Right of First Refusal: What is it?

By The Law Office of Yoel Molina.
 
A contractual right known as the right of first refusal (ROFR) may have an effect on your company and potential future possibilities. Simply explained, the ROFR offers the right's owner the choice to engage in a transaction ahead of time. However, the contractual language will determine the scope of the right and when it applies.
 
What Is the Process for the Right of First Refusal?
A contract between two parties establishes the right of first refusal. The ROFR is held by one party, which also owns other assets like real estate or a company. According to the contract, the owner of the ROFR must be given the same option to enter that transaction on the same conditions if the property owner wishes to do so with anyone else, such as opting to sell a firm. If the ROFR holder declines the chance, the property owner may only proceed with the business deal with the third party.

The ROFR may be applied to several types of property and is most frequently seen in agreements involving real estate and corporate assets. A ROFR clause, which states that if one of the LLC's owners intends to sell his share of the company, he must first give the other owners the chance to buy it before bringing in a third party, is found in many operating agreements for LLCs.
 
How to Establish the First Right of Refusal?
A legal contract is necessary for the ROFR to be functional. This privilege is frequently included in other contracts, such as leases or operating agreements. However, a single contract is another option.

The contract itself must be legally enforceable in both scenarios. The contract must normally be written, signed, and provide a description of the property, depending on the kind of property and the length of the agreement. All agreements must contain genuine consideration, which entails a trade-off between something of value for each participant. When one party receives the ROFR, the other party must also get something valuable, like money.
 
Different forms of the First Refusal Right:
The actual contract will determine the terms of the right. Here, the parties can design a contract that works for their circumstances. To make sure your contract matches the interests of your company and handles potential problems that may occur, it may be good to speak with an attorney. Among the frequent variants are:

Exclusions: The agreement may specify that the right does not apply in specific circumstances, such as business dealings with family members.
Transactions: The contract should outline the circumstances in which the ROFR is set off. For instance, it might only happen if the owner wants to sell the property rather than place a lien on it to obtain a loan.

Duration: The ROFR may terminate after a predetermined period of time or following the occurrence of an event, such as the lease's expiration. The owner of the property may conclude a transaction after the allotted period has passed without informing the person holding the ROFR.

Time to respond: In a similar vein, the agreement may provide that the party only has a set period of time to decide whether to accept the offer; thereafter, the property owner may proceed with the third party's business.

Transferability: The ROFR may be transferable to a third party at the parties' discretion. The ROFR may be transferred with the property, which means that if the business or real estate is sold, the new owner must still grant the holder the ability to veto any further transactions.
 
Alternatives to First Refusal Rights:
The right of the first negotiation, commonly referred to as the right of the first offer, is an alternative to the ROFR. This is more restricted in that the right holder only has the option of making his own offer rather than being given the chance to accept the transaction on the same terms. The other party is not required to accept that offer and is free to negotiate a different set of conditions for a business deal with a third party.
 
Penalties for Breaching Contractual Provisions:
The consequences for breaking the terms are determined by contract law since the ROFR is a contractual right. The damaged party may file a lawsuit for monetary damages or specified damages, but usually not both, if the right to reject is not offered.

Specific performance denotes that the other party is required to carry out the terms of the agreement. The ROFR holder must be given the chance to buy the property under the same conditions, such as purchasing the company's shares, if, for instance, the ROFR was not offered to a party before the third party entered the commercial transaction.

The aggrieved party may alternatively claim monetary damages if specific performance is not an option due to the facts or state law. The sum is used to make up for the lost opportunity for the affected party.


If you have any questions about this article or similar matters, please contact our office, the Law Office of Yoel Molina, P.A., at fd@molawoffice.com or 305-548-5020, option 1