Right of first offer: Overview, definition, and example
What is right of first offer?
The right of first offer is a contractual provision that gives one party the opportunity to make the first offer to purchase or lease an asset or property before the asset is offered to other potential buyers or lessees. This right is typically granted to a party with an interest in the asset, such as a tenant, shareholder, or business partner, and it allows them the chance to negotiate and potentially secure the asset on favorable terms before it is made available to others. If the party with the right of first offer is not interested in the asset, the owner is then free to offer it to other potential buyers under terms that may be less favorable than those initially offered.
Why is right of first offer important?
The right of first offer is important because it provides an opportunity for a party to secure an asset without having to compete with outside bidders. For the party holding the right, it can be a valuable opportunity to acquire an asset at a potentially favorable price or under favorable conditions. For the seller or owner of the asset, the right of first offer provides a sense of security that their asset will not be sold to an outsider without their original interested party being given the first chance to negotiate. This provision can foster goodwill and maintain business relationships by ensuring that trusted parties have the opportunity to purchase or lease before others.
Understanding right of first offer through an example
Imagine a landlord who leases office space to a tenant. The lease agreement includes a right of first offer clause, which gives the tenant the first chance to negotiate for the office space if the landlord decides to sell the building. If the landlord chooses to sell, they must first offer the building to the tenant at a price and terms they are willing to accept. If the tenant is not interested, the landlord can then offer the property to other potential buyers.
In another example, a shareholder in a company may have a right of first offer to purchase additional shares if another shareholder decides to sell their shares. This gives the existing shareholder the opportunity to buy the shares before they are offered to outsiders, maintaining their percentage of ownership in the company.
An example of right of first offer clause
Here’s how a right of first offer clause might appear in a contract:
“In the event that the Seller decides to sell the Property, the Buyer shall have the right of first offer. The Seller shall notify the Buyer of their intention to sell, including the proposed terms and price. The Buyer shall have [X] days to make an offer. If the Buyer does not make an offer or declines to purchase, the Seller is free to offer the Property to other potential buyers under the same or better terms.”
Conclusion
The right of first offer is a valuable provision that allows a party to secure an asset before it is made available to others. By offering the first opportunity to purchase or lease, this right benefits both parties: it gives the holder the chance to acquire the asset under favorable terms, while also giving the owner the flexibility to sell or lease if the holder declines. It is commonly used in business and real estate transactions to foster trust and protect relationships.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.