The Distinction Between an "Option" and a "Right of First Refusal"

The Distinction Between an "Option" and a "Right of First Refusal"

In a recent case, In re Estate of Case, 2024 IL App (5th) 230152, the Appellate Court of Illinois, Fifth District, examined the interpretation of a codicil in a last will and testament. ​ The case centered around the difference between an "option" and a "right of first refusal." ​ Understanding this distinction is crucial to ensure intentions are accurately reflected in agreements and contracts.

The case involved the last will and testament of William A. ​ Case, who granted his tenant farmer, Thomas Pichon, a "right of first refusal" to purchase specific parcels of land. ​ The dispute arose over whether this right constituted an option to purchase the property or a genuine right of first refusal. ​ The circuit court determined that, despite the use of the term "right of first refusal," the plain language of the codicil indicated that Pichon had an option to purchase the property. ​

Understanding an Option: An option, as defined in the case of Kellner v. Bartman, 250 Ill. App. 3d 1030, 1034-35 (1993), is a contractual right that allows the holder to purchase or lease property at an agreed-upon price and terms within a specified timeframe. ​ It provides the option holder with the power to accept or reject the offer to purchase without being obligated to do so. ​ In the realm of real estate law, an option grants the holder the ability to decide whether to proceed with the purchase. ​

Understanding a Right of First Refusal: ​ A right of first refusal, also known as a preemptive right, is a contractual condition that must be satisfied before the sale of a property. ​ Unlike an option, a right of first refusal does not grant the holder the power to force the sale of the property at a predetermined price. ​ Instead, the right is triggered when the property owner expresses an intention to sell or receives an offer from a third party. ​ The holder of a right of first refusal has the right to match the terms of the third-party offer and purchase the property on those terms. ​

Key Takeaways:

1. An option provides the holder with the power to decide whether to proceed with the purchase, while a right of first refusal grants the holder the right to match the terms of a third-party offer. ​

2. The language used in contracts and agreements is crucial in determining the parties' intentions. Technical terms should be interpreted based on the context and the parties' intent.

3. The timing of the right's exercise and the determination of the purchase price are significant factors in distinguishing between an option and a right of first refusal. ​

4. It is important to ensure intentions regarding options and rights of first refusal are clearly expressed to avoid ambiguity and potential disputes.

This case underscores the importance of accurately drafting and interpreting the language of contracts and agreements.  Seeking legal guidance from an experienced real estate attorney can help navigate these complexities and ensure that your interests are protected in real estate transactions.