Rights of First Refusal and Purchase Options in Tennessee Real Estate

An option to purchase and a right of first refusal are both promises about a sale that has not happened yet. Tennessee courts read them closely and hold the holder to the deadlines. Some common questions have no Tennessee answer yet, and I flag those below.

An option is an offer the owner cannot pull back

An option is an offer to sell on stated terms that the holder may accept or not. An offer made without consideration can be withdrawn before it is accepted. But if the offer is in writing and time to accept is given for a valuable consideration, the option is irrevocable, and when the holder accepts, a contract of sale is complete (Bradford v. Foster, Tenn. 1888).

The consideration need not be a separate payment. In Texas Co. v. Aycock (Tenn. 1950), the rent under a lease supported the option it contained, so during its term the option was irrevocably binding on the owners.

Exercising an option: follow the instructions, on time

The Tennessee Supreme Court has said that both at law and in equity, time is of the essence of an option contract, and that the acceptance must exactly and precisely accord with the offer's terms (Ray v. Thomas, Tenn. 1950). Ray involved a right in a deed of trust to resurvey the land and adjust the debt, which the court treated as a right in the nature of an option, and the Court of Appeals applied its exact-acceptance rule to an option to buy land in Adams v. Swift. The manner of exercise matters as much as the date:

• In Adams v. Swift (Tenn. Ct. App. 1973), the option called for a cash price and a closing by the date it expired, and it did not say it could be exercised by notice alone. The court read it to require payment or tender of the price by that date. The buyer sent a timely letter exercising the option but did not pay or tender the price before it expired, and the court held the option was not exercised.
• The same opinion describes how earlier cases turned on the wording. Where an option required payment or tender, a notice alone was not enough (Jones v. Horner, Tenn. Ct. App. 1953). Where the option did not say how to exercise it, any type of notice was sufficient (Dobson & Johnson, Inc. v. Waldron, Tenn. Ct. App. 1960).

The option document is the instruction sheet: who signs the notice, where it goes, whether money must come with it, and when closing happens.

How a right of first refusal works

The Court of Appeals has described the conventional right of first refusal as subject to a condition precedent, typically the owner's receipt of a third-party offer and the owner's good-faith decision to accept it. At that point the right ripens into an option, and the holder can make a contract on the same terms the owner is willing to accept from the third party (Riverside Surgery Center, LLC v. Methodist Health Systems, Inc., Tenn. Ct. App. 2005).

Two consequences follow:

1. What triggers the right depends on the contract's language and the facts. In Riverside, which involved an LLC membership interest rather than land, the operating agreement's preemptive right was triggered by the selling member's intent to transfer, and the court found that intent when the member signed an option agreement with an outside buyer.
2. The holder has to match the offer. In Torrence v. Higgins Family Limited Partnership (Tenn. Ct. App. Apr. 28, 2006), the court, quoting a federal bankruptcy court decision, said the holder must strictly match the third party's terms, and held that tenants who agreed to match an offer for the entire 370-acre tract had properly exercised their right. Matching has limits. In Marshall v. Summers (Tenn. Ct. App. 1996), a buyer's offer was conditioned on ending the tenant's lease. The court held that the tenant had to offer what the buyer offered in price and terms of payment, not give up its lease, and that the lease survived the tenant's decision not to match.

The label on the clause does not settle what it does. In Southern Style Shops, Inc. v. Mann (Tenn. 1928), a lease gave the tenant the right and option to meet any bona fide offer to rent the premises. The Tennessee Supreme Court held that it gave the tenant only a right to negotiate for a renewal, not a right to renew on the third party's terms.

Which transfers trigger the right

Tennessee case law on transfers other than an ordinary sale to a stranger is thin:

• Transfers among the owners. In Koella v. McHargue (Tenn. Ct. App. 1998), two co-owners granted a right of first refusal in a deed, and one later bought the other's half. The transfer between the co-tenants did not trigger the right. The clause referred to the grantors as a group and to a sale on the open market, and the court read it as protecting the holder against third-party purchases.
• Gifts and transfers to family or to the owner's own entity. I am not aware of a published Tennessee appellate decision deciding whether a gift, a transfer to a family member, or a transfer into an entity the owner controls triggers a right of first refusal. A court would start with the clause's wording, so a clause that says which transfers count leaves less to argue about.
• Package sales. When the burdened parcel is sold with other land, what must the holder match? I am not aware of a published Tennessee decision resolving that. In Torrence the tenants matched the offer for the whole tract. The argument that they could buy only the leased four acres had not been raised in the trial court, and the court added that it doubted the argument had merit because the landlord's own notice described the right as covering all terms of the offer for the 370 acres.

A right of first offer is a different deal

A right of first offer is a drafting term, and I did not find a separate set of Tennessee rules for it. In general use it means the owner must offer the property to the holder first, at a price the owner names or one the agreement sets in advance, before offering it to others, and the agreement says what the owner may do if the holder declines. The holder is not waiting for an outside offer to match. In Riverside, the court observed that a preemptive right priced in advance by a formula was more closely akin to what one court had called a right of first offer.

