Everything You Need to Know About a Right of First Refusal
By Paris, published: 2023-10-03
Right of first refusal, or ROFR for short, is a legal clause and a contractual right allowing a business transaction with a person or company to be done before anybody else.
If someone holds the ROFR, they have the first right to the transaction. However, this is not an obligation. It allows potential buyers to get into a legal contract or agreement before others can.
Right of first refusal agreements are usually time-bound, and after the set period, it expires, and the original seller is free to pursue and deal with other buyers.
How does the Right Of First Refusal work?
Individuals or companies seeking to see how business opportunities will yield usually request a Right of First Refusal.
Someone who holds this right does not need to commit to it immediately. Instead, they can choose to get involved at a later point.
Clauses related to the Rights of First Refusal are similar to options agreements as they grant rights, but in ROFR, there is no immediate obligation.
So, one can use their right when the opportunity arises to establish a contract on an asset before others can.
The difference between the Right of First Refusal and and Options Agreement
An option to purchase shares, or an option agreement, gives potential buyers the right to buy an asset at a given price, under specific conditions, at a certain period.
Here, the potential buyer has the right to complete the transaction anytime. They do not have to wait for the option to expire. Additionally, the seller cannot withdraw the option until it expires.
On the other hand, ROFR gives potential buyers a chance to get into the transaction before others can. For instance, if a seller wants to sell an asset and there are multiple interested parties, they are still obliged to give the buyer the Right of First Refusal to purchase the option to complete the transaction first.
The main difference between the two is that while options can be exercised at any time during the set period by the buyer, a ROFR is only triggered if the seller wants to complete a sale.
By choosing a right of first refusal versus an option, the property owner has more control over the sale of their property, whereas, with an option, the holder can force the sale at will.
With a Right of First Refusal, the holder must wait until the owner decides to sell the property.
Is a Right of First Refusal customisable?
Yes, these clauses are quite customisable, and one can create variations of the standard agreement. So the involved parties can make the required changes mutually.
Some common changes that are often customised include specifying the duration and validity of the right and permitting third-party who the buyer has selected to make the purchase.
ROFR in businesses
The Right of First Refusal in businesses is mostly seen in joint venture situations.
Partners in a joint venture mostly have the right of first refusal when buying the stakes of partners who are to leave the venture.
Further, this also gives non-selling shareholders of a shareholder agreement the right to buy the shares of shareholders who want to sell before it is offered to the public.
ROFR is a quite common legal agreement for businesses in different industries, with it being mainly used in areas such as real estate, custody agreements, sports, entertainment, and others.
An easy example is when publishing houses request the right of first refusal for future books prepared by authors.
ROFR in Real Estate
In real estate, the ROFR clause gives buyers the right to be the first to make an offer when a property is put up for sale.
If another buyer has an interest in the property, the person with the ROFR can either buy the property or decline and let the seller accept a contract from another buyer.
When you have a first right of refusal, the seller must contact you and let you potentially move forward with a purchase before another party accepts an offer.
The first right of refusal can be put together before a home is listed for sale or when it is on the market.
ROFR in Child Custody Cases
Allocating parenting time, especially for divorced or separated parents in shared parenting situations, can be quite difficult.
Having an ROFR provision in a child custody agreement can help manage the time children spend with each parent.
ROFR in custody agreements usually means that the other parent has to be allowed to look after their children before someone else is called for to care for them.
Understanding the Right of First Refusal
ROFR is a contractual right that gives the right holder the choice to get into a transaction with the contracting party first.
It is an assurance that they will retain their right to an asset if others express interest in it.