Legal Definitions - right of first refusal

A right of first refusal is a contractual agreement that grants a specific party the option to purchase an asset or enter into a transaction under the exact same terms and conditions offered by a third party, before the asset or transaction can be finalized with that third party.

Essentially, it gives someone the first opportunity to buy something if the owner decides to sell it to an outside buyer. The holder of the right can "step into the shoes" of the third-party buyer by matching their offer.

• Example 1: Business Partnership Shares

  Imagine two business partners, Emily and David, who own a software company. Their partnership agreement includes a clause stating that if either partner wishes to sell their shares, the other partner has a right of first refusal. David decides he wants to sell his 40% stake in the company. He receives an offer from an outside investor, Sarah, for $1 million.

  Due to the right of first refusal, David must first offer his 40% stake to Emily for $1 million. If Emily chooses to match Sarah's offer, she gets to buy David's shares and maintain control within the existing partnership. If Emily declines, David is then free to sell his shares to Sarah under the agreed terms.

• Example 2: Commercial Property Lease

  A small bookstore, "The Literary Nook," leases its commercial space from a landlord. Their lease agreement includes a provision that gives The Literary Nook a right of first refusal to purchase the building if the landlord decides to sell it. One day, the landlord receives an offer from a real estate developer to buy the entire building for $2.5 million.

  Before accepting the developer's offer, the landlord is contractually obligated to present the same $2.5 million offer to The Literary Nook. If the bookstore decides to exercise its right of first refusal and matches the developer's offer, they will be able to purchase the building. If they decline, the landlord can proceed with selling to the developer.

• Example 3: Rare Collectible Item

  A private collector, Mr. Henderson, owns a rare, historically significant antique map. Years ago, he entered into an agreement with the National History Museum, granting the museum a right of first refusal on this specific map. Mr. Henderson decides to sell the map and receives an offer of $500,000 from another private collector, Ms. Rodriguez.

  Before selling to Ms. Rodriguez, Mr. Henderson must inform the National History Museum of the offer. The museum then has the option, under its right of first refusal, to purchase the map for $500,000. If the museum decides to buy it, they acquire the map for their collection. If they pass on the opportunity, Mr. Henderson can then sell it to Ms. Rodriguez.