Right of First Refusal (ROFR)

A contract's right of first refusal (ROFR) gives a party the opportunity to purchase something valuable before it is made available to a third party. Due to the Right of First Refusal clause, a real estate owner could, for instance, offer a possible buyer the chance to buy his property at a specific price before making it available to others. Several business agreements, real estate contracts, and shareholdings contain ROFR.

How A Right Of First Refusal Works

Similar to options contracts, rights of first refusal clauses give the holder the choice but not the duty to engage in a transaction that typically involves an asset. The owner of this right gets the first chance to create a contract or agreement regarding an asset.

Most often, rights of first refusal are obtained by parties who are curious about the potential of a venture or an opportunity. A right of first refusal enables the rights holder to delay getting engaged if they would rather not make the initial investment and commitment.

The typical agreement can be modified by changing the right of first refusal clauses. As a result, the parties are free to include modifications, such as defining the duration of the right's validity or allowing the buyer to choose a third party to carry out the transaction. Normally, rights of first refusal contracts have a time limit. The seller is free to pursue other purchasers once the time limit has passed.

Example

Business agreements, shareholding arrangements, real estate transactions, and tenant-landlord contracts are all examples of real-world applications of the right of first refusal contract. Let's travel back in time to January 2001, when National Broadcasting Company (NBC) and Paramount Pictures were haggling over who would have the rights to air the TV show Frasier once the current term ended. The owner of ROFR was NBC.

According to the negotiation agreement, Paramount was free to assign the broadcasting license to a third party if it and NBC were unable to reach a financial understanding prior to the expiration of the ROFR period.

A shareholder's agreement could serve as another illustration of a ROFR contract. Before accepting the offer from a third party or outsider, a shareholder is typically required by a ROFR contract to provide the firm the opportunity to purchase back its shares.

Pros and Cons of Utilizing Rights of First Refusal

A right of first refusal serves as a kind of insurance policy for the party who is entitled to it, guaranteeing that they won't lose their claim to an asset that they want or need. A business renter, for instance, would prefer to rent a space; yet, he might buy the property if doing so meant that he wouldn't be evicted in the event that the property was sold to a new owner. In this scenario, the tenant may negotiate a right of first refusal clause into the lease, allowing them the option to purchase the property before anyone else if leasing becomes challenging.

In contrast, the right of first refusal limits the seller's ability to bargain with numerous buyers, which could result in a bidding war that raises the price. If the landlord in the aforementioned example knows that the existing tenant is always the first in line to buy, they may find it difficult to attract buyers. Yet, the landlord might still exercise a right of first refusal if finding the ideal tenant requires it.

Conclusion

  • A right of first refusal is a right in a legal contract that offers certain preferential rights to its holder.
  • Agreements containing these clauses can be found in various business contracts, shareholdings, real estate transactions, and tenant-landlord arrangements.
  • A shareholder is typically required by a ROFR contract to provide the firm the opportunity to purchase back its shares before accepting the offer from a third party or outsider.
  • The ROFR has a time limit that allows its owner some time to choose the offer before it expires.
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