In today’s “move-up” housing market, many buyers commonly have to sell their existing home before they can purchase a new one. To protect themselves, buyers usually make the purchase of their new home contingent upon the sale of their current residence.
Sellers, however, are often hesitant about accepting an offer with such a contingency for fear it will take months for the buyers to sell their home, if it sells at all. For seller’s who have received a purchase offer on their home which is subject to the sale of the buyer’s current home, or for buyer’s considering submitting such an offer, a solution can be a “right of first refusal” clause or a “concurrency” clause, as it’s also called.
This right of first refusal clause permits the seller to continue to market the property and to seek other offers. In the event the seller receives another acceptable offer, the seller then must notify the original buyers that another offer has been received, and the buyers then have a certain period of time in which to remove the contingency for the sale of their home (or to show that such a contingency has been satisfied, or they now qualify for financing without the sale of the existing home). This period of time is typically set at 48 or 72 hours, but it may be shorter or longer. In some cases the clause may provide that the first contract is automatically terminated or “bumped” and the terms can and do vary.
In theory, a first right of refusal clause or “bump” clause can be an excellent tool for all parties involved. However, in practice the exercise of such a clause can turn into a legal nightmare for the seller, buyers, and their agents if the clause was poorly drafted or not followed properly. It is important to understand that there are no statutory provisions governing such contract clauses. Instead how such clauses are exercised is purely a matter of the exact language used in the contract. For this reason it is important to make sure that the clause is well written and that the procedures established in the clause are followed to avoid a dispute between the parties.
When dealing with a first right of refusal clause, Buyers and Sellers should pay particular attention to the following issues:
What type of offer/contract will trigger the clause? The right of refusal clause should specify what type of second offer will trigger the buyer’s obligation to remove or satisfy the contingency for the sale of their home. For example, will any offer acceptable to the seller be sufficient or will only a non-contingent, cash offer allow the seller to exercise this clause?
How will the buyers be notified that the clause is being triggered? The first right of refusal clause should set forth how the seller will notify the buyer that they have received another acceptable offer. Can it be done verbally, or must it be delivered in writing? If written notice is required, it is recommended that text messaging not be used. Instead, email or other written notice should be utilized.
What does the first buyer have to do? The contract should set forth what action the first buyers have to take to keep their contract alive after they are notified that the seller has received another acceptable offer. The clause should specify whether the first buyers have to demonstrate that they have a pending contract on their existing residence or can just remove the contingency on the sale of their home. Often times the clause requires that the first buyers provide proof of financing that is not contingent on the sale of their home and/or will proceed to close within a certain specified number of days. It is important that the buyer’s agent review this clause with their buyer so that buyer’s knows what steps they need to take.
When does the clock start to run? The clause should set forth how much time the first buyer has to remove or satisfy their contingency. Usually the time frame is based on a certain number of hours (24, 48, 72) but it could be stated as a number of days. If days are used make sure you note whether it is business or calendar days. Often issues arise as to when the clock starts to run. For example, if the listing agent emails notice to the buyer’s agent, does the 24 or 48 hours start when the email is sent, when the buyer’s agent opens the email or when the agent notifies the buyer? Time is crucial with these clauses and it is critical that the buyer understand the dead line they are under to keep their contract alive.
How will the buyer notify the sellers that they have satisfied/removed the contingency? The first right of refusal clause should indicate the manner in which the buyer must deliver notice to the sellers that they are removing or have satisfied the contingency. Is the buyer required to deliver the notice in writing or can it be done verbally? Is the buyer required to provide a letter from the lender verifying that their financing has been approved unconditionally? Because it is usually the buyer’s agent who delivers this notice it is imperative that they comply with the notice requirements in the contract and that they keep their eye on the clock.
When dealing with first right of refusal clauses it is important to understand that the language used creates the blueprint that the parties must follow and, as is often the case, the devil is usually in the details. As stated above, brokers should have such an addendum drafted by an attorney so that their agents aren’t placed in a position where they attempt to draft such language. Having a ready to use addendum prepared by an attorney, will not only help to assure that it is well written and addresses the above issues, but is also necessary to avoid the unauthorized practice of law.
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