The Distinction
The distinction between an Option to Purchase and a First Right of Refusal centres on who decides whether the property is to be sold. The person receiving the benefit of the right that is granted is known as the grantee and may receive the right as a tenant under the terms of a lease, or under a separate agreement.In this scenario, the tenant is the grantee of the right and also the prospective purchaser while the landlord is the grantor of the right and the prospective vendor.

• An option often contains specified pre-conditions. These conditions must be observed strictly. A failure on the part of a grantee/tenant to adhere to the conditions may result in the loss of the right. Grantees often get caught out where they fail to exercise the option within the specified time period. This leads to a loss of the option, and the grantee must then attempt to re-negotiate the purchase, possibly for a higher purchase price. The exercise date for any option should be diarised carefully.
• The terms of an option (including the terms of the sale contract of the property) must be certain. If there is uncertainty as to the terms upon which the property is offered for sale, the option may be unenforceable. For this reason it is recommended that a copy of the proposed contract of sale be attached to the option.

First Right of Refusal (pre-emption right)Under the terms of a First Right of Refusal, it is the grantor/landlord who will determine whether (and on what terms) the property is to be sold. There is no obligation on the grantor/landlord to sell the land and the grantee/tenant does not have the right to trigger the sale of the property. The grantee/tenant merely has the opportunity, in priority to others, to accept an offer to purchase the property on the terms specified, when and if the grantor/landlord decides to sell. Only when the grantee/tenant exercises their right to refuse to buy the property, or if the right is not validly exercised, can the grantor/landlord sell the property to others.
Examples of language creating a right of refusal include: the grantee/tenant has a first chance to purchase the property if the grantor/landlord decides to sell.
Important considerations of entering into an option agreement:

• It is common practice to require that, where the grantee/tenant does not accept the offer to purchase the property, a sale to another buyer must be on no less favourable terms than the offer made to the grantee/tenant.

A first right of refusal that does not specify the terms upon which the grantee/tenant of the right may purchase the property may be void for uncertainty.

Enforceability of the rightThe most important legal consequence of this distinction is that a first right of refusal does not create any interest in the land, whereas an option to purchase does.

A right of pre-emption can only be enforced through the contract (such as a lease or tenancy agreement) in which it is granted. A right of first refusal must specify the essential terms of the sale (such as price, pre-conditions of the exercise of the right, etc) and those terms must not be uncertain or vague, otherwise the entire right may be void and unenforceable.

In contrast, an option to purchase, giving an interest in the land, affords greater protection and enforceability for the grantee/tenant, as the grantee/tenant can not only enforce the option under the contract or agreement, but it also has a right to lodge a caveat on the property the subject of the option to protect their legal interest in the land.

In summary, it important for a grantor/landlord to understand the nature of the right they intend to grant to a tenant/prospective purchaser and to ensure that the terms upon which the option or the right may be exercised are sufficiently certain. For the grantee/tenant, it is important to ensure that all of the pre-conditions for exercise of the option or the right of pre-emption are satisfied, as well as the time limits for exercising them.

From the point of view of a tenant, an Option to Purchase is the preferred legal because it gives the tenant the ability to oblige the landlord to sell the property to the tenant and pending exercise of that right gives a caveatable interest in the property. From the point of view of a landlord, a First Right of Refusal is the preferred legal right to grant because it provides flexibility to the landlord in determining the timing and conditions of the sale.

This article is general in nature and is not intended to be legal advice. You should speak to your legal adviser before acting on the basis of any information contained in this article.Article provided by Elpis Korosidis from Cornwall Stodart Lawyers