Understanding Right of First Refusal

Note: Want to skip the guide and go straight to the free templates? No problem - scroll to the bottom.
Also note: This is not legal advice.

Introduction

Right of First Refusal (ROFR) is a contractual clause that, when applied to a business transaction, allows one party an advantage in negotiations. This clause conveys the right of an individual or company to buy an asset or property before others can make offers – providing them with the opportunity to purchase at the same terms and conditions as any other interested buyer. While this concept is incredibly significant, many struggle to understand it fully and grasp its implications.

The Genie AI team, found in 2017 as ‘the world’s largest open source legal template library’, have learnt first-hand how ROFR affects business contracts and negotiations. We are committed to helping all parties understand and navigate the nuances of Right of First Refusal - from those seeking templates for their own organisations’ agreements, such as those looking for step-by-step guidance on drafting their own documents.

For any transaction involving Right of First Refusal however, it is essential that all involved are aware that any party possessing the right must be willing to purchase the asset (or enter into the same agreement) on the same terms and conditions; accept changes made; complete proceedings within an agreed timeframe; and pay any associated fees or costs which come with completing said transaction. Nevertheless, once these considerations are taken into account understanding ROFR may actually aid parties in negotiating a successful transaction – one which results in mutual benefit for all involved.

If you would like more information on Right of First Refusal - including our free template library - then read on below for further advice and assistance!

Definitions (feel free to skip)

Right of First Refusal (ROFR): A contractual right that gives a specified party the opportunity to purchase or enter into a contract before it is offered to other potential buyers or contractors.

Legal binding: A legally binding agreement is one that has been agreed to by all parties involved and is enforceable by a court of law.

Compliant: Meeting the requirements of a law or regulation.

Negotiate: To reach an agreement through discussion and compromise.

Drafting: The process of writing out a document such as an agreement or contract.

Signing: The act of affixing one’s signature to a document, signifying agreement to its contents.

Implementation: The process of putting a plan or agreement into action.

Disputes: A disagreement between two or more parties.

Review: The act of looking over something in order to check for accuracy or make necessary changes.

Contents

• Definition: Defining what right of first refusal (ROFR) is and how it works.
• Legal Considerations: Explaining the legal implications of ROFR and how it should be included in a contract.
• Benefits: Discussing the advantages of the ROFR and how it can benefit the parties involved.
• Practical Application: Exploring how the ROFR can be used in practice, such as in real estate transactions or business acquisitions.
• Negotiations: Examining the negotiation process for the ROFR, including researching the applicable laws and regulations.
• Drafting: Creating a draft of the ROFR agreement that incorporates the negotiated terms.
• Signing: Finalizing the agreement with signatures from all parties involved.
• Implementation: Putting the ROFR agreement into action, including setting up the necessary systems for monitoring and compliance.
• Disputes: Exploring how to handle disputes that may arise from the ROFR and how to resolve them.
• Review: Periodically reviewing the ROFR agreement to ensure it is still in the best interests of all involved parties.

Get started

Definition: Defining what right of first refusal (ROFR) is and how it works.

• Research the basics of ROFR and understand what it is and how it works
• Learn the key terms associated with ROFR including ““triggering event”” and ““right of first offer””
• Understand the implications of ROFR in a contract, such as the rights and obligations of parties involved
• Familiarize yourself with case law related to ROFR and how it has been applied in different scenarios
• When you can explain the basics of ROFR and the implications it has in a contract, you can check this step off your list and move on to the next step.

Legal Considerations: Explaining the legal implications of ROFR and how it should be included in a contract.

• Research and understand the legal implications of the ROFR and how it should be included in a contract.
• Read and analyze the legal implications of ROFR and determine what needs to be included in a contract.
• Draft a contract that outlines the legal implications of ROFR and how it should be included in the contract.
• Have the contract reviewed by a legal professional to ensure all legal implications have been properly addressed.

