May 21, 2018 – Do you understand the difference between the Right of First Refusal and Kick Out Clause? What do they mean and when might you encounter them?
Legal Hotline calls suggest that there’s some confusion over what these terms mean, and they’re often used interchangeably. Some calls start with: “I’m looking for a Right of First Refusal rider.” Usually, however, this member is actually looking for the Kick Out Clause rider but confused over terminology.
What is a Right of First Refusal? How does that differ from the Kick Out Clause rider?
Right of First Refusal: In general, a Right of First Refusal is an interest granted to a person or entity to purchase property before another third-party can do so. A commonly seen example is a property association’s right of first refusal. Normally reserved within the community’s documents, this right allows the property association to purchase a property before another buyer can.
In this case, the contract between the seller and the buyer is usually given to the association for review within a certain timeframe (i.e. 10 days) to give the association time to decide whether or not to exercise that right. If the association chooses to do so, it then “stands in the shoes” of the buyer in the contract, meaning that the terms of the contract remain the same, pending renegotiation, and the association can’t make the seller change a term, such as the purchase price.
Another common scenario that might have a Right of First Refusal is in a landlord/tenant relationship. Some tenants might incorporate a Right of First Refusal into their leases, stating that they have the right to buy the home before another buyer does, should the landlord want to sell that property one day. The Florida Supreme Court-approved leases don’t contain any such language, so tenants that may want a right of first refusal in this context should consult their own attorney for the appropriate language to add to their lease.
Kick Out Clause: The language in kick-out clauses could vary depending on the contract used, but in the Florida Realtors/Florida Bar Residential Contracts for Sale and Purchase (FR/Bar), the Kick Out Clause language is in a rider.
Adding Rider X to the Florida Realtors/Florida Bar contracts clarifies that the seller can continue to show the property and enter into bona fide back-up contracts. Any back-up contract with a third-party is, of course, subject to termination of the primary contract.
Upon entering into a back-up contract, the seller must share a copy of said contract with the primary contract buyer, though with certain information, like the price, redacted.
This puts the ball in the buyer’s court, and the buyer must make a decision: either place an additional deposit down with the designated escrow agent and, in doing so, waive contingencies for financing and sale of buyer’s property (if any) or don’t place the additional deposit in the timeframe required, thereby terminating the contract. In the case of termination, the buyer would receive any initial deposit back and both parties are released from further obligations under the contract.
Once terminated, the seller then notifies the back-up contract buyer that that contract is in primary position.
When might a seller want to use this type of rider? A common use is when the buyer’s offer contains a contingency for the sale of a property the buyer currently owns. A seller may want to counter the buyer’s offer with this rider added in order to retain the ability to go with an entirely different contract with a subsequent buyer should they choose to do so.
In sum, a Right of First Refusal is granted to a party via a separate legal document (i.e. a declaration of association or a lease) to purchase property before another third-party. On the other hand, a Kick Out Clause rider to the Florida Realtors/Florida Bar contract gives the seller the potential opportunity to proceed with a back-up contract.
Still have questions? As always, feel free to contact the Florida Realtors Legal Hotlineat 407-438-1409.
Meredith Caruso is Manager of Member Legal Communications for Florida Realtors
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