Purchase Options and Rights of First Refusal on SBA Collateral

Most title problems on an SBA file involve someone who is owed money. Purchase rights are different. An option or a right of first refusal gives a third party a claim to buy the collateral, and that claim can outlast the loan, complicate the exit, and hold up a release years later. These rights are common on leased sites, family owned buildings, and businesses bought from a prior operator, and they are easy to miss because they do not look like liens.

Someone else may have a claim to buy

An option to purchase is a right to buy at a set price during a set window, exercisable whether or not the owner wants to sell. A right of first refusal is narrower, triggering only when the owner decides to sell, at which point the holder gets a stated number of days to match the offer. Both are frequently recorded, and both can appear as a standalone instrument or inside a longer agreement.

Unrecorded rights are the harder category. A purchase clause may sit inside a lease, a partnership or operating agreement, a franchise document, or a dealer contract, with nothing filed in the county index. There is no instrument for an abstractor to find, so those come from the borrower’s file during diligence rather than from the record.

Why underwriting cares

The exit narrows. A purchase right that survives a foreclosure sale reduces the pool of realistic bidders, and whether it survives depends on recording dates, priority, and state law. That is the same priority analysis described in our note on lien position, and the recording date is where it starts.

The value can be capped. An option price fixed years ago may sit well below a current appraisal, and a buyer who can compel a sale at the old number effectively sets the ceiling. An appraiser working without the instrument in hand is working from incomplete facts, so send the copy along.

The paperwork multiplies. A partial release, a lot split, or a sale of one parcel out of several may require a waiver or a subordination from the holder, which is easy when the holder is a cooperative tenant and slow when it is a dissolved partnership or a family member who moved away. Our notes on partial releases and lot splits and collateral release cover how those requests get sequenced.

Scoping the search

Start with the parcel chain, with copies. Deeds, mortgages, and any option or agreement filed against the property, read for dates as much as for terms, since recording order sets priority. Then read the recorded lease documents. A memorandum of lease often recites a purchase option or a first refusal right without attaching the lease itself, and ground leases and pad sites do this routinely. Our note on recorded leases covers what those short instruments do and do not disclose.

The third piece is not a records task at all. Operating agreements, buy sell provisions, franchise and dealer contracts, and shareholder arrangements can all carry purchase rights, and nothing in the county index will surface them. Request them from the borrower alongside the funding letter items, particularly on a business acquisition where the seller stays involved.

Read the report for what it is. A search reports what was recorded and indexed over the term searched, recording practice varies by county, and an empty result is not proof that no agreement exists. Whether a recorded right is still enforceable, and what it does to your lien, is a legal question for counsel.

The takeaway

Purchase rights are a quiet category of title risk on SBA collateral, because they do not show up as a dollar figure and they often surface at the worst moment, when a release or a liquidation is already in motion. Pull the recorded instruments early, get copies rather than index entries, and ask the borrower for the unrecorded agreements while everyone is still cooperative.

Start the order online, or send us the funding letter if you want the scope matched to the requirement before anything is ordered.