Sellers Swapping Buyers

Right of First Refusal— Kick Out Clauses

You’ve just received an otherwise desirable offer on one of your listings. Unfortunately, it is not clear whether Buyer will be able to qualify for the loan. Your Seller is inclined to accept the offer, but wants to preserve the flexibility of replacing this Buyer with another one, if a better offer comes along. You suggest putting which of the following language in your counterproposal?

  1. “Buyers understand and agree that subject home shall continue to be marketed for sale, and in the event another acceptable contract to the Sellers is received, then the Buyers shall have 24 hours in which to exercise their first right of refusal.”
  2. “This shall become a valid contract only upon Buyer being approved for the loan specified in the contract. Buyer understands that Seller shall continue to market said property and is under no obligation to Buyer until the above contingency has been satisfied.”
  3. “Upon Seller, or Seller’s agent providing to Buyer written notice of Seller’s receipt of a backup offer, Buyer shall have 24 hours in which to make its earnest money non-refundable; otherwise, this contract shall terminate.”
  4. “Upon Seller’s execution of its rights of first refusal, Buyer shall have 48 hours in which to close this contract; otherwise, it shall be void.”

In an active real estate market, many agents respond to the facts presented in the above question with counterproposals containing a “right of first refusal.” These provisions must be drafted carefully. When such rights are exercised, tempers and emotions flare.

It is important to understand that these provisions are not “first right of refusals.” A first right of refusal would create a right for the first buyer to meet or beat a bona fide offer on a property. (For example, a homeowners association might hold the first right of refusal to match offers on units within the subdivision.) It would be more accurate to label these clauses “kick out” or “fish or cut bait” clauses. (Other names, unprintable in these materials, may come to mind.) For purposes of these materials, we will refer to such clauses as “kick out” clauses.

Once we think of these as kick out clauses, it forces us to address the two key issues: (1) What must the seller do to invoke his kick out rights versus the first buyer? That is, what must the seller do to get the clock ticking against the first buyer? (2) What does the first buyer need to do to avoid being kicked out? Does the first buyer need to waive the contingency for the sale of that buyer’s home? Does the first buyer need to waive the financing contingency, or perhaps all of the buyer contingencies?

Instead of being disputes amongst two parties (Seller and Buyer), there are often disputes involving at least three parties (Seller and two Buyers). There may also be two brokers working with the separate buyers who have a co-op commission at stake in the outcome of the dispute. Tempers and emotions flare, especially in Buyers who have missed out on other properties.

There are problems with all of the answers above. The first three have too much ambiguity (The nature of the ambiguity is beyond the scope of this article). The last clause is not clear and is impractical. As markets improve, these situations will arise more frequently. Brokers should work with their attorneys to develop kick out clauses which are practical and clear.

Jon Goodman is a shareholder with Frascona, Joiner, Goodman and Greenstein, P.C., a Colorado law firm. His practice areas include Real Estate,Brokerage Law, Contracts, Land Use, Leasing, Real Estate Title, Association Law, Business Law, and Finance. Contact Jon Goodman.

Disclaimer — Content is general information only. Information is not provided as advice for a specific matter, nor does its publication create an attorney-client relationship. Laws vary from one state to another. For legal advice on a specific matter, consult an attorney.

JONATHAN A. GOODMAN