Right Of First Refusal: Is It Good Or Bad?

Many associations have a section in their documents that provide the Association with a Right of First Refusal. That means prior to any sale, gift, or other transfer of the property can take place, the proposal must be provided to the Association Board. The Board then has the right, on behalf of the Association, to take possession of that Unit at the same terms. In other words, they have the right to refuse the transfer, provided the Association steps into the shoes of the buyer, recipient or transferee.

When a Right of First Refusal exists, there is a process that the Association must go through in order to obtain owner approval to spend Association funds on obtaining the Unit through this right. The process is complicated, and may differ depending upon how the section is worded. This idea is an old one that does not fit well with laws today. When we perform document reviews, we always recommend that this right be removed from the documents.

Aside from the process being difficult, it is often hard to obtain member approval for the expenditure of funds. If the approval is not obtained, all you have done is delay a sale or transfer of the property. Furthermore, most lenders in today’s market do not approve of a provision containing a right of first refusal. The main reason is that this right can be used at the board’s discretion. Therefore, it is possible that the right will be used in a discriminatory manner. It can be seen as a tool to weed out potential owners and/or occupants of protected classes that the Association finds undesirable for their community. While most associations would never use this type of provision for that type of purpose, the potential to do so exists, therefore, the lenders are withholding loan approvals in associations that have the right of first refusal. Limiting choice of lenders then makes properties harder to sell within the community.

The right of first refusal is hardly ever exercised, it creates an extra step in any closing or transfer of property, and, if it is exercised, the process is cumbersome. Therefore, we recommend that if your Association has a right of first refusal in your documents, call our office to discuss an amendment to your governing documents to remove this right. In some cases, the Association may be permitted to amend the documents by a Board vote to bring the documents into compliance with the requirements of institutional lenders.

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