Loading the player...

What is a 'Right Of First Refusal'

Right of first refusal is a contractual right , but not obligation, to enter into a business transaction with a person or company before anyone else can. If the entity with the right of first refusal declines to enter into a transaction, the owner of the asset who offered the right is free to open the bidding up to other interested parties.

Breaking Down 'Right Of First Refusal'

Rights of first refusal are similar to an options contract, since the holder has the right, but not the obligation, to enter into a transaction that generally involves an asset. The person with this right has the opportunity to make an agreement on an asset or contract before others can. 

A right of first refusal is usually requested by an individual or company when it wants to see how a business or opportunity will turn out. The right holder may prefer the option to get involved at a later point, rather than make the outlay and commitment up front. Right of first refusal allows them to do this. They don't need to commit now, but will have the first chance to commit (before others) if they decide to.

Advantages and Inconveniences of Rights of First Refusal

For the entity holding it, a right of first refusal is an insurance policy that they will not lose an asset that they want or need. For example, a commercial tenant may prefer to lease a location, but would buy the premises if not doing so meant that he would be evicted by a new owner. In such a case, the tenant would negotiate to have a right of first refusal incorporated into their lease. This way, if leasing becomes impossible, they would have the option to buy the location before others have the chance. 

Conversely, the right of first refusal is a hindrance for the property owner since it limits the ability to sell and seek buyers. In the example above, the landlord may have a difficult time attracting buyers if they know that the current tenant is always first in line to buy. However, if attracting the right tenant necessitates a right of first refusal, the property owner might still do it.

Common Uses of Rights of First Refusal

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 on buying out the stakes held by other partners, should the latter wish to leave the joint venture. Similarly, in private companies, shareholder agreements commonly allow existing shareholders to purchase those who wish to leave before any new shareholders are brought in.

Rights of first refusal are a common feature in many other areas, 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.

RELATED TERMS
  1. Bundle Of Rights

    A bundle of rights is a set of legal rights afforded to the real ...
  2. Retaliatory Eviction

    A retaliatory eviction occurs when a landlord evicts a tenant ...
  3. Lease

    A lease is a legal document outlining the terms under which one ...
  4. Subscription Right

    A subscription right is the right of existing shareholders in ...
  5. Open Offer

    An open offer is a secondary market offering, similar to a rights ...
  6. Sublease

    A sublease is the renting of property by a tenant to a third ...
Related Articles
  1. Insights

    François Fillon Refuses to Quit Presidential Race

    François Fillon has refused to drop out of the race to become France’s next president, despite his campaign coming under increasing pressure from damaging allegations.
  2. Investing

    Know your shareholder rights

    Common-stock owners have numerous privileges and should be vigilant in monitoring a company. Read on to learn what rights you have as a shareholder.
  3. Investing

    Stock Rights Issue

    Rights are offers that allow existing stockholders to buy additional shares at a predetermined price, for a set time period. Usually, the number of shares the investor can purchase are in proportion ...
  4. Investing

    Investing in Stock Rights and Warrants

    Learn why many companies choose to issue rights or warrants as an alternative means of generating capital and how their value is determined.
  5. Managing Wealth

    5 Reasons Small Business Owners Sell Their Companies

    Selling a business you've built from scratch isn't done lightly. Consider these moments when the opportunity might be right for you.
  6. Investing

    Tips for prospective landlords

    Investing in rental property can generate serious income, but there's more to it than collecting rent. Check out all the pros and cons before you invest in the rental property.
  7. Investing

    Is Property Management Worth it? Ask Yourself These 8 Questions

    If you own rental properties, ask yourself these questions when deciding who should manage them.
Trading Center