Once the legal implications of the ROFR have been researched, analyzed, and addressed in a contract, you can move on to the next step.

Benefits: Discussing the advantages of the ROFR and how it can benefit the parties involved.

• Understand the concept of right of first refusal and how it can provide protection to both parties involved in the transaction
• Identify the major benefits of having a right of first refusal clause in a contract
• Determine how each side will benefit from the clause and what recourse they have should one party breach the agreement
• Know when to include a right of first refusal clause in an agreement
• Analyze and compare the different options available for implementing the clause

When you can check this off your list and move on to the next step:

Once you have reviewed the benefits of the ROFR and can identify how it can be used in a contract, you can check this step off your list and move on to the next step: Practical Application: Exploring how the ROFR can be used in practice, such as in real estate transactions or business acquisitions.

Practical Application: Exploring how the ROFR can be used in practice, such as in real estate transactions or business acquisitions.

• Consult with a lawyer to understand the legal implications of the ROFR in your particular situation.
• Research the applicable state and local laws and regulations to ensure the ROFR is properly executed.
• Draft a ROFR agreement that outlines the rights and responsibilities of all parties involved.
• Obtain the signatures of all parties to the ROFR agreement.

You will know when you can check this off your list and move on to the next step when all parties involved have agreed to the ROFR agreement, and signatures have been obtained.

Negotiations: Examining the negotiation process for the ROFR, including researching the applicable laws and regulations.

• Research applicable laws and regulations for the ROFR
• Decide what terms you would like to apply to the ROFR agreement
• Negotiate with the other party to reach an agreement on the terms of the ROFR
• Make sure all parties involved are aware of the terms of the ROFR
• Document the results of the negotiations in writing

When you can check this off your list and move on to the next step:

• When you have reached an agreement on the terms of the ROFR with the other party
• When you have documented the results of the negotiations in writing

Drafting: Creating a draft of the ROFR agreement that incorporates the negotiated terms.

• Obtain a copy of the applicable laws and regulations and research them to ensure the negotiated terms comply.
• Gather all the necessary documentation and sources of information that are needed to create the draft.
• Draft the ROFR agreement, incorporating the negotiated terms, and ensure that all the details are accurate.
• Have the draft reviewed by a legal professional to ensure it meets all the required standards.
• Once the draft is finalized and approved, it can be checked off the list and moved onto the next step.

Signing: Finalizing the agreement with signatures from all parties involved.

• Obtain written signatures from all parties involved in the ROFR agreement
• Ensure that all signatures are properly witnessed as required by law
• Have the agreement notarized if necessary
• Make copies of the signed agreement for all parties
• Check that all parties have received their signed copies
• You will know you are done with this step when all parties have signed and received the agreement.

Implementation: Putting the ROFR agreement into action, including setting up the necessary systems for monitoring and compliance.

• Establish a system for tracking and monitoring the ROFR agreement
• Create a process for notifying parties when the ROFR is triggered
• Set up rules and guidelines for the ROFR agreement to follow
• Establish a timeline for parties to respond to the ROFR
• Develop a procedure for resolving disputes that arise from the ROFR
• Make sure all parties are in agreement with the implementation of the ROFR agreement

You’ll know you’ve completed this step when all parties involved have established systems for monitoring and compliance and have agreed to the implementation of the ROFR agreement.

Disputes: Exploring how to handle disputes that may arise from the ROFR and how to resolve them.

• Identify any parties that are likely to be affected by the ROFR and any potential disputes that may arise.
• Consider what methods of dispute resolution may be most suitable for the ROFR, such as arbitration or mediation.
• Draft a dispute resolution clause in the ROFR agreement that outlines how disputes should be handled.
• Review the dispute resolution clause with all parties involved to ensure everyone is in agreement.
• Make sure that the dispute resolution clause is enforceable, and include any necessary details or deadlines for initiating or resolving disputes.
• Ensure that all parties involved understand the consequences of not following the dispute resolution clause.

