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Avoid Pitfalls of Selling Property

Avoid Pitfalls of Selling Property
Offering an Option to Purchase or Right of First Refusal can sweeten the deal.

By Tim Halbach

Sometimes, a landowner is selling only part of his land such as his building site, but the potential buyer is only interested in the building site if he has an opportunity to acquire some or all of the remainder of the landowner's farmland. Two ways that the landowner can "sweeten" the deal for the potential buyer is to grant the potential buyer either a Right of First Refusal or an Option to Purchase in some or all of the landowner's remaining land. 

A Right of First Refusal or an Option to Purchase can be complicated and should be properly drafted by a knowledgeable and experienced attorney.

Sweetening the deal
A Right of First Refusal is a legal right a landowner grants to a person which allows the person the opportunity to match the price and other terms that the landowner is willing to sell the property to a third party. The Right of First Refusal process generally proceeds as follows: The landowner gets an offer to purchase from someone, the offer to purchase states that it is subject to a right of first refusal. The landowner then gives a copy to the person who holds the right of first refusal who then usually has a specified period of time to decide if he'll buy it or not at usually the same terms and conditions as contained in the offer to purchase. 

Alternatively, in an Option to Purchase the landowner grants to a third party the right to buy his property at a certain price, terms and time.  For example, a common Option to Purchase might say, "Neighbor shall have the option to purchase my property at any time within six months following the date of my death at the purchase price as determined by an appraisal and such purchase price shall be paid in cash." If neighbor does not elect to exercise his rights under the Option to Purchase within the specified time frame, then he forfeits those rights." 

There are many different ways to draft a Right of First Refusal or an Option to Purchase, and they can be drafted to combine elements of both.  However, since land is involved, these rights must be in writing to be legally effective. It is also a good idea to be very detailed in the written documents so the parties are clear as to how they would proceed. 

One other essential legal requirement for either a Right of First Refusal or Option to Purchase is that third parties must be aware that it exists for it to be binding on them.  For example, Farmer grants a right of first refusal to Neighbor which is pursuant to a written agreement. Years later, Farmer forgets about the agreement and sells it to Third Party. If Third Party did not know about the prior Right of First Refusal, Third Party is then considered a "bona fide third party purchaser."  As a result, Third Party gets to keep the land, though Neighbor would still have a claim against Farmer for breaking the agreement.  However, had the original agreement been recorded at the register of deeds office in the county where the property is located, then Neighbor would have been protected regardless of whether Third Party knew about the Right of First Refusal or not. I see this often in a lease of farmland where a right of first refusal provision is in the lease but nothing is recorded at the register of deeds office.

Finally, it should be noted that it is also common for people to grant in their will or trust one or more of their children an Option to Purchase or a Right of First Refusal in their land. If an Option to Purchase or Right of First Refusal is contained in a will or trust, it typically works the same way as though it was in a separate document as explained above with one critical difference. Such provisions in a will or trust would only be binding in the event the person still owned the land at the time of death. Thus, such provisions would have no effect if the land was sold while the landowner was alive.

As with most legal documents, either a Right of First Refusal or an Option to Purchase can be complicated and should be properly drafted by a knowledgeable and experienced attorney. This is an area of law full of potential pitfalls. 

Halbach is a partner in Twohig, Rietbrock, Schneider and Halbach, S.C., a Chilton law firm that specializes in ag law. Call Halbach at 920-849-4999.

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