Multiple Choice Question: Paragraph 8 of C.A.R.’s Contingency for Sale of Buyer’s Property (COP) allows a seller to accept a written backup offer and then serve the first buyer with a written notice to do 3 things: (1) remove the sale contingency; (2) remove the loan contingency; and (3) provide proof of sufficient funds to close escrow without selling the buyer’s property. What is that notice called? Pick the best answer:

A. Bump Notice.
B. Notice to Buyer to Perform.
C. Notice of First Right of Refusal.
D. Notice of Right of First Refusal. 

Answer: Answer A is the best answer in my opinion. It is obviously a slangy term not used in California, but it is used in some other states. The term perfectly describes the seller’s ability to cancel or “bump” the buyer if the buyer fails to do the 3 things within the time specified.

Answer B is not a good answer. C.A.R.’s Notice to Buyer to Perform is specifically used to give the buyer 2 days to remove contingencies, provide a lender’s preapproval letter, return signed disclosures, or do any of the other items listed in paragraph 14D(2) of the Residential Purchase Agreement (RPA). In contrast, the notice under paragraph 8 of the COP requires the buyer to perform within 3 days, not 2 days. Additionally, the circumstances giving rise to a seller’s right to serve the notice under paragraph 8 of the COP are not listed in paragraph 14D(2) of the RPA.

Answer C is also wrong. Unfortunately, however, a “first right of refusal” is what real estate practitioners in California commonly use to describe the notice under paragraph 8 of the COP. Yet, a “first right of refusal” is not a legally recognized term. The proper legal term is “right of first refusal.” Furthermore, a “first right of refusal” is somewhat nonsensical, because saying that a buyer has a “first right of refusal” implies that the buyer or someone else has a “second right of refusal,” which is just not true.

It’s fine for real estate practitioners to continue to use the term, “first right of refusal,” amongst ourselves, given that we all know what we mean. But be careful not to use that terminology when speaking with clients, because you may give off the impression that you do not have a good grasp of the underlying law.

Answer D, a “right of first refusal,” is a legally recognized term, most commonly used in commercial leasing. When a tenant like Starbucks, for example, leases commercial space, they intend to incur substantial costs to make major tenant improvements to the property, and they do not want the landlord to subsequently sell the property to someone they do not want to rent from. Hence, when negotiating the lease, the tenant may want to include a “right of first refusal” to purchase the property in the event that the landlord receives an offer to purchase from a bona fide third party.

The most glaring difference between a true “right of first refusal” and the notice under paragraph 8 of the COP is that the commercial tenant as described above only has a right to enter into a purchase contract if the landlord receives an offer from a third party. In contrast, the buyer with the COP already has a valid, enforceable contract to purchase. It would be wrong to characterize that buyer’s legal position as merely a “right of first refusal.”

Copyright© 2019 Berkshire Hathaway HomeServices California Properties (BHHSCP). All rights reserved. Any unauthorized reproduction or use of this material is strictly prohibited. This information is believed to be accurate as of August 19, 2019. It is not intended as a substitute for legal advice in individual situations, and is not intended to nor does it create a standard of care for real estate professionals.