the issues listed above. However, many rights of first refusal are not complete and specific. Even a well-drafted right of first refusal is subject to dispute, as are most agreements that anticipate future matters.

This "Law You Can Use" column was provided by the Ohio State Bar Association. It was prepared by Avon attorney Marsha L. Collett of Wickens, Herzer, Panza, Cook & Batista Co. Articles appearing in this column are intended to provide broad, general information about the law. Before applying this information to a specific legal problem, readers are urged to seek advice from an attorney.

Q:       What are liens and encumbrances? Are they different?

A:        An encumbrance is a claim, liability, or other right that is attached to real property and may lessen its value. A lien is simply a type of encumbrance that can be satisfied with the payment of money. 

A good example of a lien is a mortgage lien. As long as you have a mortgage, the mortgage lender has a lien against your property. If you don’t pay your mortgage on time, the lender can foreclose on your property. However, once you pay your lender all the money you owe under the mortgage, the mortgage is satisfied and no longer affects title to your real property. Another type of lien that may affect your property is a mechanic’s lien. If, for example, you own a home and hired a contractor to do work, but failed to pay for it, the contractor may put a mechanic’s lien on your property which, for practical purposes, will force you to pay for the work before you can sell or refinance your home.  

There are other types of encumbrances that are not liens because they cannot be satisfied by paying money and generally stick with the property for a number of years, or even perpetually. The most common example of such an encumbrance is an easement. Utility companies generally will have perpetual easements along the front, side, or rear of your real property so they can install and maintain various utilities to service the neighborhood. Also, if you have leased your property, the lease constitutes an encumbrance that will last for the number of years stated in the lease.
 

Q:       What are the most common types of liens and encumbrances affecting residential real estate?

A:        All residential real estate is subject to a real estate tax, the most common type of lien. A mortgage is also a very common lien, since most homeowners buy their homes through mortgage financing. Utility easements are very common encumbrances. Finally, homes located within a planned development are usually subject to another common encumbrance, which is a declaration or other document that includes the restrictions, rules and regulations governing the use of the real estate.

Q:       What should I know about liens and encumbrances before signing on the dotted line?

A:         You should review and understand the specific liens and encumbrances which will affect title to your real property. This is especially true if your property is subject to a declaration or other rules and regulations of a homeowners’ association. You need to know, for example, if there are restrictions on how many pets you can have and how big the pets can be, or if you are allowed to put in a fence and what type of fence it can be, and whether or not you can paint your house a certain color or put a shed in the backyard. All of these matters are usually addressed in the declaration and affect the way you can use your home. It’s best to know what the issues are before buying a home. 

Q:       When I buy a home, how can I protect myself against liens and encumbrances that may my hurt my home’s value?  

A:         You should obtain title insurance. In Ohio, the seller usually pays for this. The title insurance commitment shows you what liens and encumbrances will affect title to the real property after closing, and lets you know if, for example, the property is subject to a mechanic’s lien that the seller should pay before closing. 

Q:       I recently put a chain link fence around my property, and my homeowners’ association said that this type of fence is not allowed and must be taken down. The declaration does say that I cannot install a chain link fence, but do I have to abide by this rule, and is there any way to change it?  

A:        Unless the rule is arbitrary, discriminatory or against public policy, you must abide by all of the declaration’s rules and regulations. If the rules do not specifically address declaration amendments, it may be possible to change the terms of a declaration, but only if a large percentage (at least 75 percent) of homeowners in the development approve the change. Because it is usually very difficult to get such approval, it is especially important for you to review the governing declarations before you buy the home.

This “Law You Can Use” consumer legal information column was provided by the Ohio State Bar Association. It was prepared by Columbus attorney Ryan P. Aiello of Dinsmore & Shohl LLP. Articles appearing in this column are intended to provide broad, general information about the law. Before applying this information to a specific legal problem, readers are urged to seek advice from an attorney.