Legal Definitions - right of preemption

A right of preemption is a contractual agreement that grants a specific potential buyer the exclusive first opportunity to purchase an asset, but only if the owner decides to sell it within a predetermined timeframe and at a price that was agreed upon in advance. If the owner chooses to sell, they are legally obligated to first offer the asset to the holder of the preemption right at the specified price. If the holder declines this offer, the owner is then free to sell to another party.

• Example 1: Business Partnership Shares

  Imagine two business partners, David and Emily, who co-own a successful software development firm. Their partnership agreement includes a clause granting each partner a right of preemption on the other's shares. The agreement stipulates that if either partner decides to sell their 40% stake in the company within the next seven years, they must first offer it to the other partner for a pre-agreed valuation of $2 million.

  How it illustrates the term: If David decides he wants to retire and sell his shares, he is contractually bound to offer them to Emily first, at the specified price of $2 million. Emily has the exclusive first opportunity to buy David's shares. If Emily accepts, she acquires David's stake. If she declines, David is then free to seek an outside buyer for his shares, but only after Emily has had her first chance at the pre-determined price.

• Example 2: Commercial Property Lease

  A small bakery, "The Daily Loaf," leases its storefront from a property owner, Mr. Henderson. Their lease agreement includes a right of preemption clause. This clause states that if Mr. Henderson decides to sell the building within the next ten years, he must first offer it to The Daily Loaf for a fixed price of $750,000.

  How it illustrates the term: If Mr. Henderson receives an attractive offer from a developer to buy the entire building, he cannot immediately accept it. Because of the right of preemption, he must first present the opportunity to purchase the building to The Daily Loaf for $750,000. The bakery has the first chance to buy their leased space at the pre-negotiated price. If the bakery chooses not to buy, Mr. Henderson is then free to sell the property to the developer or any other interested party.