How does the discovery of a right of first refusal affect a contract?

QUESTION: I’m in a real pickle. One of my listings is under contract, but I’ve just learned that my seller’s property is subject to a right of first refusal that he neglected to tell me about. I’ve heard about rights of first refusal but I don’t really know how they work. Is it going to affect the seller’s ability to perform the contract? Am I in trouble for not disclosing its existence? Will I still be owed my commission? And is the buyer agent entitled to a commission?

ANSWER: According to Webster’s Real Estate Law in North Carolina (Sixth Edition), a right of first refusal “is distinguishable from both an option to purchase and a contract for the sale of real property. By granting a right of first refusal, the seller is not bound to sell the property; rather, the owner promises that if he or she decides to sell at some future time, the promisee will receive the first chance to purchase or the opportunity to match bona fide offers to purchase from third parties. The promisee is not obligated to purchase the property.”

There are requirements for the creation of a right of first refusal that are beyond the scope of this article. If there are any questions about the validity of the right of first refusal or your client’s responsibilities, you should advise him to seek legal counsel. But assuming that a valid right of first refusal exists, that right is a material fact because if the person to whom the right of first refusal was granted (the “grantee”) exercises the right to purchase the property, it will affect the seller’s ability to complete the transaction. However, unless the seller told you about the right of first refusal, or unless you otherwise should have been aware of it, you shouldn’t get into any trouble for failing to disclose its existence to the buyer.

If the grantee exercises his or her right to purchase the property, the seller will be in breach of contract because he will be unable to complete the transaction with the buyer. But the grantee may decline to exercise his or her right; thus, it would be premature for the buyer to declare the seller in breach of contract at this point in time. The right of first refusal likely gives the grantee a specified number of days to exercise the right following notice from the seller that the property is under contract. The parties should consider extending the Settlement Date if necessary to take into account that period of time.

According to the terms of the Exclusive Right to Sell Listing Agreement (Form 101), your firm should be entitled to a commission on the sale of the property, whether the sale is to the contract buyer or to the grantee.  As for the buyer’s agent, assuming the property was listed in MLS, his or her firm likely would not have a claim to the cooperative compensation if the transaction doesn’t close according to MLS rules. However, the buyer agent’s firm may still have a claim to its commission based on either an “unjust enrichment” or the “third-party beneficiary” theory. For more information, see the Q&A entitled Is the MLS co-broker fee owed if the seller terminates the contract? available in the “Commissions” section of the Q&A archives on the NC REALTORS website, or by clicking here.

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Filed Under: Contract Law,