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Contracts: Options & Rights of First Refusal

Often times the more complex an agreement or business transaction becomes the more technical the legal language becomes. Among other things, options and rights of first refusal are often utilized in more sophisticated transactions and can cause confuse in litigation. 

Strictly speaking, an option “creates in the [option holder] a power to compel the owner of property to sell it at a stipulated price whether or not he is willing to part with ownership.” Hensley-O’Neal v. Metro. Nat’l Bank, 297 S.W.3d 610, 614 (Mo. Ct. App. 2009). It is a powerful tool and there is almost always separate contractual consideration/benefit given just for the existence of an option. 

A similar but distinct concept is a right of first refusal. It is sometimes referred to as a preemptive right, but it requires a seller — when and if he/she decides to sell the stipulated item/property, to first offer it to the holder of the right, either at the stipulated price or at a price and on terms the seller is willing to sell. Jewish Ctr. for Aged v. BSPM Trustees, Inc., 295 S.W.3d 513, 519 (Mo. Ct. App. 2009). It is a contingency in that it is not activated until the owner arrives at a decision to sell the property. McNabb v. Barrett, 257 S.W.3d 166, 170 (Mo. Ct. App. 2008). The person/entity holding the right of first refusal cannot compel an unwilling seller to sell. 

Options and rights of first refusal can be used in many different contexts, but are often implemented with real estate transactions. A holder of real estate may grant an option to another person for a price, which gives the option-holder the ability to compel a sale. Alternatively, they may grant a right of first refusal to a third-party so that when the decision to sell does come the third-party has a crack at the property first. Breach of contract litigation involving these types of clauses can be complex because minor language can have a major impact in court.

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