Right of First Refusal

Right of First Refusal (ROFR)

Definition: The Right of First Refusal (ROFR) is a contractual right that gives the holder the option to enter into a business transaction for a particular asset before the owner is entitled to enter into that transaction with a third party. In essence, ROFR allows the holder to match any offer that the seller receives for said asset.

Examples

Residential Property Sale: Suppose a tenant has a Right of First Refusal clause in their lease agreement. If the landlord decides to sell the property and receives an offer from an external buyer, the tenant would have the opportunity to match this offer and purchase the property under the same terms.
Commercial Leases: A business renting commercial property might have a ROFR included in their lease. If the property owner intends to sell the building, the tenant business would be given the chance to buy the property on the same terms as any other bona fide buyer.
Investment Opportunities: An investor might have a ROFR on a portfolio of properties. If the portfolio is put up for sale, the investor can choose to purchase the portfolio on the same terms offered by a potential external bidder.

Frequently Asked Questions (FAQs)

Q1: Does the holder of a Right of First Refusal have to exercise their right?

A1: No, the holder of the ROFR is not obligated to exercise their right. They have the option to match the third-party offer but can also choose to let the opportunity pass.

Q2: Can a Right of First Refusal apply to anything other than real estate?

A2: Yes, ROFR can apply to various types of assets, including stocks, shares in a company, intellectual property, or any other significant asset where such provisions are included in agreements.

Q3: How does a Right of First Refusal differ from an Option to Purchase?

A3: An Option to Purchase gives the holder the right to buy the property at a predetermined price within a certain timeframe, regardless of whether the owner decides to sell. In contrast, ROFR only gives the holder the chance to purchase the property if the owner decides to sell.

Q4: What happens if the offer from the third party changes after the holder of the ROFR decides to match it?

A4: Typically, if the terms of the offer change, the holder of the ROFR will again have the option to match the revised offer.

Q5: Can the Right of First Refusal be waived?

A5: Yes, the holder of the ROFR can waive their right, either explicitly or by failing to act within a specified timeframe.

Option to Purchase: A contractual agreement granting the holder the right, but not the obligation, to purchase a property at a specific price within a certain period.
Lease Agreement: A contract specifying the terms under which a tenant rents property from a landlord.
Bona Fide Offer: An offer made in good faith without any intention of deceit.
Contractual Right: A right that is granted by the terms of a contract.

Online Resources

References

“Principles of Real Estate Practice” by David Cusic, much of the understanding on the fundamentals of ROFR is based on this comprehensive resource.
“The Real Estate Investor’s Solution Handbook” by Thomas Lucier for applied real estate strategies including ROFR.

Suggested Books for Further Studies

“Real Estate Law” by Marianne M. Jennings
“Commercial Real Estate Investing” by Dolf de Roos and Diane Kennedy
“The Buyer’s Toolkit” by Jeff Clauser
“Property Investment For Dummies” by Steve Sims

Right of First Refusal Fundamentals Quiz

### Who typically benefits from a Right of First Refusal clause? - [x] The tenant or current holder - [ ] The property seller - [ ] The external buyer - [ ] The local government > **Explanation:** The tenant or current holder of the ROFR benefits because they get a priority opportunity to purchase the property under the same terms as any external buyer. ### Can the Right of First Refusal apply to lease agreements? - [x] Yes - [ ] No - [ ] Only under specific circumstances - [ ] It depends on the jurisdiction > **Explanation:** ROFR can be included in lease agreements, giving the tenant the right to purchase the property if the landlord decides to sell. ### Which term is closely related to the Right of First Refusal? - [ ] Renovation Rights - [x] Option to Purchase - [ ] Eviction Notice - [ ] Lease Expiration > **Explanation:** The Option to Purchase is closely related to the Right of First Refusal, as both provide opportunities to buy property under specific conditions. ### When does the holder of ROFR usually decide whether to match an offer? - [ ] After the property is sold to a third party - [ ] Anytime during the lease - [x] During the period when a third party makes a bona fide offer - [ ] Upon entering the lease agreement > **Explanation:** The holder of ROFR decides whether to match a third-party offer during the period when the third party makes a bona fide offer for the property. ### What typically happens if the holder does not exercise the Right of First Refusal? - [x] The owner is free to sell to the third party - [ ] The offer has to be withdrawn - [ ] The property goes off the market - [ ] The holder automatically gets a second chance > **Explanation:** If the holder does not exercise the ROFR, the owner can sell the property to the third party under the same terms as the bona fide offer. ### Can a Right of First Refusal be written into any contract? - [ ] Only real estate contracts - [x] Yes, as long as all parties agree - [ ] Only business contracts - [ ] It must be a special kind of contract > **Explanation:** A ROFR can be written into any contract as long as all parties involved agree to include that provision. ### The Right of First Refusal is primarily a: - [ ] Government-mandated regulation - [ ] Real estate law - [x] Contractual agreement - [ ] Property tax rule > **Explanation:** The Right of First Refusal is a contractual agreement between parties and is not mandated by government regulation or related to property taxes. ### Which party typically drafts the Right of First Refusal clause? - [ ] The government - [x] The parties involved in the contract - [ ] The local municipality - [ ] A judicial authority > **Explanation:** The parties involved in the contract typically draft the Right of First Refusal clause, often with the assistance of legal counsel. ### What can trigger the Right of First Refusal in a lease term? - [ ] Lease renewal - [ ] Property upgrades - [x] Intent to sell by the property owner - [ ] Tenant violation of terms > **Explanation:** The Right of First Refusal is triggered by the property owner expressing an intent to sell the property. ### What usually determines the time frame for exercising the Right of First Refusal? - [x] The terms specified in the contract - [ ] State real estate laws - [ ] Federal regulations - [ ] The size of the property > **Explanation:** The contract terms usually determine the time frame within which the holder must exercise the Right of First Refusal.