Paul Migchelbrink

Understanding Rights of First Refusal

 

A right of first refusal (ROFR) is an agreement between a party interested in purchasing a piece of real property that is not currently for sale and the owner who may be willing to sell in the future but does not currently have the property on the market.  

A ROFR requires the property owner to notify the holder of any offer to purchase the property and provide the holder with the opportunity to purchase the property on the same terms and conditions as the offer.  The holder may be a tenant under a commercial lease, and adjacent land owner, or an investor interested in developing the property if it ever becomes available.

While a ROFR can provide benefits to both parties involved, it primarily benefits the holder.  As a rule, third party bidders tend to be less willing to make an offer to purchase if they know it is subject to being matched by the holder of a ROFR.  As a result, the existence of a ROFR will generally have a downward impact on the price.  Further, because the holder merely has to match the best offer received by the owner, the holder can see how others value the property and react without the risk of being pulled into a bidding war.

A ROFR should not be confused with the related concept of a "right of first offer."  A right of first offer merely requires the owner to notify the holder before offering the property for sale to third parties.  This gives the holder the right to make an offer to purchase but the owner is free to accept or reject the offer and to entertain offers from others.  An interim first right would be a "right of first negotiation" which gives the holder the exclusive right within a specified time to negotiate a purchase before the owner is entitled to offer the property to anyone else.

The event that will trigger the ROFR is the owner's receipt of third-party offer to purchase the property.  The offer may take the form of a term sheet or a fully negotiated contract.  If the offer is in the form of a term sheet that outlines only the basic terms of offer, the remaining details of the transaction will need to be negotiated.  That may give the holder an opportunity to negotiate additional and more favorable terms.  An offer in the form of a fully negotiated sales contract will limit the holder to accepting the deal on those specifically negotiated terms. 

The holder of the ROFR will want to be sure that any third party offer presented by the owner is bona fide.  At a minimum, the seller should be obligated to provide the holder with written proof of any offer, including the offering party's name.  This will help to satisfy the holder that the seller has an actual buyer and is not just using the ROFR to prompt a sale at an inflated price.  To further ensure that the third party offer is bona fide, the ROFR agreement may provide that offers from an entity in which the seller has a direct or indirect interest will not trigger the ROFR. 

The ROFR should clearly provide the time period the holder has to exercise the ROFR.  The owner will want to limit the time for the holder to respond, since delays may affect the owner's transaction and negotiations with the third party.  The holder on the other hand, will generally want to have as long a period as possible to evaluate the offer and make a decision. 

Depending on the nature of the property and the deal, the holder may need time to seek third-party financing, conduct surveys and complete environmental assessments of the property before having to accept or reject the option.  If time remains an issue, an alternative means of protecting the holder would be a requirement that any special knowledge acquired or held by the third party seeking to purchase the property, such as surveys, environmental assessments and inspections, be shared with the holder.  

As a rule, neither the holder nor the owner may vary the terms of the purchase agreement from the terms of the third party offer.  Unless the holder has reserved rights for itself in the ROFR agreement, it must be prepared to match all of the material terms of the offer, including price, financing, and the time for closing.  In a similar vein, the ROFR agreement should provide that if holder does not exercise its right to purchase, the owner must close the sale on the terms specified in the original offer (and not more favorable terms).  If any such changes are made, the offer must be resubmitted to the holder.  Likewise, the ROFR agreement should provide that if the sale to the third party does not close, the ROFR will be reinstated and must be honored if any future offers come in.

A ROFR will not be enforceable against a third party buyer who pays valuable consideration for the property and has no actual or constructive knowledge of the ROFR.  Therefore, the holder of the ROFR will want the agreement to be recorded in the county where the property is located in order to provide constructive notice to third parties and avoid bona fide purchaser issues. 

The 2013 Oregon Legislative session ended on July 8th - and it was prolific. As of the date of this newsletter, Gov. Kitzhaber has signed 571 bills into law and is still reviewing others. Many laws (some very quirky) were introduced that touch on real property issues - from bed bug disclosures to a rewrite of large aspects of the foreclosure statutes. Here is a peek at a few of the bills concerning real property that will become Oregon law.

Neglecting Foreclosed Residential Properties is Now Against the Law

Beginning on its June 6th passage, HB 2662 prohibits an owner that foreclosed on the property from neglecting it. In addition, the owner must provide the owner's name and telephone number to the neighborhood association or an official that the local government designates, and must post a notice in a conspicuous location on the foreclosed property that lists a telephone number.

The new law defines "neglect" as failing to maintain or monitor and inspect the property at least every 30 days to prevent or remedy the following conditions:

(i)   Excessive growth of foliage that diminishes the value of adjacent property;

(ii)  Trespassers or squatters that remain on the property;

(iii)  Mosquito larvae or pupae that grow in standing water on the property; or

(iv)  Other conditions that contribute to causing a public nuisance.

