Two contractual agreements that are commonly used in business matters and shareholder agreements include the right of first refusal and the right of first offer. While these rights are similar, these rights are not the same. A right of first offer provides the holder of the right with the opportunity to submit the first bid on an asset. The right of first refusal gives the right holder the option to match an offer that has been made to the seller — or refuse to match it. Each right can come with advantages and disadvantages, depending on whether you are the seller or the buyer.
What is a Right of First Refusal?
A right of first refusal is a contractual agreement that gives a party the right to be the first buyer of an asset. The right of first refusal does not give the interested party the obligation to actually buy the asset — the right simply gives them the option to do so. With a right of first refusal, the seller must have an offer on the asset, which the right holder can then match or refuse to match.
The right of first refusal is common in joint ventures and other situations where a party might prefer to see how an opportunity develops before making a commitment. The right is only valid for a limited amount of time — as outlined in the contract — before the seller can accept another party’s offer. These agreements can have several advantages for a buyer, including giving them an insurance policy, letting them be focused on, and giving them a competitive edge.
What is a Right of First Offer?
A right of first offer is a contractual obligation that lets a party purchase or bid on an asset before the owner tries to sell it to someone else. If the owner wishes to sell the asset, they must first give the holder of the right of first offer the first chance to buy it or submit a bid. The terms of the contract would specify the time the right holder must make an offer before it ends. The seller may either accept or reject the offer.
If the seller rejects the offer, they can offer it to another party. If they cannot sell it to a third party, the right holder may make a new offer. In such cases, the right holder is not bound by the original offer. The right of first offer is commonly used in real estate matters — and during the sale of businesses. For example, a business owner may give the right of first offer to their partners or investors before placing it on the market.
Is a Right of First Offer or a Right of First Refusal Better?
The contractual right of first refusal is closely related to the right of first offer. Neither right is necessarily better than the other. Both rights have pros and cons, depending on whether you are the buyer or seller.
The right of first refusal usually favors the buyer. Assets and property with this right attached to them can be more difficult to sell. A right of first refusal typically limits the seller’s ability to negotiate with multiple buyers. They may also have more difficulty attracting potential buyers. Still, this right can give a buyer the assurance that there may be a purchaser ready to move forward with the transaction.
While the right of first offer is often more useful to sellers, there are often conditions placed on the sale price, and what the seller will accept. However, the seller may be contractually required to keep the price of the right of first offer within a specific percentage if the asset is offered to others — or the property is placed on the general market.
Contact an Experienced New York Business Attorney
If you are negotiating a contract involving the right of first offer or the right of first refusal, it’s vital to have an experienced business attorney by your side who can ensure your interests are protected. Brinen & Associates provides knowledgeable counsel and diligent representation to businesses, shareholders, and corporate owners for a wide variety of contractual matters. Call (212) 330-8151 or send us a message to schedule a consultation.