A right of first refusal is a contractual covenant given by one party (the owner) to the holder of the right of first refusal (the holder) that prohibits the owner from selling an asset to a third-party purchaser without first making an offer of sale to the holder. A right of first refusal is a commonly negotiated provision in many leases, joint tenancy agreements, tenancy in common agreements, partnership agreements, limited liability company operating agreements and other contracts where one party has an economic interest in an asset that could be compromised if the owner sells the asset in the future. A similar arrangement is a right of first offer, in which the owner covenants to the holder that it will not offer the asset for sale to any other person without first offering to sell the asset to the holder. Although there are some differences between a right of first refusal and a right of first offer, they function similarly in many respects, and this article focuses primarily on the former.
A right of first refusal contains elements of an option insofar as it becomes a binding contract of purchase and sale if the owner offers the asset for sale to the holder and the holder accepts the offer pursuant to the established terms. Unlike an option, however, which entitles the optionee to compel the owner to sell the asset to the optionee, typically on previously established terms, a right of refusal “merely requires the [owner], when and if he decides to sell, to offer the property first to the [holder] so that [the holder] may meet a third-party offer or buy the property at some other price set by a previously stipulated method.”1 The right of first refusal is violated “only when the [owner] sells the property without first offering the [holder] the right to match the purchase offer.”2
