What is a Right of First Refusal?

Fotolia_171059478_Subscription_Monthly_M-300x200A right of first refusal is an important legal right in business law. It gives a certain party the opportunity to engage in a transaction before another party can do so. The right of first refusal can be used in many different contexts and can be extremely important for many companies. If a right of first refusal is granted and not subsequently honored, it can lead to a legal dispute.

If you are including a right of first refusal provision in a contract, you should always have a skilled business lawyer review the contract to ensure the provision properly protects your rights. We can also ensure the contract allows you the appropriate remedies should another party breach the contract provision.

Situations Involving a Right of First Refusal

There are different scenarios in which a business may seek or grant the right of first refusal. Some examples include:

  • A business leases a commercial space and wants to remain there. The company seeks a right of first refusal to purchase the property in the event the owner wants to sell the property. If another buyer offers $800,000 for the property, the owner will have to offer to sell the property to the business owner under the same terms before accepting an offer from another party.
  • Two people own a company together. They each get the right of first refusal in case the other owner goes bankrupt or wants to sell their stake in the company. This gives the other owner the right to purchase the shares instead of having a third-party stranger come in and have an ownership stake in the business.
  • Venture capitalists who initially invest in a business may seek a right of first refusal to get the best price to purchase additional stocks or the entire company. Holding a right of first refusal can often result in a better deal than purchasing assets right away.

There can be many benefits to a right of first refusal in different situations. First, these provisions are highly customizable and you are not obligated to actually make the purchase when the time comes. Offering a right of first refusal can make a commercial property more attractive for tenants. When a startup offers this right to current stockholders, it can prevent the shares from dilution should a third party step in and purchase stock for sale.

In order to reap the benefits of a right of first refusal, you need to ensure the contract is properly drafted. You must also ensure the provision provides you with liquidated damages or other appropriate remedies in the event of a breach.

Contact a San Jose Corporate Law Firm to Learn More Today

At Structure Law Group, our California business attorneys regularly draft, negotiate, and review complex business contracts. We can advise you about the possible benefits or drawbacks of a right of first refusal in your specific situation. Please call 408-441-7500 or contact us online to schedule a consultation with a member of our legal team.