What Is Right of First Refusal (ROFR), and How Does It Work?

James Chen, CMT is an expert trader, investment adviser, and global market strategist.

Natalya Yashina is a CPA, DASM with over 12 years of experience in accounting including public accounting, financial reporting, and accounting policies.

What Is a Right of First Refusal?

Right of first refusal (ROFR), also known as first right of refusal, is a contractual right that someone has to match or decline to match an offer for an asset after other offers have been made.

The person who holds this right is entitled to enter a transaction before anyone else does. If they decide not to enter the transaction, the seller is free to entertain the other offers.

This is a popular clause among those who rent real estate because it gives them first crack at buying the properties they occupy. It is also popular among venture capitalists looking for assurances that their investments will not be sold out from under them.

Key Takeaways

• A right of first refusal is a contractual right giving its holder the option to match or decline to match an offer on an asset before the owner can sell it to someone else.
• The ROFR assures the holder that they will not lose their right to an asset if others express interest in it.
• The right of first refusal can limit the owner's potential profit as they are restricted from negotiating third-party offers before the rights holder exercises their right.

How a Right of First Refusal Works

Right of first refusal clauses are similar to options contracts in that holders are granted rights but not obligations. With an ROFR, the right holder has the right, but not the obligation, to match or decline to match an offer already made on an asset by another party.

The person who owns the asset is obligated to notify the right holder that they've received an offer for their property.

So, if a shareholder wants to sell their share and is subject to an ROFR, they must find someone willing to make an offer for that share. Once they have an offer, they then must notify the right holder, who can exercise their option to match that offer and purchase the share or refuse to match it and let another party purchase it.

Purpose of the ROFR

Rights of first refusal are usually requested by individuals or companies who want to see how an opportunity will turn out. The right holder may prefer to get involved later rather than make a financial outlay and commitment right away. A right of first refusal allows them to do so.

However, the right holder generally only has a specified time before the seller can accept another offer. Moreover, the right is also only valid with the seller with whom they contracted.

Customization

Right of first refusal clauses can be customized to create variations of the standard agreement. The parties involved can incorporate changes, such as specifying how long the right is valid or allowing a third party nominated by the buyer to make the purchase.

A right of first offer (ROFO) is different from the ROFR. It gives the holder the right to make an offer on an asset before the seller sells it to someone else. Under an ROFR contract, the seller must have an offer from another party, and then notify the contract holder of that offer.

Advantages and Disadvantages of Rights of First Refusal

ROFR contracts usually favor buyers, but these agreements also have cons.

Advantages for Buyers

• The ROFR is akin to an insurance policy for a buyer
• It might give a buyer a competitive edge
• It gives buyers priority

Disadvantages for Buyers

• Prices might drop after the buyer exercises the ROFR and makes a purchase
• Sellers may forget that the buyer has an ROFR

Advantages for Sellers

• The seller may be comforted knowing there is a buyer ready
• The seller has other interested buyers should the holder of the ROFR not want to purchase the asset
• The seller can prioritize certain individuals

Disadvantages for Sellers

• The ROFR limits the ability to negotiate with multiple buyers
• The seller may have a difficult time attracting buyers
• The right holder isn't obligated to transact a purchase
• Another buyer might be willing to pay more than the right holder

Special Considerations

In the business world, rights of first refusal are commonly seen in joint venture situations. The partners in a joint venture generally possess the right of first refusal to buy out the stakes held by other partners who leave the venture.

Rights of first refusal are a common feature in many other fields, from real estate to sports and entertainment. For example, a publishing house may ask for the right of first refusal on future books by a new author.

What Is the Meaning of Right of First Refusal?

A right of first refusal is a contract with an asset owner that gives the holder of the right the ability to match or refuse to match an offer from another party to buy the asset.

Why Is Right of Refusal Bad?

A right of first refusal is neither good nor bad; it is simply a tool used by some to ensure they have the first claim on an asset or to ensure a buyer is waiting.

What Is the Difference Between an Options Contract and a Right of First Refusal?

An options contract is an agreement whereby the contract buyer purchases the right but not the obligation to exercise the right and buy or sell shares of stock. A right of first refusal is the right but not the obligation to match an offer someone else has made on an asset and purchase it.

The Bottom Line

A right of first refusal is a contractual agreement between two parties that gives one the ability to be the first buyer. This party can match an offer made by a third party and purchase an asset, or they can refuse to match it, in which case the seller can proceed with selling it to that third, or another, party.

These contracts are generally used by interested parties who don't want a contractual obligation to purchase an asset but do want the option to do so if other parties become interested in it.

The Porter Diamond Model is a model to explain the competitive advantage that nations or groups can develop based on certain factors.

A fee is a fixed charge for a service. Fees can also be additional charges related to a good or service. Hidden fees cost consumers billions of dollars every year.

A reverse auction is a type of auction in which sellers bid for the prices at which they are willing to sell their goods and services.

A joint endorsement is often required on a check presented for deposit or cashing that has been made out to two or more individuals.

A cloud on title is any document or encumbrance that might invalidate a title to real property or make the title doubtful.

Statutory voting is a corporate voting procedure wherein each shareholder gets one vote per share and votes must be divided evenly among the issues.

• About Us
• Terms of Service
• Dictionary
• Editorial Policy
• Advertise
• News
• Privacy Policy
• Contact Us
• Careers
• EU Privacy

We Care About Your Privacy

We and our 100 partners store and/or access information on a device, such as unique IDs in cookies to process personal data. You may accept or manage your choices by clicking below, including your right to object where legitimate interest is used, or at any time in the privacy policy page. These choices will be signaled to our partners and will not affect browsing data.

We and our partners process data to provide:

Store and/or access information on a device. Use limited data to select advertising. Create profiles for personalised advertising. Use profiles to select personalised advertising. Create profiles to personalise content. Use profiles to select personalised content. Measure advertising performance. Measure content performance. Understand audiences through statistics or combinations of data from different sources. Develop and improve services. Use limited data to select content. List of Partners (vendors)