Legal Definitions - first refusal, right of

A right of first refusal is a contractual agreement that grants a specific party the opportunity to purchase an asset or enter into a transaction before the owner can offer it to anyone else. If the owner decides to sell or transact, they must first present the proposed terms to the party holding the right of first refusal. This party then has the option to accept or decline those terms. Only if they decline can the owner proceed to offer the asset or transaction to a third party, and typically, it must be on the same terms initially offered to the right holder.

• Example 1: Commercial Property Lease

  Imagine a small business, "The Daily Grind Cafe," that leases its storefront from a landlord. Their lease agreement includes a clause stating that if the landlord ever decides to sell the building, The Daily Grind Cafe has the right of first refusal. One day, the landlord receives a compelling offer from a real estate developer to buy the entire building. Before accepting the developer's offer, the landlord is legally obligated to present the exact same terms (price, closing date, etc.) to The Daily Grind Cafe. The cafe then has a specified period to decide if they want to purchase the building on those terms. If they decline, only then can the landlord sell to the developer.

  This illustrates the right of first refusal because the cafe gets the exclusive first opportunity to buy the property they occupy, preventing the landlord from selling it to an outside party without giving the current tenant a chance to match the offer.

• Example 2: Business Partnership Shares

  Consider two partners, Sarah and Tom, who co-own a successful graphic design agency. Their partnership agreement includes a right of first refusal clause regarding the sale of shares. If Tom decides he wants to retire and sell his 50% stake in the company, he cannot simply sell it to any interested buyer. He must first offer his shares to Sarah at the same price and on the same conditions that he would offer to an external buyer. Sarah then has the option to purchase Tom's shares, ensuring she has the first opportunity to maintain full ownership or control of the business before an unknown third party can acquire a stake.

  This demonstrates the right of first refusal by giving Sarah priority to buy out her partner's interest, preserving the existing ownership structure if she chooses to do so.

• Example 3: Unique Collectible Item

  A renowned art collector, Mr. Davies, owns a rare antique clock. His friend and fellow enthusiast, Ms. Evans, has always admired the clock and expressed a strong desire to own it someday. They enter into a written agreement where Ms. Evans is granted a right of first refusal on the clock. Years later, Mr. Davies decides to downsize his collection and receives an offer of $50,000 for the clock from an auction house. Before he can finalize the sale with the auction house, Mr. Davies must first offer the clock to Ms. Evans for $50,000. If Ms. Evans accepts, she gets the clock; if she declines, Mr. Davies is free to sell it to the auction house.

  This example shows how the right of first refusal can apply to unique personal assets, giving a specific individual the priority to acquire an item they desire if it ever comes up for sale.