What kind of lease clause do I use to give a tenant the right of first refusal if I decide to sell my rental home?
Usually such a lease clause needs to be customized to the specific property and the specific tenant. Writing such a lease clause requires certain knowledge of law and real estate matters to ensure the clause is unambiguous, adequately states the intent of the parties, and is legally binding. An inadequately written clause could create unwanted potential problems. You may want to consult with a knowledgeable attorney regarding a number of issues before drafting a right of first refusal document.
Giving anyone a right of first refusal potentially creates problems for the seller. The fact that there is such a right usually requires disclosure of that fact to potential buyers, or their agents. In normal market conditions, depending on terms of the clause, this may well result in a limited pool of potential buyers. This is because either the buyers or their agents will prefer to go on to other available properties rather than waste time since the tenant can easily win the purchase by simply matching the buyer’s offer. There could be problems if the tenant disclosed certain property issues to potential buyers in order to discourage the buyer.
If the terms of the clause allow the tenant to buy the property by simply matching the first offer, even if not acceptable to the landlord-seller, then the seller has lost the ability to make a counter offer to the potential outside buyer. If the terms protect against this by allowing bidding, the potential buyer may walk away after his initial offer.
The clause usually requires customization for specific tenants because the tenant must approve of the clause if he/she is to sign the lease agreement. Accordingly, the terms are potentially negotiable unless the landlord is willing to turn away any potential tenants who are aware of potential problems and try to negotiate the clause, therefore reducing the pool of applicants.
The terms of a right of first refusal clause/document can vary according to law, location, and customary practices. There may be contingencies and/or exceptions based upon the type of purchase offer such as a cash sale. Any obligations, limitations, or deadlines must be thoroughly understood before the document/clause is executed.
The owner/landlord has the right to offer his property for sale to any tenant and any tenant has the right to make an unsolicited offer to purchase the property without having a right of refusal – either before or after another offer has been made.