Option Contracts and Rights of First Refusal

July 5, 2023by Sarah Fisher0

By: Sarah Fisher and Andrew Capitelli

Two common contractual rights include option contracts and rights of first refusal. While option contracts and rights of first refusal may be found in many different areas of contract law, both are
frequently used regarding the transfer of immovable property, such as the buying and selling of tracts of land or buildings. Both option contracts and rights of first refusal are agreements used to facilitate a potential future transaction, and although they are similar, they create distinct legal rights that serve different purposes.

Option Contracts

An “option” is a contract whereby one party gives to another the right to accept an offer to sell or to buy a thing within a specified period of time. An option contract is preparatory, meaning it contemplates some underlying future, more definitive contract. However, because the option is itself a contract, it must contain certain requirements for the formation of a contract. Once the option is on the table, the party granting the option (the optionor) holds the option open to the receiving party (the optionee), giving the optionee the opportunity to accept during a stipulated period of time.

Right of First Refusal

A “right of first refusal”, when granted by one party (the grantor) to another (the grantee), obligates the grantor to give the grantee preference on a potential future transaction. Said another way, using sales as an example, the grantor agrees that he will not sell a certain item to another without first offering it to the grantee on the same terms and conditions. The grantee then becomes the holder of a right of first refusal.

The same can be true regarding a right of first refusal to buy something. Unlike an option, the right of first refusal does not give the holder of the right the power to compel an unwilling owner to sell. The offer associated with a right of first refusal must only be extended when, if ever, the owner decides to move forward with the transaction subject to the right of first refusal. Unless the parties agree otherwise, once the grantor extends the offer to sell a thing to the holder of a right of first refusal, the offer must be accepted within 10 days if the thing is movable, and within 30 days if the thing is immovable (i.e., real estate).

Other Time Limitations

While an option requires a stipulated period of time for its exercise, a right of first refusal does not. If immovable property is involved, however, neither can be granted for a term longer than 10 years. If a contract provides for an option or a right of first refusal lasting longer than 10 years, that time will be automatically reduced to 10 years.

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