Right of first refusal

H. Surya Priya

Right of first refusal

Right of first refusal (ROFR or RFR) is a contractual right that gives its holder the option to enter a business transaction with the owner of something, according to specified terms, before the owner is entitled to enter into that transaction with a third party. In brief, the right of first refusal is similar in concept to a call option.

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Because an ROFR is a contract right, the holder's remedies for breach are typically limited to recovery of damages. In other words, if the owner sells the asset to a third party without offering the holder the opportunity to purchase it first, the holder can then sue the owner for damages but may have a difficult time obtaining a court order to stop or reverse the sale. However, in some cases the option becomes a property right that may be used to invalidate an improper sale.

An ROFR can cover almost any sort of asset, including

Real Estate, Personal property, Patent license, Screenplay, or an interest in a business.

It might also cover business transactions that are not strictly assets, such as the right to enter a joint venture or distribution arrangement.

ExamplesAbe owns a house that he plans to sell to Bo for $1 million. However, Carl holds a right of first refusal to purchase the house. Therefore, before Abe can sell the house to Bo, he must first offer it to Carl for $1 million. If Carl accepts, he buys the house instead of Bo. If Carl declines, Bo may now buy the house at the proposed $1 million price.

REAL ESTATE PROPERTY

When you hold an FROR (First right of refusal) on a real estate property (or any other asset for that matter), it basically means the current owner of the property is obligated to offer you the property (to purchase) whenever he/she decides to sell the property. In case the owner sidesteps the person holding First right of refusal, and sell it to another buyer, the FROR holder can take them to court for reparation.

Patent license

EXAMPLE:Sepracor is willing to transfer and license to HemaSure, and HemaSure desires to acquire and license from Sepracor, certain technology and intellectual property and rights thereto for the purpose of allowing HemaSure to develop and market products using such technology and intellectual property and rights thereto.

In the future, Sepracor may develop certain inventions, improvements, processes or know-how, or Sepracor may obtain technology or patents or other proprietary rights useful in the business of HemaSure, and, in each such case, Sepracor is willing to grant to HemaSure a license or sublicense to use such developments, technology or rights.

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Right of First Refusal:

If Sepracor proposes to sell, or license a third party to sell, any product for use within the HemaSure Field (a "Product"), Sepracor will first provide HemaSure with written notice of suchproposal, including all material terms and conditions thereof (the "Product Notice"). For 30 days following receipt of the Product Notice, HemaSure shall have the option to purchase or license from Sepracor the Product upon the terms and conditions set forth in the Product Notice. In the event HemaSure elects to purchase or license the Product from Sepracor, HemaSure shall give written notice of its election to Sepracor within such 30-day period and the parties shall negotiate a mutually agreeable agreement for the purchase or license of the Product. If HemaSure does not elect to purchase or license the Product, Sepracor may, within the 30-day period following the expiration of the option right granted to HemaSure, transfer or license the Product to the proposed transferee or any other transferee, provided that this transfer shall not be on terms and conditions more favorable to the purchaser than those contained in the Product Notice.

Screenplay

In entertainment, a right of first refusal on a concept or a screenplay would give the holder the right to make that movie first. Only if the holder turns it down may the owner then shop it around to other parties.

ADVANTAGES

Clear advantages include the right to be notified first about a planned sale or change in the terms of a contract, and the ability to respond before that information becomes public. This is one reason rights of first refusal are built into some forms of employment contracts.

DISADVANTAGES

The value of the contract may become inflated.

The existence of the right of first refusal may be used to play bidders against each other in order to obtain a higher price.

EXAMPLE

In a simple example, two people could enter a contractual agreement on a house that gives the renter the right of first refusal in the event that the landlord ever decides to sell. If the landlord decides to list the house for sale, the tenants are approached first to see if they want to buy it. They can opt to refuse, allowing the house to be listed publicly, or they can accept and enter into a purchase agreement.

This type of agreement can come up in a number of contexts. It applies not only to real estate and personal property, but also to employment contracts and other types of agreements. Right of first refusal is commonly structured into the contracts signed by athletes, giving their teams or sponsors an opportunity to match offers made by competitors. It can also be applied to employment contracts for people working at corporations and large institutions, where the employer might want a chance to match an offer from a competitor if an employee is being wooed away with a job offer.

CASE LAW

Percept D’ Mark (India) (P) Ltd. v. Zaheer Khan & Anr. (2006) 4 SCC 227 :

Agreement in restraint of trade void.- Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. Saving of agreement not to carry on business of which good- will is sold.- Exception 1.- One who sells the good- will of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the good- will from him, carries on a like business therein, provided that such limits appear to the Court reasonable, regard being had to the nature of the business.

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Quigley Vs Capalongo

In Quigley, the owner sold land pursuant to an agreement that provided, with respect to a different parcel, that if the owner received a written offer for the purchase of the property during a five-year period, the owner would offer the property to the plaintiffs on the same terms and conditions. One year later, the owner received a written offer to purchase from Ithaca College, which was accepted. However, when the college learned of the agreement with plaintiffs, its offer and the acceptance were withdrawn by mutual consent and the parties entered into a long-term lease, to run until after the plaintiffs’ right of first refusal expired, together with an exclusive option to purchase at the end of the lease term. Rental payments were to be credited against the purchase price. Plaintiffs sued to specifically enforce their right of first refusal to purchase, arguing that the lease and option were a disguised sale and, therefore, a bad faith attempt to avoid the plaintiffs’ right of first refusal. The court awarded plaintiffs specific performance, holding that the lease and option agreement “formalized defendant-owner’s intention to sell the premises in response to the offer of Ithaca College, thus activating plaintiffs’ right of first refusal.”9 However, the court left open the issue with which we are concerned: “whether the acceptance of a bona fide purchase offer is enough by itself to activate a right of first refusal if the offer and acceptance are subsequently withdrawn in good faith.”

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