What is the Right of First Refusal?

The right of first refusal can sometimes be costly

By PON Staffon / Business Negotiations

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.

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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.