The Right of First Refusal (ROFR) is a contractual right that grants a party the opportunity to enter into a business transaction with the owner according to specified terms, before the owner enters into that transaction with a third party. This right is commonly used in real estate, business partnerships, and other contractual scenarios.
Applications of ROFR
Real Estate
In real estate, a tenant may be given the right of first refusal to purchase the property they are renting if the landlord decides to sell. For example, if a tenant’s apartment is being converted to a condominium, the tenant might have the ROFR to buy the unit before it’s offered to any outside buyer. The tenant can buy the unit at the same price and terms as those offered in a third-party contract.
Business Transactions
In business dealings, stakeholders such as investors or partners might have the ROFR for purchasing shares before they are sold to outsiders. This helps protect their interests and maintains stability within the company.
How ROFR Works
Upon receiving an offer from a third party, the property owner must present the offer to the holder of the ROFR. The holder then has a specified period to either accept the terms and proceed with the transaction or decline, allowing the owner to proceed with the third-party offer.
Key Considerations
- Notification: The property owner must formally notify the ROFR holder of the third-party offer.
- Timing: The holder usually has a limited time window, commonly 30 to 60 days, to exercise their right.
- Matching Terms: The ROFR holder must match the terms of the third-party offer exactly, which includes price, payment terms, and other contract conditions.
- Legal Implications: Detailed contract clauses outline the ROFR process to prevent disputes and legal complications.
Examples of ROFR
Example 1: Tenant Purchase
Suppose a tenant, John, is renting an apartment. If the landlord decides to convert the apartments into condominiums and sell them individually, John’s lease agreement might include a ROFR clause. If the landlord receives an offer of $200,000 from a buyer, John has the opportunity to match this offer and purchase the apartment at the same price and terms.
Example 2: Business Shareholders
In a startup company, investors often have a ROFR to purchase additional shares before they are sold to new investors. If the company plans to issue new shares, existing investors can maintain their equity percentage by matching the terms offered by potential new investors.
Historical Context
The concept of the Right of First Refusal has roots in both common law and civil law traditions. It addresses the need to safeguard interests and ensure fair play in transactions involving multiple stakeholders.
Applicability and Comparisons
- ROFR vs. Right of First Offer (ROFO): While ROFR allows the holder to match a third-party offer, a Right of First Offer (ROFO) gives the holder the chance to make an offer before the owner seeks outside offers.
- ROFR vs. Options: Unlike options, ROFR doesn’t guarantee a transaction but provides a chance to engage under specific terms.
Related Terms
- Right of First Offer (ROFO): An early opportunity to purchase before the property is offered to others.
- Option Agreement: A contract granting an exclusive right to buy, without the need for a third-party offer.
- Preemptive Rights: The right to purchase additional shares before the company offers them to the public.
FAQs
What happens if the ROFR holder declines the offer?
Is ROFR enforceable in all states?
Can ROFR be transferred to another party?
References
- Legal Information Institute
- Nolo’s Plain-English Law Dictionary
- Real Estate Law: Real Property and Home Ownership
Summary
The Right of First Refusal (ROFR) provides a safeguard for parties with vested interests in a property or business by allowing them the first opportunity to match the terms of a third-party offer. This contractual right ensures fairness and stability, protecting the interests of tenants, business partners, and investors. Understanding the nuanced legal implications and correctly applying ROFR can prevent disputes and secure advantageous positions in various transactions.
