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by Rez Legal | August 22, 2018 | 0 Comment

A Right of First Offer (“ROFO”) and a Right of First Refusal (“ROFR”) are both contractual obligations that often arise in the context of a lease arrangement or in connection with selling an asset (such as a piece of property).  These provisions restrict the assets held or leased by an owner and benefit the holder of the ROFR or ROFO (as applicable). They also require the owner to first discuss the sale or lease of the asset with the holder prior to completing the sale or lease of the asset to a third party.

Although similar in nature, the distinguishing factor between the ROFO and ROFR is that each right is triggered by a different event during the offering of an asset for sale or lease. Because these rights are often accompanied by strict timeframes in which a holder must exercise its right (or risk forfeiture), it is important that a holder understand the key differences between a ROFO and a ROFR.

The ROFO

The ROFO requires an owner of an asset to negotiate the sale or lease of an asset with the holder of the ROFO before offering the asset for sale or lease to a third party. The ROFO provides the holder of the ROFO with the “first look” on acquiring or leasing the asset before the owner of the asset can bring other buyers to the table. If the parties fail to come to an agreement on the terms of the sale or lease (or if the holder of the ROFO fails to exercise the ROFO within the given timeframe), then the owner of the asset has no further obligation to the holder of the ROFO and is free to sell or lease the asset to a third party.

The ROFR

By contrast, the ROFR is a “last-look” right triggered when an owner of an asset receives a bona fide offer to purchase or lease the asset subject to the ROFR. Unlike the ROFO, the owner of an asset is not prohibited from marketing and entering into negotiations for the sale or lease of assets covered by a ROFR.  Before the owner can complete the sale or lease to a third party, however, the owner must first offer the asset to the holder of the ROFR on the same terms and conditions offered by the third party. If the holder of the ROFR cannot meet the terms offered by the third party within the given timeframe, the rights under the ROFR will be forfeited, and the owner will be free to complete the sale or lease to the third party on the same terms disclosed to the holder of the ROFR.  Under a ROFR, a third party (and not the holder of the ROFR) dictates the terms of how the underlying asset may be conveyed.

A significant difference between the ROFR and ROFO is that with the ROFR, the parties have a bona fide offer from a third party that establishes the terms related to the sale or lease of the asset. Under the ROFO, the parties determine the price and terms related to the sale or lease of the asset without the interference of a third party.

Second-Looks

Under either a ROFO or ROFR, the holder should be aware of any potential “second-look” rights. In many cases, a ROFR provides that the owner of the asset must actually convey the asset on substantially the same terms as disclosed to the holder of the ROFR. If the owner of the asset actually sells or leases the asset on different terms, the owner will be in breach of the ROFR. Likewise, if an owner of the asset refuses to negotiate with a ROFO holder on fair terms, and then actually sells or leases the asset to a third party on fair terms, the owner of the asset will be in breach of the ROFO.

Whether a ROFO or ROFR is better for the owner of the asset or the holder of the right depends upon context.  Consult with an attorney to review your contractual rights under either right. The ROFR and ROFO can cause uncertainty if not properly drafted and understood.