Right of First Refusal
By Paris, Last updated: 2023-02-02 (originally published on 2022-08-25)
What Is a Right Of First Refusal?
Right of first refusal also known as ROFR for short is a legal clause and a contractual right that allows for 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 just gives potential buyers an opportunity to get into a 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 Right Of First Refusal Work?
Individuals or companies who want to see how business opportunities will yield first usually request a Rights Of First Refusal. Someone who holds this right does not need to commit to it right away, instead, they can choose to get involved at a later point.
Clauses related to the Rights of First Refusal are quite similar to options contracts as it grants rights, but in ROFR there is no immediate obligation as such. So, one can use their right when the opportunity arises to establish a contract on an asset before others can.
Difference between the Right of First Refusal and the Option to purchase
Option to Purchase gives potential buyers the right to purchase an asset at a given price, under specific conditions, at a certain period of time. Here the potential buyer has the right to complete the transaction at any time. 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 with 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 owner of the property 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 Right of First Refusal customizable?
Yes, these clauses are quite customizable and one can create variations of the standard agreement too. So, the involved parties can make required changes mutually. Some common changes that are often customized include, specifying the duration and validity of the right, and permitting third-party who has been selected by the buyer to make the purchase.
ROFR in businesses
In businesses, the Right of First Refusal is mostly seen in joint venture situations. Partners in a joint venture mostly have the right of first refusal when it comes to 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 quite common in different industries with it being mainly used in areas such as real estate, custody agreements, sports, entertainment, and others. An easy example of this is: when publishing houses usually 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 has the option to 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 an offer can be accepted from another party. The first right of refusal can be put together either before a home is listed for sale or during the time 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 a ROFR provision in a child custody agreement can help manage the time that children get to spend with each parent.
ROFR in custody agreements usually means that the other parent has to be given the opportunity to look after their children before someone else is called for to care for the kids.
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 not lose the right they have to an asset if others express interest in the same.