National Real Estate Exam (PSI)ContractsMedium
A landlord gives a tenant a right of first refusal on an adjacent parcel the landlord owns. What must occur before the tenant can exercise this right?
- AThe landlord must first receive a bona fide offer from a third party to purchase the parcel
- BThe right automatically converts into an option contract after one year
- CThe tenant must exercise the right within 30 days of lease signing regardless of any sale
- DThe tenant must pay option consideration immediately upon signing the lease
Show answer & explanationAnswer & explanation
Correct answer: A. The landlord must first receive a bona fide offer from a third party to purchase the parcel
A right of first refusal only becomes exercisable when the owner receives and is willing to accept a bona fide third-party offer; unlike an option, it does not give an unconditional right to purchase at any time.
Why the other options are wrong
- B. There is no automatic conversion to an option contract; the two are distinct instruments.
- C. The right isn't time-limited to lease signing; it applies whenever a bona fide offer arises.
- D. Right of first refusal typically requires no separate option consideration to be triggered.
Right of First Refusal
A contractual right giving a party the first opportunity to purchase or lease a property under the same terms offered by a third party, triggered only when the owner receives a bona fide offer.
- Different from an option, which allows purchase at any time within the option period
- Owner is not obligated to sell, but must offer to the right holder first if they do
- Common in leases granting tenants future purchase priority
Memory trick: First refusal waits for an offer; an option can strike anytime.