What is the right of first refusal? How does it work in real estate?

Legal contracts have many terms and conditions that determine its nature, roles, responsibilities, rights, and obligations of the parties concerned. The right of refusal is one of the often-used clauses in most contracts, including lease and licence agreements.

See also: What is a void contract?

What is the right of first refusal?

In contracts, the right of first refusal is a right to enter a business transaction with a person or an entity before anyone else can. The person with this right enjoys the opportunity to establish a contract or an agreement on an asset before anyone else can.

The right of first refusal (ROFR) is a pre-emptive clause in a contract that provides the contract holder a special privilege that he/she can accept or decline an offer made about the asset before others can. This ROFR puts the contract holder in a better position to lay his/her claim over an asset even if others express interest in it. Only when he/she declines to enter a transaction, the obligator can entertain other offers.

Use of right of first refusal clause in lease agreements

The right of first refusal is a clause often used in lease and licence agreements. This clause provides the leaseholder an option to lay his claim on the property he occupies before anyone else can. While this clause safeguards the interest of the leaseholder or the tenant, it limits the offers the owner of the property can get even if he is looking for new tenants or sellers.

While the contract holder has the right to enter the transaction if he so wishes, he is not legally obliged to do so. In a lease contract, the tenant will have the right to continue his tenancy over the leased property if he wishes in case the lease has a right to first refusal clause. However, the landlord can’t force him to do so. It is completely at the will of the tenant what he/she desires to do.

How does the right of first refusal work in lease deeds?

This can be understood better with an example. Suppose a business owner has leased a commercial property in New Delhi’s Connaught Place. Over the years, his business has grown tremendously due to the location advantage of the establishment, among other factors. At this point, if the landlord desires to sell the property and the tenant was to be evicted, his business would suffer significant loss due to the change of location. In case the lease contract has a right to first refusal clause, the landlord will be obliged to offer the tenant the first right to buy this property. It is only after the tenant refuses to enter a sale contract; the landlord will be able to receive other offers for the said property.

For the point of view of the landlord, this clause will limit his ability to start a bidding war for his coveted asset outright as they are bound by the clause to first wait for the tenant to make up his mind about taking or leaving the offer.

However, this clause also elaborates on the landlord’s rights in case the tenant exercises the right to purchase the property, declines the right to purchase or fails to respond to the landlord’s notice of a proposed sale.

Right of first refusal clause: Format

There is no one way to insert this clause in a lease deed. Depending on the specific nature of the contract, the parties can tweak the clause as they wish. However, most right of first refusal clauses in contracts are time-bound and have an expiry date.

Right of first refusal clause in leases: Sample

Right of First Refusal to Purchase Leased Premises:

 (a) If landlord; during the lease term or any extension of the term, elects to sell all or any portion of the premises, tenant shall have the right of first refusal to meet any bona fide offer of sale from a third party on the same terms and conditions of that offer, including but not limited to the price and date for close of escrow, provided tenant is not then in default under this lease. On receipt of an acceptable bona fide third party offer for purchase of the premises, landlord shall notify tenant in writing of the offer and its terms and conditions. Tenant, within thirty (30) days after the date of landlord’s notice to tenant, shall notify landlord in writing whether tenant agrees to purchase the premises on the same terms and conditions as contained in the third-party offer. A failure by tenant to give landlord any written notification within the prescribed time shall be deemed notice to landlord that tenant does not elect to purchase the premises. If tenant elects not to purchase the premises, landlord shall be free to sell the premises or portion thereof to that third party in accordance with the terms and conditions of the third parry offer; provided, however, that any material change in such terms and conditions shall be deemed a new offer triggering this right of refusal.

 (b) The right of first refusal granted to tenant shall exclude all of the following transfers: any transfer by landlord to individuals holding an ownership interest in landlord; any transfer resulting from the landlord’s death; any transfer by landlord to landlord’s spouse or any of landlord’s children; and any transfer by landlord to any other entity in which landlord or its owners hold a fifty-one percent (51%) or greater ownership interest. The right of first refusal granted to tenant also shall not apply in the event of foreclosure (or a deed in lieu of foreclosure) or to a sale of the premises by a lender who has foreclosed.

 (c) The right of first refusal granted to tenant under this lease is personal, and tenant shall have no right to assign or transfer the right of first refusal either separately from or together with a transfer of tenant’s leasehold interest.

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