What Is a Right of First Offer?
A right of first offer is a contractual obligation that allows a rights holder to purchase an asset before the owner tries to sell it to someone else. If the rights holder is no longer interested in the property, the seller can sell it to a third party.
Rights of first offer are most commonly used in the real estate industry and in the sale of businesses.
Rights of First Offer Explained
A right of first offer is usually written into a contract such as a lease agreement or business partnership. It is triggered when the owner wants to sell the asset or property. Under the terms of the contract, the owner is obliged to give the holder of the right of first offer the first chance to buy the property. The right holder has a specific amount of time in which to make an offer before it expires. The seller is free to accept or reject the offer.
[Important: The right of first offer is a generally quick process.]
If he rejects the offer, the owner can then sell it to a third party without any restrictions. If the attempts at selling to a third party are unsuccessful, the seller can come back to the rights holder for a new offer. The rights holder is not bound by his original offer at this point and can lower it. Knowing the seller has been unsuccessful in finding a third party puts the rights holder in a stronger position.
Sellers typically include landlords and business owners, while rights holders are generally tenants and investors.
Practical Use of Rights of First Offer
The most common situation where a right of first offer is used is in real estate between a landlord and tenant. The tenant may want a right of first offer from the landlord to avoid being forced to relocate. The tenant may wish to make a reasonable offer to the seller. Meanwhile, the landlord, or seller, may consider the offer to make a quick sale and minimize legal and brokerage fees.
The right of first offer is also used when businesses are being sold off. A business owner may give the right of first offer to partners or investors before putting it on the general market to sell to a third party.
Right of First Offer Versus Right of First Refusal
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 with a right of first refusal attached 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.