Is it smart to include a right of first refusal (ROFR) clause in a contract? Not always.
If you’re the property owner/potential seller, think twice before including a ROFR in your contract. The ROFR tends to favor the potential buyer while restraining the seller.
Below, we’ll look at what you, as a property owner, should know about the pros and cons of ROFRs, and what makes a ROFR enforceable in South Carolina.
Pros and Cons of the Right of First Refusal (ROFR) for Property Owners/Sellers
We’ve previously covered the basics of the right of first refusal in South Carolina and some of the pros and cons of including one in an agreement. Here’s a quick recap:
The upsides of a ROFR are clear for potential buyers. They get “first dibs” on buying property when it comes up for sale, giving them the opportunity but not the obligation to purchase it.
Property owners, instead, have the obligation to offer the property to the ROFR holder first* without the guarantee the sale will go through, and with a strong possibility that if it does, the final sales price will be lower than what could have been gotten on the free market. For these reasons, a property owner should not automatically agree to a ROFR clause.
* Note that South Carolina courts in recent decisions have not differentiated between the “right of first refusal” and “right of first offer,” and the discussion of ROFR here also includes rights typical of the ROFO.
Here are primary pros and cons from the property owner’s perspective:
Pros:
- Having a pre-agreed terms and a potential buyer already lined up could save property owner time, money, and effort when it comes time to sell
- Terms of the ROFR could ensure the property does not sell below market value
Cons:
- Keeps property owner locked into terms that were likely determined months or years ago, which may no longer be favorable
- Often deters third-party bids, which can result in a lower final sales price
- Can restrain the owner from selling or disposing of the property entirely
To this last point: A ROFR can act as an unreasonable restraint on the property owner’s “power of alienation” (aka right of alienation), or ability to freely dispose of the property, effectively preventing its sale or transfer altogether. This is the core issue in the 2024 SC Court of Appeals case Crescent Homes SC, LLC v. CJN, LLC. Read more about that case and the court’s decision here on our blog.
Enforceability of Right of First Refusal (ROFR) Clauses in South Carolina
South Carolina courts have routinely ruled that a ROFR is enforceable only when drafted with clear, precise terms that impose reasonable restraints on all parties. In the 2023 case Clarke v. Fine Housing, Inc., the SC Supreme Court laid out criteria for an enforceable ROFR.
An enforceable ROFR should include:
- Clear description of the property being encumbered by the right
- Terms on price
- A fixed-dollar sales price, OR
- A clear formula to determine a sales price
- Terms on procedure
- What event triggers the ROFR
- How notice is given
- How long the ROFR holder has to respond
- What happens if the ROFR holder declines to exercise the right
- The duration of the right
A few things to consider about the duration of the right:
We rarely set forth ROFRs in contracts we draft for our clients here in our practice, but when we do, we make the price extremely clear and always include an expiration date and time, e.g., “This right expires at 11:50 pm ET on December 31, 2026.” An earlier expiration date is generally better for the property owner/potential seller.
If you are the potential buyer, a later expiration date – or none at all – is better for you. Now you can include a ROFR of “perpetual” duration, since the Supreme Court of South Carolina’s January 2026 ruling in the Spring Valley Interests case has conclusively affirmed that the Rule Against Perpetuities (RAP) does not apply to nondonative commercial transfers in South Carolina. This must be explicitly stated in the terms of the agreement for it to be enforceable. (Read more about the Spring Valley case and the RAP here on our blog.) If you are the property owner/potential seller, it’s in your best interest to avoid granting such a right to another party.
Should You Skip the Right of First Refusal Altogether?
If you are the potential buyer, you may benefit from agreeing to a ROFR with favorable terms on price and procedure.
But if you’re the property owner/potential seller, you should strongly consider skipping it, for all the reasons explained above. The benefits, which are small and uncertain to begin with, don’t outweigh the potential downsides, in our experience. If you do want or need to include a ROFR, make sure it’s drafted by an experienced corporate and commercial real estate attorney like Gem McDowell.
For help drafting, revising, or reviewing corporate and commercial real estate documents, call Gem. Gem help business professionals grow their businesses, avoid mistakes, and protect their interests. Gem and his team at the Gem McDowell Law Group serve business owners and professionals across the state from offices in Myrtle Beach and Mount Pleasant, SC. Call today at 843-248-1021 to schedule your free consultation.
