The right of first refusal gives someone the first chance to buy or make a deal, but if they refuse, the seller can make an agreement with anyone. It can apply to real estate, personal property, and employment contracts, but can also inflate the value of the contract. Careful drafting is necessary, and parties should review the terms to avoid inopportune exercise.
The right of first refusal is a clause in a contract that gives someone the first chance at a sale or other business. If the person holding this right refuses to exercise it, the person preparing to make the sale or deal can make an agreement with anyone. In a simple example, two people might sign a contractual agreement on a house that gives the renter the right to make an offer on the house first if the owner decides to sell. If the owner decides to list the house for sale, he first approaches the tenants to see if they want to buy it. They can choose to decline, allowing the home to be publicly listed, or they can accept and enter into a purchase agreement.
This type of agreement can arise in various contexts. It applies not only to real estate and personal property, but also to employment contracts and other types of agreements. The right of first refusal is commonly structured into contracts signed by athletes, giving their teams or sponsors the opportunity to match offers made by competitors. It can also apply to employment contracts for people who work in large corporations and institutions, where the employer might want an opportunity to match an offer from a competitor if an employee is being fired with a job offer.
There are advantages and disadvantages to this contract clause. Clear advantages include the right to be notified first about a planned sale or change in the terms of a contract, and the ability to respond before that information becomes public. This is one reason why first refusal rights are built into some forms of employment contracts. One problem that can arise is that the value of the contract can be inflated. The existence of the clause can be used to pit bidders against each other to obtain a higher price.
Standard standard contracts can be used to write an agreement that gives someone the right of refusal. For more complex agreements, an attorney should be retained to draft a contract that addresses the specific circumstances. These contracts can be very carefully crafted and may contain some special clauses that address particular issues that may arise. People who are involved in negotiations for a business agreement where someone else has this right may ask to review the terms to determine whether or not the other party could exercise it at an inopportune time.
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