When you can check this off your list and move on to the next step:
You will be able to move on to the next step when you have identified the parties that are likely to be affected by the ROFR, considered the most suitable methods of dispute resolution, drafted a dispute resolution clause, reviewed the clause with all parties involved, and made sure that the clause is enforceable.

Review: Periodically reviewing the ROFR agreement to ensure it is still in the best interests of all involved parties.

• Make sure to set a timeline for the review of the ROFR agreement that is agreed upon by all parties.
• During the review process, assess any changes in the interests of the involved parties.
• Make sure to take into account any new legal regulations that may affect the ROFR agreement.
• Make any necessary changes to the ROFR agreement in order to ensure that all parties are still satisfied with the agreement.
• Once the ROFR agreement has been reviewed, all parties should sign off on the changes in order to make it official.

You’ll know that you can check this off your list once you’ve received all signatures from the involved parties.

FAQ:

Q: Does a Right of First Refusal apply outside the UK?

Asked by Sarah on July 9th, 2022.
A: Yes, a Right of First Refusal can apply outside the UK. Depending on the jurisdiction, there may be different conditions or requirements that need to be met in order for a Right of First Refusal to be valid. For example, in the US, the right must be included in a written contract or agreement. In the EU, the right may be implied from other applicable laws or regulations. It is important to research the local laws and regulations to ensure that any Right of First Refusal is valid and enforceable in the relevant jurisdiction.

Q: Can I use a Right of First Refusal for my business?

Asked by Noah on April 25th, 2022.
A: Yes, a Right of First Refusal can be used for businesses of all sizes and types. The key is to understand the purpose of a Right of First Refusal and how it works within your particular business model and industry sector. A Right of First Refusal typically gives one party (the “grantor”) the right to purchase an asset before any other party can purchase it. This can be beneficial for businesses as it allows them to control their own destiny by having first refusal on future opportunities. However, it is important to also consider any potential downsides before using a Right of First Refusal, such as tying up capital or affecting liquidity.

Q: How do I know if a Right of First Refusal is best for me?

Asked by Abigail on August 18th, 2022.
A: The decision whether or not to use a Right of First Refusal should be based on an assessment of your business’s needs and goals. It is important to consider any potential risks and rewards associated with using a Right of First Refusal before making your decision. You should also think about how it will affect your business’s liquidity and capital structure. Additionally, you should consider whether your industry sector or market is likely to have opportunities that would benefit from having a Right of First Refusal in place. Ultimately, you should make an informed decision based on all these factors before deciding whether or not to use a Right of First Refusal for your business.

Q: Does a Right of First Refusal create legal obligations?

Asked by Mia on October 5th, 2022.
A: Yes, when properly drafted and executed a Right of First Refusal creates legal obligations between two parties. The grantor has an obligation to offer the asset first to the grantee before offering it to any other party. Similarly, the grantee has an obligation to accept the offer if they wish to exercise their Right of First Refusal. Both parties must adhere to the terms and conditions set out in the agreement for it to be legally binding and enforceable in court.

Q: What are the benefits of using a Right of First Refusal?

Asked by Joshua on December 28th, 2022.
A: A Right of First Refusal provides several benefits for both parties involved. For example, it gives the grantee greater control over their destiny by allowing them to have first refusal on future opportunities that may arise within their industry sector or market. Additionally, it can help businesses protect their investments by giving them more certainty over who will acquire assets they are interested in purchasing. Lastly, it can help businesses avoid bidding wars or being outbid by competitors as they will have exclusive access to certain assets first before anyone else does.

Q: What are some potential risks associated with using a Right of First Refusal?

