Right of first refusal (ROFR or RFR) is a contractual right that gives its holder the option to enter a business transaction with the owner of something, according to specified terms, before the owner is entitled to enter into that transaction with a third party. A first refusal right must have at least three parties: the owner, the third party or buyer, and the option holder. In general, the owner must make the same offer to the option holder ''before'' making the offer to the buyer. The right of first refusal is similar in concept to a
call option In finance, a call option, often simply labeled a "call", is a contract between the buyer and the seller of the call option to exchange a security at a set price. The buyer of the call option has the right, but not the obligation, to buy ...
. An ROFR can cover almost any sort of
asset In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that c ...
, including
real estate Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more genera ...
, personal
property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of the property, an owner of property may have the right to consume, alter, share, ...
, a
patent A patent is a type of intellectual property that gives its owner the legal right to exclude others from making, using, or selling an invention for a limited period of time in exchange for publishing an enabling disclosure of the invention."A ...
license, a
screenplay ''ScreenPlay'' is a television drama anthology series broadcast on BBC2 between 9 July 1986 and 27 October 1993. Background After single-play anthology series went off the air, the BBC introduced several showcases for made-for-television, fea ...
, or an interest in a business. It might also cover business transactions that are not strictly assets, such as the right to enter a joint venture or distribution arrangement. In entertainment, a right of first refusal on a concept or a
screenplay ''ScreenPlay'' is a television drama anthology series broadcast on BBC2 between 9 July 1986 and 27 October 1993. Background After single-play anthology series went off the air, the BBC introduced several showcases for made-for-television, fea ...
would give the holder the right to make that movie first while in real estate, a right of first refusal would create incentive for the tenant to take better care of their leased apartment in case the opportunity to purchase arises in the future. Only if the holder turns it down may the owner then shop it around to other parties. Because an ROFR is a contract right, the holder's remedies for breach are typically limited to recovery of
damages At common law, damages are a remedy in the form of a monetary award to be paid to a claimant as compensation for loss or injury. To warrant the award, the claimant must show that a breach of duty has caused foreseeable loss. To be recognised at ...
. In other words, if the owner sells the asset to a third party without offering the holder the opportunity to purchase it first, the holder can then sue the owner for damages but may have a difficult time obtaining a court order to stop or reverse the sale. However, in some cases, the option becomes a property right that may be used to invalidate an improper sale. ROFR also arises in visitation agreements/orders in divorce cases. In such cases, an ROFR may require a custodial parent to offer parenting time to the non-custodial parent (rather than having a child supervised by a third party) any time that the custodial parent or their family is unable to exercise their right to parenting time (such as if the custodial parent needs to travel out of town). Under these circumstances a breach may result in a finding of contempt and any remedies for contempt. An ROFR differs from a Right of First Offer (ROFO, also known as a Right of First Negotiation) in that the ROFO merely obliges the owner to undergo exclusive
good faith In human interactions, good faith ( la, bona fides) is a sincere intention to be fair, open, and honest, regardless of the outcome of the interaction. Some Latin phrases have lost their literal meaning over centuries, but that is not the case ...
negotiations with the rights holder before negotiating with other parties. A ROFR is an option to enter a transaction on exact or approximate transaction terms. A ROFO is merely an agreement to negotiate.


ROFR: Abe owns a house and Bo offers to buy that house for $1 million. However, Carl holds a right of first refusal to purchase the house. Therefore, before Abe can sell the house to Bo, he must first offer it to Carl for the $1 million that Bo is willing to buy it for. If Carl accepts, he buys the house instead of Bo. If Carl declines, Bo may now buy the house at the proposed $1 million price. ROFO: Carl holds a ROFO instead of an ROFR. Before Abe can negotiate a deal with Bo, he must first try to sell the house to Carl on whatever terms Abe is willing to sell. If they reach an agreement, Abe sells the house to Carl. However, if they fail, Abe is free to start fresh negotiations with Bo without any restriction as to price or terms.


