Granting someone the Right of First Refusal is to grant them the legal right to in formed about when you sell your property, and have the opportunity to buy your property. In the past, this was used by condominium corporations to have the opportunity to buy back condominiums from the owners when they decide, giving the condo corporations more oversight on the properties over the long-term. Also, farmers have used this strategy in the past to sell their farm houses to people, providing them the opportunity to buy back the farm house in the future, as it may be adjacent with surrounding land also owned by the farmer, thus offering a unique value to the farmer.
I tried purchasing a new condo apartment in Calgary recently and the Offer to Purchase (OTP) agreement had a ROFR clause in it, however it was not just a ROFR clause, it was more than that (and worse). If I chose to sell within 18 months after closing, the clause required me not only to give the builder an opportunity to buy the condo back from me, but to offer it to them at 80% of the price that I paid for it (a 20% discount).
I was told that this was a common practice in Calgary by both a lawyer in Edmonton and by the builder. The builder told me \”I don\’t know how we could write that clause to make it any more fair\” and I said \”That\’s OK, just remove the clause altogether.\”
The builder declined to remove the clause and indicated that this clause is meant to prevent resale condos from being sold in specific areas for a certain period of time. The specific example they gave was, if the builder were to build another condo complex one year after selling, my resale condo would create competition for the new condos. He was very plain and open about the fact that this would \”protect\” house prices (i.e. keep prices high). He was also very plain and open about the fact that they do not want speculators to buy their units. They want to sell to people that are going to stay in these units for the long haul.
I declined to move forward with the condo purchase, which would have closed in 3 years after the construction was complete.
I viewed this ROFR clause was unacceptable for the following reasons:
- The ROFR clause would make the property less attractive for a lender to finance. As an investor, I do require the option to sell the property shortly after the closing date because that might be the only way that I can get financing.
- The financing may come with above-average interest rate (such as 10%), especially if I\’m at my max TDS ratio. This interest rate would make it more attractive to sell the property rather than hold it, especially if the property is only set to appreciate at 3% per year (not uncommon for Calgary).
- When you buy a property, the builder should not try to control the property after the closing date.
- It\’s a free market – nobody should be trying to influence the price of properties, especially when they don\’t own them.