Some common situations where you find Rights of First Refusal include:

• Landlords may grant one to a tenant who wants to buy the property when the landlord is not ready to sell immediately.
• When a property owner sells a portion of his property and retains the rest, he may grant a right of first refusal to the buyer on the seller’s remainder tract.
• In partnerships, each partner may grant a right of first refusal to all other partners requiring him to offer his partners the right to buy his interest in the partnership before allowing some new entity to buy in.  (Also see “Shotgun Clause” on wikipedia for a more interesting arrangement.)

In the event the property owner receives an offer that he plans to accept, he must notify the Holder usually by delivering a copy of the purchase offer.  Certified Mail Return Receipt Requested is what I’ve used in the past to create proof of delivery along with a letter for the Holder to sign acknowledging notification.  The Holder then has a period of time (defined when the right of first refusal is granted) to elect to purchase the property under the exact same terms as the written offer or release the right of first refusal.  Sometimes a this release requires a Quit Claim deed and sometimes the expiration of the time limit on the right is sufficient depending on the requirements of the title company and the parties involved in the transaction.

The response period is usually 30-60 days and can make any property with a right of first refusal very difficult to market because a potential buyer has to wait for a month or two without any certainty that they will actually get the property.  Sometimes rights of first refusal specify a price trigger such that the seller only has to contact the right holder if the offer to purchase is below a specific price.  Sometimes the right expires for example a right may expire at the end of lease if granted by a landlord to a tenant.

The correct way to do a right of first refusal is to record the right on the title of the property in question.  This protects the holder of the right because anyone trying to buy the property would most likely do a title search and discover the right of first refusal.  In practice, the right is written directly into the lease.

What happens if the owner sells property bound by a right of first refusal without notifying the Holder.  That’s probably where an several attorneys could rack up fees trying to sort the matter out.  My advice is to always have a real estate attorney’s help in creating or exercising a right of first refusal.

Footnote:  Rights of First Refusal are one of the best reasons for Brokers not to accept Open Listings.