Right of refusal: Overview, definition, and example
What is a right of refusal?
A right of refusal is a contractual provision that gives one party the right to have the first opportunity to accept or reject an offer before the offer is made to others. The right of refusal ensures that the holder of the right has priority when a particular opportunity, such as purchasing an asset or entering into an agreement, becomes available.
This right is commonly used in various contexts such as real estate, business agreements, and investment opportunities. In many cases, the right of refusal is triggered when the owner of an asset or business wishes to sell or lease it, and the holder of the right has the first opportunity to negotiate the terms or make a purchase.
Why is a right of refusal important?
The right of refusal is important because it:
- Gives priority: It ensures that the holder has the first chance to act on an opportunity, preventing others from getting the opportunity before they can evaluate it.
- Protects interests: It allows parties to protect their interests by ensuring they don’t lose out on valuable opportunities.
- Encourages transparency: With this right in place, the process of offering opportunities is more transparent, as the holder knows that they have priority.
- Reduces competition: In some business situations, having a right of refusal helps eliminate the risk of unwanted competition from outside parties, especially in sensitive or strategic situations.
In real estate, for example, a tenant with a right of refusal on a property has the opportunity to purchase the property first before the owner can sell it to someone else. In business, a partner might have a right of refusal to buy another partner’s shares before they can be sold to outsiders.
Understanding the right of refusal through an example
Imagine a company that owns a commercial building and leases it to a tenant. The lease includes a right of first refusal clause, meaning the tenant has the first chance to buy the building if the owner decides to sell. If the owner receives an offer from a third party, they must present the offer to the tenant. The tenant can either accept the offer and purchase the property or decline the opportunity, allowing the owner to sell to the third party.
In another scenario, a business partner holds a right of first refusal to purchase the shares of another partner who is looking to exit the business. If the departing partner receives an offer from an external buyer, the right of refusal allows the remaining partner the option to match the offer and acquire the shares before the external buyer is allowed to purchase them.
An example of a right of refusal clause
Here’s how a right of refusal clause might look in a contract:
“In the event that the Seller receives an offer to sell the Property, the Buyer shall have the right of first refusal to purchase the Property on the same terms and conditions offered by the third-party buyer. The Seller shall notify the Buyer of such offer in writing, and the Buyer shall have [X] days to exercise their right to purchase.”
Conclusion
The right of refusal ensures that the holder has the first opportunity to accept or reject an offer before it is extended to other parties. Whether in real estate, business agreements, or investment opportunities, this right helps protect interests, give priority, and ensure fairness. By including a clear right of refusal clause in agreements, businesses and individuals can avoid unnecessary competition and ensure that they have a chance to act on opportunities before others.
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.