Right of First Refusal

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Understanding Right of First Refusal (ROFR)

What it is

A Right of First Refusal (ROFR) is a contractual provision that gives a designated party the priority to buy an asset before the owner can sell it to others. When the owner receives a bona fide offer from a third party, they must present that offer to the ROFR holder, who can either match it and buy the asset or decline, allowing the owner to sell to the third party.

Key takeaways

  • ROFR lets a holder match any external offer before a sale to a third party proceeds.
  • Common in real estate, joint ventures, venture capital, publishing, sports and entertainment.
  • ROFR differs from a right of first offer (ROFO) and from options contracts.
  • ROFRs can be customized (time limits, price formulas, nominee rights) but may slow or complicate sales.

How ROFRs work

  1. A third party makes a bona fide offer to the seller.
  2. The seller notifies the ROFR holder and provides the offer details.
  3. The ROFR holder has a limited time to accept (match) or decline.
  4. If the holder matches, the asset is sold to them under the same terms; if they decline, the seller can complete the sale with the third party (subject to any contractual conditions).

Common customizations

  • Time windows for exercise (e.g., 10–30 days).
  • Scope of the right (specific assets, percentage interests, or future projects).
  • Price determination (must match the third-party offer or use a valuation formula).
  • Transferability (whether the holder can nominate a third-party buyer).
  • Waiver provisions and procedures for providing notice.

ROFR versus ROFO and options

  • ROFO (Right of First Offer): The holder gets the chance to make the first offer before the seller markets the asset. No third-party offer is required.
  • ROFR: The seller must bring an existing third-party offer to the holder to match.
  • Options contract: Gives the buyer the right (but not the obligation) to buy or sell at a set price or on set terms without waiting for a third-party offer. Options are standalone rights; ROFRs depend on external offers.

Advantages and disadvantages

For the ROFR holder (buyer)
* Advantages:
– Priority access to assets of interest.
– Can observe market interest and price before deciding.
* Disadvantages:
– May miss out if unwilling or unable to match a higher third-party bid.
– Exercising the right may lead to paying a premium or an unfavorable price if market moves.

For the seller
* Advantages:
– Provides a ready buyer and can reassure parties (e.g., partners or landlords).
– Can preserve preferred ownership structures (e.g., keeping control within a group).
* Disadvantages:
– May deter third-party bidders who dislike the delay or uncertainty.
– Can reduce negotiating leverage and complicate or lengthen sale processes.

Typical use cases

  • Real estate: Tenants with an opportunity to purchase the property they occupy.
  • Joint ventures and partnerships: Partners have the chance to buy departing members’ interests.
  • Venture capital and private equity: Investors protect their ownership position before outside investors gain stakes.
  • Entertainment and publishing: Publishers or studios reserve the option to acquire future works or rights.

Practical considerations and best practices

  • Define “bona fide offer” and required supporting documentation to prevent disputes.
  • Specify exact notice procedures, delivery method and exercise deadline.
  • Consider whether the holder may assign the right or nominate a buyer.
  • Address how to handle improvements, encumbrances, or changes to the offer during the exercise period.
  • Be mindful that ROFRs can create fiduciary or disclosure obligations in certain contexts (e.g., corporate sales).

Bottom line

A ROFR is a flexible contractual tool that grants priority purchase rights without obligating the holder to buy. It protects buyers who want the option to acquire an asset while allowing sellers to seek market offers — but it can slow transactions and affect marketability. Clear drafting of scope, timelines, notice, and valuation terms is essential to reduce friction and litigation risk.