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What is Right of First Refusal?

Mary McMahon
By
Updated May 16, 2024
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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.

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Mary McMahon
By Mary McMahon

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.

Discussion Comments
By pleonasm — On Apr 25, 2013

@bythewell - It depends on what it is for. I mean, in your case your contract probably doesn't have any kind of hidden clauses or anything except the boilerplate agreement you get from any old website on renting.

But if you were talking about a business contract or a book contract I imagine it would be a bit different, particularly since there was more potential to make the other party's life more difficult.

I don't think I would ever sign any kind of contract without getting a lawyer to take a look at it first, unless I had a sample contract (which you can find online) to compare it to.

By bythewell — On Apr 24, 2013

@browncoat - I don't think you necessarily need a lawyer with this kind of thing as long as you are absolutely sure you understand every clause of the contract.

I signed a tenants' right of first refusal when I was moving into my new apartment recently and it was pretty straightforward and easy to understand. I think there's danger in someone skimming a contract, or in maybe pretending they understand when they don't, but if you really do get it, then it's probably not that big a deal.

By browncoat — On Apr 23, 2013

This is something that comes up a lot in contracts between writers and publishers and it can be a pain in the neck for inexperienced writers who don't know how to vet a contract (and don't have an agent to do it for them).

Even though it seems like it wouldn't make all that much difference in the long run, it can have all kinds of nonsense attached to it, like terms about how long a company has before they can refuse or accept the next book. If they manage to write into the contract that they have the first right of refusal on all books in that series, and you get into a legal scrap with them over something, they can hold up your books for a long time.

Or say they put in a clause saying that you aren't allow to sell the book to anyone else for less than what you offer them. If you don't like publishing through them and want to go with someone else, you're basically stuck at their whim unless you can find another publisher who is willing to one-up them at the price (which would be difficult).

This is why your whole contract, including the first right of refusal agreement, should be gone over by an experienced agent or a lawyer specializing in books.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a...

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