What Is a Right of First Offer?

A right of first offer is a contractual obligation that allows the right holder to purchase an asset before the owner tries to sell it to someone else. If the right holder is no longer interested in the property, the seller can then sell it to a third party. Rights of first offer are most commonly used in the real estate industry and the sale of businesses.

Key Takeaways

  • A right of first offer says that a rights holder can buy or bid on an asset before the owner tries to sell it to a third party.
  • These rights are common with real estate and business sales and are often written into the lease agreement or business partnership.
  • Thus, right holders are usually either tenants or investors.
  • A right of first refusal, different from a right of first offer, gives the right holder the option to match an offer already received by the seller.
  • A right of first offer is said to favor the seller, while a right of first refusal favors the buyer.

Understanding a Right of First Offer

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 real 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 the right expires. The seller is free to accept or reject the offer.

If the seller 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 right holder for a new offer. At this point the right holder is not bound by their original offer and therefore can lower it. Knowing the seller has been unsuccessful in finding a third party buyer puts the right holder in a stronger position. Sellers typically include landlords and business owners, while right holders are generally tenants and investors.

The right of first offer is generally a quick process.

Special Considerations

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 in the event of a sale of the property. The tenant may wish to make a reasonable offer on the property. Meanwhile, the landlord may consider the offer to make a quick sale and minimize legal and brokerage fees.

The right of first offer is also used when a business is 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 vs. 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 option 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.