Good Fences Make Good Neighbors … So Do Clear and Concise Intentions: An Examination of Tools That Give a Party the Right to Control Property They No Longer Own

A selling party owned two adjacent oceanfront homes in a scenic community in Massachusetts. The sellers intended to continue to own and use one of the homes and planned to sell the other. Importantly, the two homes shared a private beach. To preserve the peace and quiet the sellers enjoyed on the shared private beach, the seller’s intended to find a buyer who was known to them and to condition the sale on the seller’s right to buy back the home should the buyer decide to ever sell the home. The sellers were fortunate enough to find a friend who was willing to purchase the home and agree to the Seller’s right to buy back the property via a side agreement that was not recorded at the applicable registry of deeds.

The seller’s intended to have a pure option to re-purchase the home. However, upon the matter being litigated in court, the court had a different view. The case raised the importance of clearly defining the parameters of any deal, whether it is a side deal or not. In doing so, the court distinguished between a few very important tools in a real estate practitioner’s tool belt when intended to preserve a party’s control over property it no longer owns.

The first such tool is what is referred to as an “option.” An option contract is a unilateral contract by which the owner of a property agrees with the holder of the option (in this scenario, the original seller) that the holder of the option has the right to buy the property according to the terms and conditions of the contract. The option itself can be exercised on the occurrence of a variety of conditions which can be negotiated to suit the needs of the holder in the option agreement. The option typically creates a unilateral right in the holder of the option to compel performance exclusively for his or her benefit. As such, it is of paramount importance that all essential terms in an option contract are definite and certain so that the intention of the parties is clear. Once an option is exercised by the option holder, it ripens into a bilateral purchase and sale agreement, after which the property owner has no choice but to sell the property to the holder.

Alternatively, a “right of first refusal” is typically a limitation on a property owner’s right to freely dispose of his or her property without first offering it to the holder of the right at the price offered by a third party. Rights of first refusal are not intended to bind the property owner unless and until he or she decides to sell the property. A right of first refusal differs from an option contract because, in a right of first refusal, the property owner controls the rights of the holder of the right of first refusal, and those rights don’t ripen until a third party makes a bona fide offer to purchase.

A third option is a “right of first offer” pursuant to which an owner of property must first offer to sell to the party holding the right of first offer. A right of first offer typically specifies the price and terms on which the seller is willing to sell, before offering the property to a third-party buyer. Case law distinguishes that where a right of first refusal requires a party to give the right of first refusal holder an opportunity to enter into a transaction on the same terms and conditions after negotiating with third parties, a right of first offer obligates a seller, before negotiating with third parties, to offer to sell the property to the holder of the right of first offer on specific terms.

A seasoned real estate professional will have access to a variety of tools to assist a party with navigating which options are the best options to start from, and which options are the most likely to blossom into a deal.