Unlock the Power of Right of First Offer
A right of first offer (ROFO) is a unique contractual privilege that allows the holder to purchase an asset before the owner markets it to other potential buyers. This right is prominently utilized in the real estate and business sectors, offering strategic advantages to both parties involved.
Key Takeaways
- Preemptive Advantage: A right of first offer grants the right holder the initial opportunity to buy or bid on an asset before it’s marketed to third parties.
- Common Usage: ROFOs are frequent in real estate and business transactions, commonly embedded in lease agreements or business partnerships.
- Aligned Interests: Rights holders, often tenants or investors, benefit from minimized disruptions, while sellers benefit from streamlined sales processes.
- Comparison to ROFR: Unlike a right of first refusal (ROFR), which allows the holder to match an existing offer, a ROFO favours the seller by prompting an initiatory bid.
- Balanced Advantage: A significant distinction lies in their favor; a ROFO typically favors sellers, whereas a ROFR favors buyers.
Understanding a Right of First Offer
A ROFO often forms part of various contracts like lease agreements or business partnerships and activates when the owner intends to sell the asset. Under the contract terms, the owner is required to offer the asset to the ROFO holder first. The right holder must then decide within a specified timeframe whether to make an offer. The seller retains the option to accept or reject this offer. If the offer is declined, the seller can pursue third-party buyers, but may return to the right holder if external sales efforts fail – allowing the right holder potentially to revisit and adjust their offer.
Sellers are often landlords or business owners, while the right holders are typically tenants or investors. In commercial real estate, this type of agreement ensures that current occupants can bid on the space they already use before others can.
Good Faith
Both parties involved in the right of first offer are expected to transact in good faith. The seller must provide comprehensive information to assist the right holder in making an informed bid. This transparency ensures smooth and fair dealings.
Special Considerations
Real estate deals between landlords and tenants are the most common scenarios of ROFO usage. Tenants often seek a right of first offer to prevent forced relocations and secure buying opportunities. For landlords, tenant offers could mean quicker, simpler transactions and potential savings on legal and brokerage fees.
The business sale scene also features ROFOs, with business owners granting these rights to partners or investors prior to offering the business on the open market.
Right of First Offer vs. Right of First Refusal
While similar, a ROFO provides a distinct advantage to sellers by encouraging proactive bids from rights holders, unlike a ROFR which lets the holder match offers already on the table. Assets with an ROFR might be less appealing to market buyers due to the potential disruption of having an existing right holder who can pre-empt them.
Sale Price Restrictions
ROFO agreements often include sale price restrictions. For instance, if a right holder bids $1 million on a property but is declined, the seller may be restricted from accepting market offers below $1.05 million if the contract dictates a 5% threshold above the original bid. This mechanism aims to ensure the right holder isn’t effectively bypassed due to minor offer differences.
Common Questions About Right of First Offer
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What is a Right of First Offer? A ROFO gives the holder the capability but not the obligation to make the first bid on a property before it’s broadly marketed.
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Difference Between Right of First Offer and Right of First Refusal? A ROFO allows the right holder to make the initial offer on a property, while a ROFR gives the holder the opportunity to match or refuse an offer already extended to the seller.
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How Long is a Right of First Offer Valid? This varies by contract, typically ranging from 30 to 60 days, ensuring ample time for both parties to conduct due diligence and make informed decisions.
Related Terms: Right of First Refusal, lease agreements, asset purchase, tenant rights, business partnership.
References
- Adam Leitman Bailey, PC. “Right of First Refusal: In Pursuit of an Effective, Litigation-Proof Provision”.
