What is a 'Right Of First Offer'
A right of first offer is a contractual obligation by the owner of an asset to a rights holder to negotiate the sale of an asset with the rights holder before offering the asset for sale to third parties. If the rights holder is not interested in purchasing the asset or cannot reach an agreement with the seller, the seller has no further obligation to the rights holder and may sell the asset.
BREAKING DOWN 'Right Of First Offer'A right of first offer is closely related to a right of first refusal, but the former is considered to favor the seller while the latter is considered to favor the prospective buyer. A right of first refusal gives the holder of the right the capacity to match an offer that has been received by someone wishing to sell an asset. Assets that have a right of first refusal attached to them can be more difficult to sell because potential buyers may not want to go to the trouble of negotiating a deal that must be offered to another party first.
Conversely, a right of first offer is triggered when the owner of property wants to sell. In such a case, the holder of a right of first offer is entitled to make an offer on the property within a given time frame before the seller can offer it to anyone else. The seller is then free to accept the offer or not. If he refuses, he can then sell to a third party without any restrictions. If his attempts at selling to a third party are unsuccessful, the seller can come back to the right holder and seek a new offer. However, at that point, the buyer is not bound by his original offer and can lower it. In practice, knowing the seller has been unsuccessful in finding a third party, the buyer will be in a stronger position.
Practical Use of Rights of First Offer
The most common situation where a right of first offer is used in practice is between a commercial tenant and a landlord. In such a case, the tenant may want to have a right of first offer to avoid being forced to relocate. As such, the tenant may wish to make a reasonable offer to the seller. Conversely, the landlord, or seller, may consider the offer to be able to make a quick sale and minimize legal and brokerage fees.