Asked by Abigail on March 14th, 2022.
A: Although there are many potential benefits associated with using a Right of First Refusal, there are also some potential risks that should be considered before making this decision for your business. For example, if you have multiple parties interested in acquiring an asset you might end up tying up capital if you exercise your right but do not end up purchasing it in the end as other parties may have offered more money for it in the meantime. Additionally, if you have multiple rights in place at once this could affect your liquidity as you would need to make sure you have enough money available at all times in order to exercise these rights when they become available.

Q: Can I use a Right of First Refusal with SaaS products?

Asked by Michael on June 2nd, 2022.
A: Yes, Rights of First Refusal can be used with SaaS products as well as any other type of asset or product that might be offered for sale or purchase in an agreement between two parties. A common example might be software as a service (SaaS) products where one party may wish to purchase certain licenses from another party at certain times during their agreement period in order for their product or service offering to remain competitive and up-to-date with changing technology trends and customer demands. By having a right of first refusal in place this party would then have exclusive access to those licenses rather than having to compete with other potential buyers at potentially higher prices or risk not being able to access them at all if they were sold out elsewhere first…

Q: Are there any specific requirements that need to be met when using a Right of First Refusal?

Asked by Joshua on November 8th, 2022.
A: Yes, there are certain requirements that need to be met when using a Right of First Refusal depending on the jurisdiction where it is being used; these requirements may vary from country-to-country so it is important that you research local laws and regulations before executing one for your business needs. Generally speaking however; these agreements must include certain details such as what assets are covered under the agreement; who has rights under this agreement (grantor vs grantee); what type(s) of rights are included; what price(s) will need to be paid; and when these rights will expire (if applicable). It is also important that both parties fully understand their legal obligations under this agreement so they can ensure compliance with all applicable laws and regulations when entering into this arrangement…

Q: Is there any way I can avoid a bidding war when using a Right of First Refusal?

Asked by Abigail on February 12th 2022
A: Yes, one way you can avoid bidding wars when using a Right Of First Refusal is by setting up an agreed upon pricing structure between both parties prior to agreeing upon this arrangement so that everyone involved knows exactly what will happen if one party exercises its right but another party offers more money for whatever is being offered (i.e., who gets preference). This way there won’t be any surprises down the line when/if someone ends up offering more money than what was previously agreed upon between both parties involved in this arrangement…

Q: Is there anything else I should consider before entering into an agreement which includes a Right Of First Refusal?

Asked by Michael on August 12th 2022
A: Yes, there are several things you should consider before entering into an agreement which includes a Right Of First Refusal including understanding how this arrangement could affect your business’s capital structure; liquidity; and overall financial health over time; researching local laws and regulations related to these types of agreements; understanding any potential risks associated with using this type of arrangement; and making sure both parties fully understand their legal obligations under this agreement so they can ensure compliance with all applicable laws and regulations when entering into this arrangement…

Example dispute

Suing a Company for Breach of Right of First Refusal

• A plaintiff may raise a lawsuit against a company for breach of right of first refusal if they believe they were denied the opportunity to purchase or lease a property or asset due to the company not honoring the right of first refusal agreement.
• Commonly, right of first refusal agreements are included in contracts between two parties in order to protect the interests of one party.
• In order to win the lawsuit, the plaintiff must be able to prove that the right of first refusal agreement was breached and that they suffered harm as a result.
• The plaintiff must also prove that they had a legitimate opportunity to purchase or lease the property or asset, but that the company failed to honor the agreement and allowed another party to purchase or lease the property or asset.
• If the plaintiff is successful in proving that the company breached the right of first refusal agreement, then the court will typically order the company to pay damages to the plaintiff. The damages may include any losses the plaintiff suffered due to the breach, such as the difference in purchase price or lost profits.
• The court may also order the company to pay the plaintiff’s legal fees and court costs.

Templates available (free to use)

First Refusal Agreement
Right Of First Refusal Agreement
Section 5B Offer Notice Right Of First Refusal To Public Auction Disposal
Section 5C Right Of First Refusal Offer Notice
Section 5D Right Of First Refusal Offer Notice

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