Business and Legal Insights

Rights of first refusal (“ROFR”) and rights of first offer (“ROFO”) are restrictive covenants that a property owner (“Owner”) can place on their property granting a third party (“Holder”) the right to purchase that property before the Owner can sell it to someone else.  While similar in nature, a key difference between a ROFR and a ROFO is the kinds of sales or marketing activities the Owner can undertake before approaching the Holder.

Right of First Refusal

A ROFR requires the Owner to offer the property that is subject to the ROFR (“Subject Property”) to offer the Subject Property for sale to the Holder if the Owner receives a third party offer to purchase the Subject Property that the Owner wants to accept.  In the case of a ROFR, once the Owner decides that they want to accept an offer to purchase the property, the Owner must notify the Holder about the Offer so that the Holder can decide whether to purchase the Subject Property based the negotiated terms of the ROFR.

When a property is subject to a ROFR, the Owner is usually able to market the Subject Property for sale and negotiate the terms of a letter of intent with a prospective buyer, before approaching the Holder.  However, as soon as the Owner and the prospective buyer agree on the terms of sale, and before the Owner can sell the Subject Property to the prospective buyer, the Owner must first notify the Holder and offer that Subject Property for sale to the Holder based on the negotiated terms of the ROFR. 

Right of First Offer

A ROFO requires the Owner to offer the Subject Property for sale to the Holder before the Owner markets the property for sale to third parties. 

When dealing with a ROFO, the Owner may not market the Subject Property for sale to third parties until the Owner has offered that property for sale to the Holder.  Once an Owner decides the terms upon which it will offer Subject Property for sale to third parties, the Owner must present those terms to the Holder so that the Holder can decide whether it will purchase the Subject Property based on the negotiated terms of the ROFO. 

Differences

The key distinction between a ROFR and a ROFO is what the Owner can do to prepare the Subject Property for sale before approaching the Holder.  When dealing with a ROFR, Owners are typically free to take the Subject Property to market before approaching the Holder, giving the Owner better opportunity to evaluate the market value of that Subject Property.  This could be particularly beneficial to the Owner if they receive offers from more than one prospective purchaser.  With a ROFO, on the other hand, Owners must approach the Holder before taking the property to market, giving the Holder the option to purchase the property before anyone else.

Considerations

Both ROFRs and ROFOs are powerful restrictive covenants that should be carefully reviewed. 

When giving or receiving a ROFR or a ROFO, it is important that the terms of the purchase right are clear so that everyone is on the same page because, without limitation, it is usually months or years from the date that a ROFR or ROFO is granted and the date that the right comes into play.  The scope, timing, and material terms of the ROFR or ROFO should be agreeable to both the Owner and the prospective Holder.  For example, the parties should consider: (a) which purchase right (ROFR or ROFO) is appropriate for the parties’ given strategy; (b) how long the purchase right will remain in effect; (c) how long the Holder has to notify the Owner whether they want to exercise their purchase right; (d) does the Holder have to match the price that the Owner presents, or is there some other negotiated price that the Holder must pay for the property; (e) if the Holder does not elect to purchase the property the first time, does the ROFR or ROFO remain in effect for the next offer; and (f) will the parties record evidence of the purchase right in the County public records? 

If you are considering whether to purchase property in Florida, or you are under contract to purchase property in Florida, and you discover that the property is subject to a ROFR or a ROFO, it would be advantageous to request that the Owner provides written evidence that the Holder has waived the purchase right as early in the transaction as possible. Otherwise, if a Holder exercises their purchase right, you lose the ability to purchase the Subject Property, along with any money you have spent on the contract up to that point. Your purchase contract should contain an affirmative statement from the Owner that the property is not subject to a ROFR or ROFO. 

Each set of circumstances surrounding a ROFR or ROFO is different, and the solution for one transaction might not work for another.  At Shutts & Bowen LLP, our attorneys are experienced in negotiating, drafting, and exercising both Rights of First Refusal and Rights of First Offer.  Please contact a Shutts Real Estate attorney if have questions related to a transaction.