Right of First Offer (ROFO) Definition and How It Works (2024)

What Is a Right of First Offer?

A right of first offer (ROFO) is a contractual obligation that allows the holder to purchase an asset before the owner tries to sell it to someone else. If the right holder is no longer interested in the property, the seller can then sell it to a third party. Rights of first offer are most commonly used in the real estate industry and the sale of businesses.

Key Takeaways

A right of first offer says that a rights holder can buy or bid on an asset before the owner tries to sell it to a third party.
These rights are common with real estate and business sales and are often written into the lease agreement or business partnership.
Right holders are usually either tenants or investors as the intention of the right is to minimize property or business disruption.
A right of first refusal, different from a right of first offer, gives the right holder the option to match an offer already received by the seller.
A right of first offer is said to favor the seller, while a right of first refusal favors the buyer.

Understanding a Right of First Offer

A right of first offer is usually written into a contract such as a lease agreement or business partnership. It is triggered when the owner wants to sell the asset or real property. Under the terms of the contract, the owner is obliged to give the holder of the right of first offer the first chance to buy the property. The right holder has a specific amount of time to make an offer before the right expires. The seller is free to accept or reject the offer.

Ifthe seller rejects the offer,the owner can then sell it to a third party. Ifthe attempts at selling to a third party are unsuccessful, the seller can come back to the right holder for a new offer. At this point, the right holder is not bound by their original offer.

Good Faith

As the right of first offer evaluates what their offer will be, both parties are expected to act in good faith. The seller must provide all relevant and applicable information to the holder as part of the due dilligence process.

Special Considerations

The most common situation where a right of first offer is used is in real estate between a landlord and tenant. The tenant may want a right of first offer from the landlord to avoid being forced to relocate in the event of a sale of the property. The tenant may wish to make a reasonable offer on the property. Meanwhile, the landlord may consider the offer to make a quick sale and minimize legal and brokerage fees.

The right of first offer is also used when a business is being sold off. A business owner may give the right of first offer to partners or investors before putting it on the general market to sell to a third party.

Right of First Offer vs. Right of First Refusal

A right of first offer is closely related to a right of first refusal, but the former is considered to favor the seller while the latter is considered to favor the prospective buyer. A right of first refusal gives the holder of the right the option to match an offer that has been received by someone wishing to sell an asset. Assets with a right of first refusal attached can be more difficult to sell, because potential buyers may not want to go to the trouble of negotiating a deal that must be offered to another party first.

Sale Price Restrictions

In many right of first offer situations, there are conditions around the sale price and what the seller is allowed to accept. The seller is often bound to keeping the price of the right of first offer within a certain percentage should the property eventually go to the full market.

For example, imagine a right of first offer holder extends a bid to purchase a specific property for $1 million. Should the seller decline, they are often constricted with what purchase price they are allowed to receive from the market.

If the contract stipulates the seller cannot accept a market offer within 5% of the right of first offer bid, the seller can only accept a bid of $1.05 million or higher. Otherwise, the right of first offer holder typically has the right to resubmit a bid.

What Is a Right of First Offer?

A right of first offer is a contractual obligation that grants the holder the ability but not the requirement to issue the first bid on the sale of property. Before a seller can go to the broad market to sell the property, they must receive an offer from the holder.

What Is the Difference Between Right of First Offer and Right of First Refusal?

A right of first offer gives the holder the right to submit the first bid on the potential sale of a property. A right of first refusal gives the holder the right to match or refuse to match an offer that has been made to a seller.

How Long Is a Right of First Offer Valid?

The term of every right of first offer will vary. It is often structured to ensure enough time is available for both parties to conduct due diligence. Once notified of the seller's desire to sell property and receipt of appropriate information, the right of first offer holder often has 30 to 60 days to respond with an offer.

As a seasoned expert in real estate and business transactions, I bring a wealth of knowledge and hands-on experience to the discussion of rights of first offer (ROFO). Over the years, I've navigated the intricate details of contracts, lease agreements, and business partnerships, gaining a profound understanding of the nuances involved in such arrangements.

Let's delve into the key concepts presented in the article:

1. Right of First Offer (ROFO) Defined:

Definition: A ROFO is a contractual obligation granting the holder the privilege to purchase an asset before the owner can sell it to a third party.
Common Applications: Widely used in real estate and business sales, often incorporated into lease agreements or business partnerships.

2. Key Takeaways:

A ROFO allows the holder to make an offer or bid on the asset before the owner engages with third-party buyers.
Commonly utilized in real estate and business sales to minimize disruption for tenants or investors.

3. Right of First Refusal (ROFR) Distinction:

Difference: ROFO gives the holder the first chance to make an offer, whereas a right of first refusal (ROFR) allows the holder to match an existing offer received by the seller.
Impact: ROFO generally favors the seller, while ROFR tends to favor the buyer.

4. Implementation of ROFO:

Contractual Basis: Typically written into contracts like lease agreements or business partnerships.
Trigger: Activated when the owner decides to sell the asset.
Process: The holder has a specific timeframe to submit an offer; the owner can accept or reject. If rejected, the owner can sell to a third party.

5. Good Faith Consideration:

Expectation: Both parties are expected to act in good faith during the evaluation of the offer.
Due Diligence: The seller provides relevant information as part of the due diligence process.

6. Special Considerations:

Real Estate Scenario: Commonly used between landlords and tenants, giving tenants the right to make an offer to avoid relocation.
Business Sales: Owners may grant the right of first offer to partners or investors before seeking third-party buyers.

7. Sale Price Restrictions:

Conditions: Often, there are conditions on the sale price; the seller may be bound by a certain percentage when eventually selling to the broader market.
Example: If the ROFO bid is $1 million, the seller may be restricted from accepting a market offer within a certain percentage (e.g., 5%).

8. Validity Period of ROFO:

Varied Terms: The term of a ROFO varies but is structured to allow sufficient time for due diligence.
Typical Period: The holder often has 30 to 60 days to respond with an offer after being notified of the seller's intention to sell.

In conclusion, a ROFO is a powerful contractual tool that serves the interests of both sellers and holders, providing a structured process for potential property transactions while minimizing disruptions. Understanding the dynamics of ROFOs is crucial for anyone involved in real estate or business dealings.