Right Of First Refusal
Right of first refusal (ROFR), also known as first right of refusal, is a contractual right to enter into a business transaction with a person or company before anyone else can. If the party with this right declines to enter into a transaction, the obligor is free to entertain other offers. This is a popular clause among lessees of real estate because it gives them preference to the properties in which they occupy. However, it may limit what the owner could receive from interested parties competing for the property.
Definition: The Right of First Refusal (ROFR), also known as the first purchase right, is a contractual right that allows the holder to enter into a business transaction with a person or company before anyone else. If the holder of this right declines to proceed with the transaction, the debtor is free to consider other offers. This right is common among real estate tenants as it allows them to have the first option to purchase the property they occupy. However, it may limit the property owner's ability to obtain the highest possible amount from interested parties competing for the property.
Origin: The concept of the Right of First Refusal originated in commercial contracts and real estate transactions to protect the rights of existing stakeholders. The earliest records date back to medieval Europe, where landlords would grant tenants the right to purchase the leased land first. Over time, this concept has been widely applied in various business transactions.
Categories and Characteristics: The Right of First Refusal can be categorized into several types, including:
- Real Estate ROFR: The most common type, typically granting tenants the first right to purchase the property when it is put up for sale.
- Equity ROFR: Common in shareholder agreements, allowing existing shareholders to purchase new shares when the company issues them.
- Intellectual Property ROFR: Found in technology transfer or patent licensing agreements, granting one party the first right to purchase or transfer intellectual property.
Case Studies:
- Real Estate Case: A tenant with a ROFR in their lease agreement has the first right to purchase the property when the landlord decides to sell. If the tenant declines, the landlord can then sell the property to other buyers.
- Equity Case: A company’s shareholder agreement stipulates that existing shareholders have a ROFR when the company issues new shares. This means that when the company decides to issue additional shares, existing shareholders can purchase them in proportion to their current holdings to prevent dilution of their equity.
Common Questions:
- Does the ROFR affect the market value of the property? Yes, the ROFR may limit the property owner's ability to obtain the highest possible amount from interested parties, as potential buyers know their offers might be matched by the ROFR holder.
- Can the ROFR be transferred? It depends on the contract terms. Some ROFRs are transferable, while others explicitly state that they are not.