If the local government finds the property is being neglected, it must provide 30 days' notice to the owner to remedy the violation. In addition, if the specific condition of the foreclosed residential real property constitutes a threat to public health or safety, the local government may require an owner to remedy the specific condition. If the owner fails to remedy the neglect, the local government may remedy or contract with another person to remedy the neglect and require the owner to reimburse the local government for reasonable costs incurred. These costs will become a super-priority lien on the property when the local government files a claim of lien with the county clerk, allowing the local government to foreclose the lien.

Residential Real Estate Lenders Will Have to Pay Interest on Tax and Insurance Impound Accounts Beginning January 1, 2014

Many residential real estate lenders require borrowers to make periodic estimated insurance and tax payments into an escrow account to ensure that insurance premiums and property taxes are timely paid. Since 1975, Oregon law has required lenders to pay to borrowers interest on those accounts when the loan was in the amount of $100,000 or less and was secured by residential real property occupied by the borrower.

The Legislature passed HB 2528 which removes the $100,000 cap on loans that are subject to the requirement to pay interest. Beginning January 1, 2014, all loans secured by residential real property occupied by the borrower which require these estimated payments will be subject to the interest payment requirement.

Additional Costs for Doing Work Without a Permit

There are many perils to doing construction work or having it done on your property without proper permits. The Oregon legislature has now given two new enforcement tools to the Oregon Department of Consumer and Business Services ("DCBS") that administers the building codes, and local municipalities that administer and enforce a building inspection program.

Beginning January 1, 2014, these entities can assess an investigation fee against a person who is required to obtain a permit for work on the electrical, gas, mechanical, elevator, boiler, plumbing or other systems of a building or structure if the work is commenced before the required permit is obtained.

The fee is the average or actual additional cost of ensuring that a building, structure or system is in conformance with state building code requirements that results from the person not obtaining a required permit before work commences. This fee will not apply in the case of an emergency repair if the building permit for the repair is obtained no later than five business days after commencement of the repair, or if a law authorized the work to be commenced prior to obtaining a permit. In addition, if DCBS has reason to believe that a person has engaged in, or is engaging in, or is about to engage in any violation of the state building codes, or codes related to manufactured structures, or the fire code, or other related laws or rules, DCBS can sue to stop the violation.

If the Bedbugs Bite, You Can Keep it Secret

Did you know that a bedbug is a "member of the Cimicidae family of parasitic insects"? This is the way HB 2131 defines a "bedbug," and if you own a property that has an infestation, you can now rest assured that a newspaper or other organization cannot find out about it by doing a public records request to a local public health authority or district, or the Oregon Health Authority.

Commencing on April 2, 2013, the Oregon legislature required public health authorities to maintain the following information reported by pest control operators confidential, and prohibited this information from being disclosed under Oregon's public disclosure request laws:

• The location of a site where a pesticide intended to prevent, destroy, repel or mitigate an infestation of bedbugs has been applied or is to be applied;
• The identity of any person who owns, rents or leases property described above; and
• Any information describing or pertaining to the infestation or suspected infestation.

Although this law now protects properties from being disparaged publicly, a seller of a property that has had an infestation should speak with the seller's attorney about the potential legal ramifications of not disclosing this fact in a sale transaction.

Legislature Makes it Easier for Locksmiths and Home Inspectors to Get CCB Licenses

Oregon law has required individuals performing home inspections and locksmith services to be certified by the Construction Contractors Board ("CCB"). In addition, those individuals have to work for a business licensed as a contractor by the CCB. Generally, licensed contractors are required to take tests measuring knowledge regarding business practices and law affecting construction contractors.

With SB 207, the Legislature made it easier for home inspectors and locksmiths to become licensed contractors with the CCB. Beginning January 1, 2014, this law will create a residential locksmith services contractor license and home inspector services contractor license, prohibiting the CCB from requiring the contractor to take a test. It does not, however, exempt home inspectors and locksmiths from education requirements for certification.

The licensed business that has the contractor license has to have a responsible managing individual who is certified as a locksmith under ORS 701.485, or a home inspector under ORS 701.350. Each of these businesses must obtain a bond and have general liability insurance.

Among other changes, the new law also creates a "home services contractor license" authorizing the business to provide service, repair or replacement for homes through a licensed contractor under a "home service agreement." A "home service agreement" is a contract to service, repair or replace the mechanical or appliance system or the components that break down due to normal wear and tear or inherent defects in a home, or to provide incidental service, repair or replacement to cover leaks and failures in roofing systems in a home. These are generally done in connection with home insurance contractors.

The above summaries represent only a few of the new laws affecting real estate. We tried to select interesting legislation that would appeal to our broad range of clients. We will continue to send detailed alerts, separate from this newsletter, regarding foreclosure legislative updates. If you are not currently receiving our foreclosure alerts and would like to, please email Karey Robinson.