Koella shows why the mechanics matter more than the name. The deed required the owners to give notice of the price at which the land would go on the open market and gave the holders 15 days to buy at that price. The holders argued that a traditional right of first refusal let them wait for a third-party offer. The court enforced the deed as written.

Get it in writing, and get it recorded

Tennessee's statute of frauds bars an action on a contract for the sale of land, or a lease of land for longer than one year, unless it or a memorandum of it is in writing and signed by the party to be charged or someone that party lawfully authorized. In a land sale, the party to be charged is the party against whom enforcement is sought (Tenn. Code Ann. § 29-2-101(a)). Tennessee courts have analyzed options to buy land under that statute (Texas Co. v. Aycock; Womble v. Walker, Tenn. 1944). I did not find a Tennessee appellate decision squarely applying it to a right of first refusal standing alone.

Recording is what protects the holder against later buyers. The writings that may be registered include leases for more than three years, or a summary or abstract of those leases, and agreements for the conveyance of real property (Tenn. Code Ann. § 66-24-101). Since April 27, 2026, the provision covering an agreement for the conveyance of real property, or a contract, memorandum, abstract, or affidavit for the sale of real property, requires the document to carry the authenticated signatures of the owner and the proposed purchaser and to state the agreement's expiration date by day, month, and year (2026 Tenn. Pub. Acts ch. 865). I have not found a decision applying that change to an option or a right of first refusal, including one with no fixed end date. Those instruments are effective between the parties without registration, but as to others without actual notice, only from the time they are noted for registration (§ 66-26-101). Unregistered instruments are void as to existing or subsequent creditors of, or bona fide purchasers from, the makers without notice (§ 66-26-103).

Aycock shows what can happen without recording. The tenant's lease with a purchase option was never recorded, but the later buyers' deed said the property was subject to a lease to the tenant. The court held that this put the buyers on inquiry, which gave them actual notice, or its equivalent, of the option, and the option holder had priority.

The rule against perpetuities

Tennessee adopted the Uniform Statutory Rule Against Perpetuities in 1994, and it supersedes the common law rule (Tenn. Code Ann. §§ 66-1-201, 66-1-207). Under it, a nonvested property interest is generally invalid unless it is certain, when created, to vest or terminate within 21 years after the death of an individual then alive, or it vests or terminates within 90 years after its creation (§ 66-1-202(a)).

The statute does not apply to a nonvested property interest arising out of a nondonative transfer, except interests arising out of marital agreements and settlements, a spouse's election, contracts to make or not to revoke a will or trust, contracts to exercise or not to exercise a power of appointment, a transfer in satisfaction of a duty of support, or a reciprocal transfer (§ 66-1-205(1)).

So for an option or right of first refusal bargained for in a sale, a lease, or an operating agreement, the exclusion appears to take the right outside the statute, to the extent the right is a nonvested property interest at all. The statute does not define nondonative transfer or say whether these rights are nonvested property interests, and I found no Tennessee appellate decision applying it to either. A right created as part of a gift, such as one reserved in a deed of gift to a family member, may not fall within the exclusion, and how the statute applies to it is unsettled in Tennessee.

Options and first refusal rights in a lease

Aycock noted that business leases frequently contain a purchase option. Three questions come up:

• Renewals. In Womble v. Walker, the option could be exercised during the lease or any renewal of it, and the lease was renewed for successive five-year terms by oral agreement. The Supreme Court rejected the view that the tenant was merely holding over: the renewals were made under the lease's own terms, so the written option carried into them for as long as the tenancy existed under the original lease or an extension of it.
• Holdover. I am not aware of a Tennessee appellate decision on whether a purchase option or first refusal right survives when a tenant simply holds over without a renewal or extension. The lease language is where that answer starts.
• Personal or assignable. In Ray v. Thomas, which involved a deed of trust rather than a lease, a right in the nature of an option was given to the first party alone, while the neighboring clauses named successors and assigns, and the court held it was personal and ended when that party transferred the property. In Bradford, by contrast, the holders' deal to give financiers part of the land was treated as a lawful sale of an interest in the option. In Dick Broadcasting Co. v. Oak Ridge FM, Inc. (Tenn. 2013), a right of first refusal on radio station assets was assignable only with consent, and because the clause set no standard, consent had to be decided in good faith and in a commercially reasonable manner unless the parties explicitly agreed otherwise. I found no Tennessee appellate decision squarely deciding whether a tenant's option passes to an assignee of a lease that is silent.

Residential lease-options raise their own landlord-tenant questions, covered in owner financing and land contracts in Tennessee.

When the owner will not perform

The holder usually asks the court to order the sale. In Bradford, the court ordered title divested into the holders once they paid the price into court, and in Aycock it reversed the dismissal of the option holder's suit, with the price to be paid into court on remand. In Riverside, the holders sought a declaratory judgment and specific performance, and the Court of Appeals affirmed summary judgment for them on whether their right had been triggered. How specific performance works is covered on my office's specific performance page, and damages and other remedies in breach of contract claims in Tennessee.

An option or first refusal right is written at the start of a deal and tested years later. If you are granting or receiving one in a purchase agreement, a deed, or a commercial lease, or trying to exercise one, my office can review the language and the deadlines with you.

Educational disclaimer: This article provides general Tennessee educational information only and is not legal advice for any specific property or transaction.