What is the Right of First Refusal?

The right of first refusal can sometimes be costly

By on / Business Negotiations

right of first refusal

When transferring property, sellers sometimes insist on the real estate right of first refusal – this gives them the chance to be first in line to repurchase the property if their buyer later decides to sell.

Rights of first refusal can have obvious advantages if your financial circumstances change later on. If you’re keeping adjoining land, you may wish to protect yourself against the risk of something unattractive or unwanted being built next door.

But Brit Grosskopf of Texas A&M University and Alvin Roth of Harvard University have both identified a little-recognized distinction in legal drafting during sale negotiations that can turn this apparent blessing into an unwanted curse.


Discover step-by-step techniques for avoiding common business negotiation pitfalls when you download a copy of the FREE special report, Business Negotiation Strategies: How to Negotiate Better Business Deals, from the Program on Negotiation at Harvard Law School.


What is a Right of First Refusal?

One type of first-refusal right gives the former owner the ability to regain the property by matching competing bids. Rights holders only have to equal the high bid without engaging in the auction themselves.

But another form of rights of first refusal (common in certain real-estate and entertainment negotiations) requires the right holder to accept or reject the seller’s demand before other potential buyers are offered the same deal. If the right holder refuses the price, she forfeits the chance to match other offers.

The Right of First Refusal in Negotiation

As illustration, suppose you hold the right of first refusal for a piece of property you value at $500,000. If you only have to match prior bids, you may get a bargain if the market is weak, perhaps buying back the parcel for $400,000. But supposed you have to respond before the market has been tested. If the owner demands $475,000, you may be pushed close to your limit, yet feel reluctant to risk losing the property to a higher bidder. In essence, the second type of right leaves you bidding against yourself.

As this particular example suggests, when negotiating sales with the right of first refusal on the table, make sure the specific terms won’t turn around and bite you later. You need to remember: Even perfectly negotiated agreements rarely become perfectly executed negotiated agreements – you shouldn’t hesitate to make sure to negotiate for the best terms to agreement while also thinking about implementation and the long-term viability of the agreement.

Have you benefited from a right of first refusal? We’d love to hear your story in the comments.

Related Posts:
10 Hardball Tactics in Negotiation – Here are some negotiation strategies to counter hard bargaining tactics at the negotiation table. From dealing with difficult people at the bargaining table and unproductive counterparts to overly aggressive and uncompromising counterparts, difficult people at the negotiation table take on a myriad of forms but the negotiation strategy for grappling with them remains similar. Don’t leave value unclaimed, and don’t let a hard bargaining counterpart keep you from creating value with the negotiation advice in this article.
Dealmaking: Are You Overly Committed to the Deal? – Becoming overly committed to the deal at hand can cost negotiators in the future. Before entering into any negotiated agreement, negotiators need to have a full understanding of exactly what the agreement entails, financially and otherwise. Find out the pitfalls negotiators face when they become focused on the idea of reaching a negotiated agreement, rather than focusing on the importance of crafting viable, win-win agreements that are sustainable long into the future of the business relationship.
Dealmaking: Top Business Deals  – The Program on Negotiation’s top ten business deals – negotiation case studies from real life examples of negotiation. What negotiating strategies did these expert negotiators employ in their successful deals, and what pitfalls did other negotiators encounter in their less successful agreements?
Top 10 Business Negotiations  – These are the top business negotiation case studies – examples of hard bargaining tactics and integrative strategies that encompass a range of negotiation styles.

Originally published in 2012.


Discover step-by-step techniques for avoiding common business negotiation pitfalls when you download a copy of the FREE special report, Business Negotiation Strategies: How to Negotiate Better Business Deals, from the Program on Negotiation at Harvard Law School.


Comments

8 Responses to “What is the Right of First Refusal?”

  • Renee L.

    Rights of first refusal are thrown around quite liberally (and vaguely) in deals by business teams who often have little understanding of the mechanics of such clauses. Accordingly, this post does a nice job of highlighting one of the more problematic issues for the inattentive deal-maker. That said, it is also critical to highlight that the time-frame of a Right of First Refusal generally is important to track as well, lest the parties be held ‘hostage’ by a term for an indefinite period of time. Good deal makers understand that taking time up front to address critical detail saves time (and lots of $$) in the long run.

    Reply
  • jeff b.

    The first type of right of first refusal may make the property essentially unmarketable–in a sale of a property encumbered by such a right, one then has to negotiate with a buyer, reach a price and then tell the buyer to hold that thought while someone else decides whether or not they want to take advantage of the deal the buyer has struck. Many potential buyers are reluctant to enter that game–the lower the price they negotiate, the more likely they are to lose.

    Reply
  • Genghiz K.

    Hello Jeff, One would assume that before the property goes to market the seller would have already negotiate he right of refusal withy the potential buyer.
    Am I wrong here?
    Genghiz

    Reply
  • Anne-Sophie S.

    Dear friends,

    I believe right of refusal is an extraordinary asset IF you really want to regain access to the property, for example. More for an emotional or practical reason as a business move it is not necessarily the smartest since you are already showing the future potential buyer your level in interest… extremely high. You have very little leverage.

    In the case that you do not compete against yourself, you compete against others, which is as dangerous since bluffing (false potential buyer with high offer) can push you to make a stronger offer….

    In conclusion, I would say that if you want it that bad, in the end, you will probably pay it more, unless the asset you want is UNWANTED by anyone else….

    Reply
  • James f.

    I believe that right of refusal is an extraordinary asset if you really want to regain access to the any kind of property and if you already negotiate the right of refusal property with the buyer.

    Reply
  • I think right of refusal is one of the best thing if a person really want to regain the access over any kind of property. The author of this article Pon Staff does a nice job of highlighting one of the more problematic issues for the inattentive deal-maker. Nice article. Keep going

    Reply
  • Omar K.

    This topic is also very pertinent to negotiating in areas other than real estate and property rights. Right of First Refusal or ROFR as it is often referred to in technology collaboration and supply agreements, is a must, to gain or maintain competitive advantage in the Hi Tech R&D arena and during a tight supply market. Having been involved in business negotiations of many such agreements, I know firsthand that to grant or to gain ROFR often becomes a bone of contention for both negotiating parties.

    Whenever we negotiated long term supply agreements of critical electronic materials or joint development agreements with specialty chemicals and process gases companies, our team always insisted on and negotiated hard to have “exclusivity rights” as number one priority. If a company had upper hand in negotiations due to IP or patented processes, and they did not want to grant exclusivity, then ROFR was, and still is, the next best thing. By having exclusivity or ROFR, a company can easily gain fair amount of competitive advantage over competing companies, expected to be vying for the same specialty material, “recipe” or the patented process in coming days.

    Reply

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