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Right of First Refusal: Definition, Example and Related Terms

What is Right of First Refusal ?

The 'Right of First Refusal' (ROFR) is a contractual right granted to a party (often a tenant, partner, or investor) to enter into a business transaction with the owner of an asset before the owner is entitled to enter into a transaction with a third party. This right provides the holder with the initial opportunity to accept or refuse an offer based on specified terms before any external negotiations commence. It's like having the first shot at something before it becomes available to others.

For example, in property leases, a tenant may be granted a Right of First Refusal that allows them the chance to purchase the property before the landlord can sell it to another buyer. This ensures that they have the opportunity to secure the asset they are already invested in.

From a business perspective, the ROFR is an important negotiation tool that can provide strategic advantages, such as securing key assets or investments. However, it also requires close monitoring, as the holder must be prepared to act quickly when the owner decides to initiate a transaction.

It's crucial to clearly define the terms and conditions attached to the ROFR in any contract. This can include aspects like the duration of the right, the process by which the right is triggered, and how offers are to be communicated and responded to. This ensures transparency and reduces potential conflicts or misunderstandings.

Example(s)

  • Scenario Description
    Real Estate Lease A commercial lease grants the tenant a right of first refusal to purchase the building. If the landlord receives an offer from a third party, the tenant must be given the chance to match the offer before any sale can proceed.
    Business Partnership In a partnership agreement, a partner holds the right of first refusal on the sale of any shares in the business by another partner, allowing them to prevent an outside party from entering the partnership.
    Technology Licensing A tech company licenses its software and grants the licensee a right of first refusal to acquire any third-party rights to the technology, ensuring their competitive advantage and control over the usage.