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Understanding ‘right of first refusal’

On Behalf of | May 17, 2019 | Business Formation & Planning |

If you have a contract with someone who has “right of first refusal,” it’s essential to understand what your obligations are to them. It means that they have the right to enter a particular transaction before anyone else is offered that right.

Individuals and entities seek the right of first refusal in everything from real estate to publishing to sports and entertainment. Often, partners who are involved in joint ventures and shareholders in a company have right of first refusal to buy out a portion of the business that another partner chooses to sell before it’s offered to anyone else.

No two right of first refusal clauses are necessarily the same. They are typically customized to specify the amount of time that the person with that right has to act on an opportunity before others are offered it.

Those who seek a right of first refusal often do so because they may not be ready to invest in an opportunity or a person (like an author or an athlete) just yet. However, they want the ability to do so before anyone else.

In real estate, an individual or entity may choose to lease a commercial property until they can see how it’s doing rather than make the commitment to buy. However, they want the option to buy before a property is offered to anyone else.

Why would someone (like a property owner, for example) allow someone to have right of first refusal? It can make it difficult to attract buyers. However, if a potential buyer you’d particularly like to have requests it, it may be worthwhile.

Whichever side of the right of first refusal equation you’re on, it’s wise to make sure that any contract that includes it is written or at least reviewed by an experienced attorney. They can help protect your rights and save you from costly litigation.