# Understanding Right of First Refusal (ROFR): A Complete Guide

## What Is a Right of First Refusal?

A Right of First Refusal (ROFR) is a contractual provision that ensures the right holder has the priority to purchase an asset before others can. Upon receiving an offer from a third party, the asset owner must present this offer to the right holder, who can choose to match it or let it pass to the third party. Often found in real estate and venture capital agreements, ROFR grants tenants the chance to buy properties they rent and provides venture capitalists assurances about their investments. This article explores how ROFR works, its advantages and disadvantages, and its role across different sectors.

### Key Takeaways

*   The Right of First Refusal (ROFR) is a contractual right allowing holders to match any offers made on an asset before the owner accepts other bids.
*   ROFR clauses are popular in real estate and investment scenarios, providing holders the priority to buy rental properties or maintain investment positions before public offers.
*   Although advantageous for buyers due to the opportunity to pre-empt further bids, ROFR can delay a seller's ability to accept subsequent offers.
*   ROFR differs from an options contract in that it gives the right to match an external offer rather than an outright option to buy or sell independently of other bids.
*   Customization of ROFR agreements can include specifications on validity periods or the involvement of third-party buyers.

![Right of Refusal](https://www.investopedia.com/thmb/V75zlxrldSnJCcZ1a87QCELwxgo=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/rightoffirstrefusal.asp-final-65c0921b7a9d49a09be96b12031c1e35.png)

*— Investopedia / Zoe Hansen*

## Understanding the Mechanics of a Right of First Refusal

Right of first refusal clauses are similar to [options contracts](https://www.investopedia.com/terms/o/optionscontract.asp) in that holders are granted rights but not obligations. With an ROFR, the right holder has the right, but not the obligation, to match or decline to match an offer already made on an asset by another party.

The asset owner must inform the right holder about any offers received.

So, if a shareholder wants to sell their share and is subject to an ROFR, they must find someone willing to make an offer for that share. Once they have an offer, they then must notify the right holder, who can exercise their option to match that offer and purchase the share or refuse to match it and let another party purchase it.

### Why Right of First Refusal Matters

Individuals or companies request rights of first refusal to see how opportunities develop before making commitments. A right of first refusal allows them to do so.

The right holder typically has a limited time to act before the seller can accept other offers, and the right is only valid with the contracted seller.

### Tailoring a Right of First Refusal to Fit Your Needs

Right of first refusal clauses can be tailored, allowing parties to specify validity periods or permit a buyer-nominated third party to purchase.

> **Fast Fact**
>
> A right of first offer (ROFO) is different from the ROFR. It gives the holder the right to make an offer on an asset before the seller sells it to someone else. Under an ROFR contract, the seller must have an offer from another party, and then notify the contract holder of that offer.

## Pros and Cons of the Right of First Refusal

ROFR contracts often benefit buyers, but they also have drawbacks.

### Advantages for Buyers

*   The ROFR is akin to an insurance policy for a buyer
*   It might give a buyer a competitive edge
*   It gives buyers priority

### Disadvantages for Buyers

*   Prices might drop after the buyer exercises the ROFR and makes a purchase
*   Sellers may forget that the buyer has an ROFR

### Advantages for Sellers

*   The seller may be comforted knowing there is a buyer ready
*   The seller has other interested buyers should the holder of the ROFR not want to purchase the asset
*   The seller can prioritize certain individuals

### Disadvantages for Sellers

*   The ROFR limits the ability to negotiate with multiple buyers
*   The seller may have a difficult time attracting buyers
*   The right holder isn't obligated to transact a purchase
*   Another buyer might be willing to pay more than the right holder

## Key Usage Scenarios for Right of First Refusal

In business, rights of first refusal are common in [joint ventures](https://www.investopedia.com/terms/j/jointventure.asp), where partners can buy out stakes of departing members.

Rights of first refusal are also found in fields like real estate, sports, and entertainment; for example, a publisher might request it for future books by a new author.

## What Is the Meaning of Right of First Refusal?

A right of first refusal is a contract with an asset owner that gives the holder of the right the ability to match or refuse to match an offer from another party to buy the asset.

## Why Is Right of Refusal Bad?

A right of first refusal is neither good nor bad; it is simply a tool used by some to ensure they have the first claim on an asset or to ensure a buyer is waiting.

## What Is the Difference Between an Options Contract and a Right of First Refusal?

An options contract is an agreement whereby the contract buyer purchases the right but not the obligation to exercise the right and buy or sell shares of stock. A right of first refusal is the right but not the obligation to match an offer someone else has made on an asset and purchase it.

## The Bottom Line

A right of first refusal is a contractual agreement between two parties that gives one the ability to be the first buyer. This party can match an offer made by a third party and purchase an asset, or they can refuse to match it, in which case the seller can proceed with selling it to that third, or another, party.

These contracts are generally used by interested parties who don't want a contractual obligation to purchase an asset but do want the option to do so if other parties become interested in it.