Right of First Offer - Explained
What is the Right of First Offer?
Written by J. Mance Gordon
Updated at April 20th, 2024
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What is the Right of First Offer?
Right of First Offer is a contractual right that obligates the owner of an asset to offer it to the right holder before selling it to any third party. However, if the right holder refuses the offer or they fail to negotiate an agreement the owner is free to offer the asset to a third party. Here, the right holder has the right to purchase the asset before it is being offered to someone else.
How does the Right of First Offer Work?
This right is generally attached to a lease agreement for real estates or part if partnership agreement for businesses. If this right is included in the tenancy agreement or the partnership agreement the owner or a partner first need to negotiate the selling with the tenant or partner. If the tenant or the partner rejects the offer, then the owner is free to offer it to anyone else. Similarly, if the seller and the rights holder fail to reach an agreement about the terms of the sale the seller may sell the asset to someone else.
The Right of first offer is associated with the Right of first refusal, where the Right of First Offer is advantageous for the seller, the Right of first refusal serves the prospective buyers. The holder of the Right of First Offer needs to offer a deal to the seller within a specific time period after which the seller may offer it to others. The seller may accept the terms of the offer or may reject it and start negotiating with other prospective buyers. If the seller cannot find another buyer or if the seller fails to reach an agreement with another buyer, he or she can come back to the right holder. Then the right holder can make a new offer with same or changed terms.
The right holder may want to lower the previously offered price. Failure of finding another buyer puts the right holder in an advantageous position in the negotiation. The strategy of including this right in the agreement reduces the transaction cost of the seller. Usually, the process of selling an asset is costly and time-consuming. It may need to involve agents, lawyers, accountants, and advisers. It takes a lot of time and effort to find a suitable buyer for the asset and this strategy saves both.