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Right of first refusal (ROFR or RFR) is a
contractual right A concession or concession agreement is a grant of rights, land or property by a government, local authority, corporation, individual or other legal entity. Public services such as water supply Water supply is the provision of water ...
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 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_(finance), security at a set price. The buyer of the call Option (finance), option has the right, but not ...

call option
. An ROFR can cover almost any sort of
asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...
, 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 ...

real estate
, 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, r ...
, a
patent A patent is a type of intellectual property Intellectual property (IP) is a category of property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depe ...

patent
license, a
screenplay A screenplay, or script, is a written work by screenwriter A screenplay writer (also called screenwriter for short), scriptwriter or scenarist, is a writer A writer is a person who uses written words in different styles and techniques ...
, 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 A screenplay, or script, is a written work by screenwriter A screenplay writer (also called screenwriter for short), scriptwriter or scenarist, is a writer A writer is a person who uses written words in different styles and techniques ...
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 In law, common law (also known as judicial precedent or judge-made law, or ) is the body of law created by judges and similar quasi-judicial by virtue of being stated in written opinions. ' is the most-used legal dictionary used ...
. 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 The right to property or right to own property (cf. ownership) is often classified as a human right for natural persons regarding their possessions. A general recognition of a right to private property is found more rarely and is typically heavily ...
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 his/her family is unable to exercise his/her 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 Good faith ( la, bona fides), in human interactions, is a sincere intention to be fair, open, and honest, regardless of the outcome of the interaction. While some Latin phrases have lost their literal meaning over centuries, this 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.


Examples

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.


Variations

The following are all variations on the basic ROFR: *''
Duration Duration may refer to: * The amount of Time#Terminology, time elapsed between two events * Duration (music) – an amount of time or a particular time interval, often cited as one of the fundamental aspects of music * Duration (philosophy) – a th ...

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 Property is a system of rights that gives people legal control of valuable things, and also refers to the ...

escrow
, 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 A term sheet is a bullet-point In typography File:metal movable type.jpg, 225px, Movable type being assembled on a composing stick using pieces that are stored in the type case shown below it Typography is the art and technique of types ...
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 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

*
Right of pre-emptionA pre-emption right, right of pre-emption, or first option to buy is a contractual right to acquire certain property newly coming into existence before it can be offered to any other person or entity. It comes from the Latin verb ''emo, emere, emi, e ...
*
Option (finance) In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money avail ...
*
Drag-along right Drag-along right (DAR) is a legal concept in corporate law. Under the concept, if the majority shareholder(s) of an entity sells their stake, the prospective owner(s) have the right to force the remaining minority shareholders to join the deal. H ...
*
Tag-Along right Tag along rights comprise a group of clauses in a contract A contract is a legally binding agreement that defines and governs the rights and duties between or among its parties Image:'Hip, Hip, Hurrah! Artist Festival at Skagen', by Peder ...
*
First-look deal A first-look deal is any contract containing a clause granting, usually for a fee or other consideration that covers a specified period of time, a pre-emption rightA pre-emption right, right of pre-emption, or first option to buy is a contractual ri ...


References


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