Right of first refusal is a clause in a contract that allows someone the opportunity to have the first chance at a sale or other business deal. If the person who holds this right declines to exercise it, the person preparing to make the sale or deal can enter into an agreement with anyone. In a simple example, two people could enter a contractual agreement on a house that gives the renter the right to make an offer on the house first in the event that the landlord ever decides to sell. If the landlord decides to list the house for sale, the tenants are approached first to see if they want to buy it. They can opt to refuse, allowing the house to be listed publicly, or they can accept and enter into a purchase agreement.
This type of agreement can come up in a number of contexts. It applies not only to real estate and personal property, but also to employment contracts and other types of agreements. Right of first refusal is commonly structured into the contracts signed by athletes, giving their teams or sponsors an opportunity to match offers made by competitors. It can also be applied to employment contracts for people working at corporations and large institutions, where the employer might want a chance to match an offer from a competitor if an employee is being wooed away with a job offer.
There are advantages and disadvantages to this contract clause. Clear advantages include the right to be notified first about a planned sale or change in the terms of a contract, and the ability to respond before that information becomes public. This is one reason rights of first refusal are built into some forms of employment contracts. One problem that can emerge is that the value of the contract may become inflated. The existence of the clause may be used to play bidders against each other in order to obtain a higher price.
Standard boilerplate contracts can be used to draft an agreement giving someone right of first refusal. For more complex agreements, an attorney must be retained to write a contract that will address the specific circumstances. These contracts can be very carefully crafted and may contain some special clauses addressing particular issues that may come up. People who are involved in negotiations for a business deal where someone else has this right may want to ask to review the terms to determine whether or not the other party could exercise it at an inopportune moment.
Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.