Loading the player...

What is a 'Right Of First Refusal'

A right of first refusal is a contractual right of an entity to be given the opportunity 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 is free to open the bidding up to other interested parties.

BREAKING DOWN 'Right Of First Refusal'

Since an entity with the right of first refusal has the right, but not the obligation, to enter into a transaction that generally involves an asset, it is akin to a having a call option on the asset.

A right of first refusal is usually negotiated by a party when it wants to see how a business will turn out. The party may prefer to hold the option to get involved at a later point, rather than make the outlay and commitment up front.

Advantages and Inconveniences of Rights of First Refusal

For the person holding it, a right of first refusal is an insurance policy that he will not lose an asset that he may need for his business. For example, a commercial tenant may prefer to lease premises but would actually 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 his lease.

Conversely, the right of first refusal is a hindrance for the property owner since it does, in fact, limit his ability to sell and seek buyers. In the same example as above, the landlord may have a difficult time attracting buyers if they know that the current tenant will likely meet any offer they make. 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 relatively new author.

  1. Godfather Offer

    An irrefutable takeover offer made to a target company by an ...
  2. Rump

    The name given to the group of investors refusing to tender their ...
  3. Open Offer

    An open offer is a secondary market offering, similar to a rights ...
  4. Retaliatory Eviction

    When a landlord takes revenge against a tenant's actions by evicting, ...
  5. Subscription Right

    A subscription right is the right of existing shareholders in ...
  6. Exhaust Price

    A discount price at which a broker must liquidate a client's ...
Related Articles
  1. Investing

    Buying a House with Tenants: A Quick Guide

    Before buying a house with tenants, know the risks and responsibilities you're taking on.
  2. Investing

    Understanding Rights Issues

    Not sure what to do if a company invites you to buy more shares at discount? Here are some of your options.
  3. Managing Wealth

    Know Your Shareholder Rights

    Common stock owners have numerous privileges and should be vigilant in monitoring a company.
  4. Managing Wealth

    11 Mistakes Inexperienced Landlords Make

    Avoid these pitfalls if you considering purchasing a rental property.
  5. Investing

    Top 4 Nightmares For Real Estate Investors

    Renting out your property is not without risks; the good news is, they don't have to keep you up at night.
  6. Retirement

    Could Being a Landlord Pay for Your Retirement?

    If you have the money to buy them and the energy to run them – or the funds to pay a good manager – rental properties can help pay for your retirement.
  7. Personal Finance

    Top 5 Reasons Banks Won't Cash Your Check

    Learn the top reasons that a bank won't cash your check, and find out what steps you can take to prevent those scenarios from happening.
  8. 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.
  9. Investing

    Tips for renting out your home

    Renting out your home can be a great way to ride out a real estate slump - if you do it right.
  1. What is the difference between real estate and real property?

    Understand how real estate is legally different from real property and the implications of that difference for each property ... Read Answer >>
  2. Why would a company issue a rights offering?

    Understand more about a rights offering, and learn the most common reasons a company might have to issue a rights offering, ... Read Answer >>
  3. What rights do all common shareholders have?

    Learn what rights all common shareholders have, and understand the remedies that can be taken if those rights are violated ... Read Answer >>
  4. What is the difference between share purchase rights and options?

    Discover the difference between share purchase rights and options, which are essential to understand when deciding to invest ... Read Answer >>
Hot Definitions
  1. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  2. Entrepreneur

    An Entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture. ...
  3. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  4. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  5. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  6. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
Trading Center