The following are all variations on the basic ROFR: *'' Duration'': The ROFR is limited in time. For example, Abe must make the offer to Carl for any proposed sale only in the first five years. After that, the right expires and Abe has no further obligation to Carl. *''Exceptions'' include certain transactions. Abe may sell or transfer the property to a holding company, a trust, family members, etc. without first offering it to Carl. However, the new owners remain subject to the right. *''Transferability'': Carl may assign his ROFR to Dave. Abe must now offer Dave an option to purchase the property instead of Carl. Not every ROFR is transferable; some are personal to the original holder. *''Extinguished on first sale'': if Abe sells the property to Bo because Carl declines the right, the property is no longer subject to the right. Bo may resell it free of the ROFR. *''Extinguished on declined/failed exercise'': if Abe proposes to sell the property to Bo and Carl declines, or if Carl accepts but is unable to complete the transaction, the right is extinguished whether or not Abe ultimately sells the property. *''Persistent'': in contrast to the above two, in this case, the right runs with the property and binds the new purchaser. If Abe sells the property to Bo, Bo must offer the property to Carl first, just like Abe if Bo wishes to re-sell it. *''Offer and acceptance terms'': specific deadlines, procedures, and forms may be required. For example, Abe must give Carl a "notice of sale." Carl has 30 days to accept or reject, with failure to respond counting as rejection. Carl must then close the transaction within that time, or that counts as a failed attempt to exercise. *''Limited time period to close transaction'': Abe offers the property to Carl under the ROFR, and Carl declines. Abe now has 60 days to close the transaction with Bo. If it cannot close within 60 days, Abe must offer it again to Carl before proceeding further with Bo. *''Substitute purchaser allowed'': Abe offers the property to Carl, who declines. Abe is then free to sell it to Bo but fails to do so. Abe may sell the property under the same terms to Erin instead without reoffering it to Carl. *''No pending transaction required'': Abe wishes to sell the house for $1 million but has not yet identified a purchaser. He prepares proposed sales terms and offers it to Carl on those terms. If Carl declines, Abe may then shop around for a purchaser. *''Slight variations allowed in exercise'': Abe enters an agreement with Bo calling for Bo to put down a 30% down payment, conduct certain inspections, and close the transaction in 20 days. He offers it to Carl at those terms. Carl accepts but is entitled to insist on a 20% down payment and a 30-day closing period. *''Slight variations allowed in sale'': Abe offers the house for $1 million to Carl, who declines. Abe then enters a transaction with Bo but during the
escrow An escrow is a contractual arrangement in which a third party (the stakeholder or escrow agent) receives and disburses money or property for the primary transacting parties, with the disbursement dependent on conditions agreed to by the transacti ...
, Bo discovers a flaw in title and several defects. Abe is entitled to discount the price by $20,000 to close the sale with Bo without having to reoffer the house to Carl at $980,000. *''Continuous'': a continuous right of first refusal can be worded to continue to live, even upon infinite opportunities that are declined. Many other variations are possible. A fully drafted ROFR addresses all of the types of issues and more, and in the case of valuable or complex transactions it is subject to negotiation and review by business transaction attorneys. However, many ROFR are not completely specified. Even the best drafted ROFR agreements suffer a high risk of dispute and litigation because they are anticipating future transactions and contingencies that are unknowable when the ROFR originates.

In venture capital

In venture capital deals, the right of first refusal is a term sheet provision permitting existing investors in a company to accept or refuse the purchase of equity shares offered by the company, before third parties have access to the deal. The main goal of the provision is to allow investors to prevent ownership dilution as the company raises additional capital. Typically, the provision will exempt certain types of shares, such as those in an employee pool, or shares issued to equipment loaners or lessors.
Startup companies A startup or start-up is a company or project undertaken by an entrepreneur to seek, develop, and validate a scalable business model. While entrepreneurship refers to all new businesses, including self-employment and businesses that never inten ...
are advised to attempt negotiating out this right, because it enables existing investors to send stronger (potentially negative) signals to new investors, and consequently drive down the company's valuation.

See also

* Drag-along right * First-look deal *
Option (finance) In finance, an option is a contract which conveys to its owner, the ''holder'', the right, but not the obligation, to buy or sell a specific quantity of an underlying asset or instrument at a specified strike price on or before a specified dat ...
* Pre-emption right * Tag-along right


External links

An Economic Analysis of Rights of First RefusalRights of first refusal: The thorny issues raised by ''Bramble''The Right of First Refusal: A Modest Proposal
{{Authority control Publishing Contract law