Beware of the ‘ROFR’
Right of First Refusal
What is a “ROFR”? The acronym stands for “Right of First Refusal.” It is an option to purchase real property exercisable by the holder of the ROFR upon an offer to purchase a property made to a Seller by a third party that Seller is willing to accept. People often confuse a ROFR with an Option. Unlike an “Option” to purchase real property, a ROFR is weak because it is only triggered in the event a third party would like to purchase the property versus an Option which is exercisable in the Option holder’s discretion, and further because it involves three contractual parties versus two. Unfortunately, ROFR’s hold more questions than answers based on Colorado case law.
We find that many Vail Valley properties are subject to a ROFR. For example, a lease, a party wall agreement or covenants for a common interest community may contain a ROFR. Sellers must beware of the ROFR prior to listing a property for sale (with or without a broker) and Buyers must beware of the ROFR prior to making an offer to purchase a property if for no other reason than the purchase may not happen because the holder of the right may preempt the purchase by Buyer.
Colorado Courts have held that the ROFR must be exercised subject to the same terms and conditions as the triggering offer. What does this mean? From a practical standpoint, by the time the holder elects to exercise the ROFR, due diligence deadlines may have already passed. Has the holder then waived these deadlines? While there is not much ROFR case law in Colorado on these issues, Eagle County Courts have held that notice provisions must be strictly adhered to and read in strict conformance with the ROFR clause.
Tricks of the trade have evolved in dealing with ROFR’s. A buyer may insert the inclusion of certain terms or conditions that are unable to be met by the ROFR holder. One example is the inclusion of storage or parking units as part consideration for the purchase price. If the holder offers to compensate seller for the value of the storage or parking units in lieu of the actual storage or parking units, is this equivocal terms and conditions of the triggering offer? These types of impossible contingencies are meant to avoid exercise of the ROFR. Further, a buyer may propose an inflated value of seller’s property in the hopes of avoiding exercise by the ROFR holder.
The foregoing examples of buyer circumvention tactics do not apply to the seller. Stated otherwise, the seller does not ultimately care who purchases the property in most instances so long as the price and other material terms and conditions do not change. However, there is one area of the transaction that absolutely impacts seller and that is if the buyer is represented by a real estate broker. If the buyer (sometimes referred to as the triggering offeror) is represented by a selling broker, Colorado Courts have found that the selling broker is not entitled to a real estate commission on the sale if the ROFR is exercised by the holder. Once the holder exercises the ROFR, the original buyer is essentially kicked out of the process and the seller is obligated to sell the property to the ROFR holder. This proves interesting since “but for” the buyer’s triggering offer, the ROFR would not have come into play and the sale would not be made. As previously mentioned, Colorado Courts have held that seller is not responsible for any commission due a selling broker despite selling broker’s procuring the original buyer who was “ready, willing and able” to buy the property. Fallenius v. Walker, 787 P.2d 203 (Colo. App. 1989).
In sum, beware the ROFR. Ideally, analysis occurs prior to entering into any purchase and sale agreement. There may be exemptions or other unique aspects of a ROFR clause that require evaluation. Structuring an offer to purchase where there is a ROFR or if you are going to exercise a ROFR may require the assistance of an attorney.
We have several experienced real estate attorneys ready to assist.