A Right of First Offer (ROFO) is a contractual mechanism that provides the holder—often a tenant or an investor—the exclusive opportunity to purchase an asset before the owner can offer it to third parties. This right is particularly prevalent in real estate transactions and business sales, offering a safeguard to the holder against unexpected changes in asset ownership that could disrupt their operations or investments.
Definition
A Right of First Offer (ROFO) obligates the asset owner to notify the holder when they decide to sell the asset and to give them the first opportunity to make an offer. If the holder is not interested, the seller can then sell the asset to other buyers. This contractual arrangement is typically detailed within lease agreements, partnership contracts, or stand-alone agreements, ensuring that the holder is kept informed of any potential sale.
Duration and Notification
The specific duration of a ROFO can vary significantly, often structured to allow both parties adequate time to conduct necessary due diligence. Upon receiving notification from the seller about their intent to sell, the holder usually has a defined period—commonly 30 to 60 days—to respond with an offer. If they choose not to proceed, the seller may then seek offers from other interested parties.
Key Characteristics of Right of First Offer
- Structure of the ROFO
ROFO agreements are typically detailed within formal contracts.These agreements specify the responsibilities of each party, which include:
– Notification Requirements: The seller must inform the holder of their intent to sell and provide relevant details about the asset.
– Terms of Sale: The seller may be restricted from offering the asset to third parties on more favourable terms than those initially offered to the holder.
- Good Faith Negotiation
A fundamental aspect of a ROFO is the expectation of good faith negotiation. This means both parties must act honestly and fairly during the negotiation process.
Comparison with Other Rights
1.Right of First Refusal (ROFR)
A ROFR allows the holder the opportunity to match any offer that the seller has received from a third party. In contrast, a ROFO provides the holder the first chance to make an offer before the seller solicits third-party bids.
- Preemptive Rights
In corporate contexts, ROFOs may also appear as preemptive rights, allowing existing shareholders the first opportunity to purchase new shares before the company offers them to outsiders. This helps maintain ownership percentages and prevents dilution of existing shareholders’ equity.
Practical Applications of ROFO
- Real Estate Transactions
ROFOs are particularly common in the real estate sector, especially in commercial leasing scenarios. For example, a tenant may seek a ROFO to ensure they can purchase the property they occupy if the landlord decides to sell.
In a typical scenario, the lease agreement would stipulate the ROFO, detailing the process the landlord must follow if they decide to sell. This includes the obligation to notify the tenant and provide them a specified time to submit an offer. If the tenant is unable or unwilling to purchase, the landlord may then seek offers from other potential buyers.
- Business Sales
In business transactions. A ROFO can be crucial when a business owner plans to sell their company or stake in the business.
For example, if a partner in a law firm wishes to sell their share of the business, the remaining partners may have a ROFO that gives them the first chance to purchase that share. This not only protects their interests but also ensures that the firm’s culture and operational dynamics remain intact.
Special Considerations
- Legal Framework
Establishing a ROFO requires careful legal drafting to ensure clarity in the terms and obligations of both parties.
- Market Value and Appraisals
When a ROFO is in play, determining the asset’s market value can be crucial. Sellers often provide a price based on current market conditions. But holders may seek independent appraisals to assess the property’s value accurately.
This is especially crucial in unstable markets where asset values can vary dramatically.
- Failure to Execute
If the holder fails to exercise their Right of First Offer. The seller typically has a limited timeframe to pursue offers from third parties.
Michel Harm
