Right of first refusal

Right of first refusal explained

The right of first refusal (ROFR or RFR) is a contractual right that allows its holder to enter into a business transaction with the owner of something on specified terms before the owner is allowed to do so with a third party. The owner, a third party or buyer, and the option holder must all be parties to a first refusal right. Before making an offer to the buyer, the owner must generally make the identical offer to the option holder. The right of first refusal is comparable to a call option in concept.

Real land, personal property, a patent license, a screenplay, or a company investment are all examples of assets that can be covered by a ROFR. It could also include non-asset commercial transactions, such as the ability to form a joint venture or a distribution agreement. In the entertainment industry, a right of first refusal on a concept or screenplay would allow the owner to make the film first, whereas in real estate, a right of first refusal would encourage tenants to take better care of their leased apartment in the event that the opportunity to buy arises in the future. The owner may only shop it around to other parties if the holder declines.

Right of first refusal process

Rights of first refusal clauses are similar to option contracts in that the holder has the choice, but not the obligation, to engage in a transaction involving an asset. This person has the option to make a contract or agreement on an asset before anyone else.

Individuals or businesses that wish to observe how a business or opportunity will come out typically request rights of first refusal. A right of first refusal permits the rights holder to participate later rather than making the initial investment and commitment, and it allows them to do so.

Right of first refusal clauses can be tweaked to produce unique versions of the conventional contract. As a result, the parties can make amendments such specifying how long the right is valid or allowing the buyer to choose a third-party to complete the transaction. Right of first refusal agreements are usually time-limited. The seller is free to pursue other purchasers after the period has expired.

Benefits to the right of first refusal

A right of first refusal serves as an insurance policy for the entitled party, ensuring that they do not lose their rights to an asset they want or need. A commercial renter, for example, may prefer to lease a location but may purchase it if he fears being evicted if the property is sold to a new owner. In this situation, the tenant would negotiate to include a right of first refusal language in his lease. If leasing becomes infeasible, he will have the opportunity to purchase the property before others.

Negatives of right of first refusal

The right of first refusal, on the other hand, is a disadvantage to the property owner since it limits the capacity to bargain with several buyers, who could drive up the price in a bidding war. If the landlord knows that the existing tenant is always first in line to buy, as in the example above, finding buyers may be difficult. If attracting the right renter requires a right of first refusal, the property owner may exercise it.